Organigram’s financing is a good idea, says Raymond James

A new equity offering by Canadian cannabis company Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) may raise a few eyebrows but the move is a sound one, says Raymond James analyst Rahul Sarugaser, who updated clients on OGI in a report on Wednesday.

Sarugaser has maintained his “Outperform 2” rating for the stock, saying Organigram should have an excellent quarter coming up.

Moncton, New Brunswick-based licensed producer Organigram on Wednesday announced an at-the-market equity program to issue up to $49 million in common shares to be sold on the TSX and NASDAQ exchanges at the prevailing market price at the time of sale.

OGI said the proceeds will go to capital projects, general corporate purposes and to repay debt. Last quarter, OGI was in violation of one of the financial covenants of its BMO term loan, which required positive EBITDA, and is currently renegotiating with BMO.

In his note, Sarugaser rated the announcement as having a net neutral impact.

“While issuing equity under the present market backdrop we view as hazardous for any company, we believe OGI is being judicious in its decision to add cash rather than additional debt to its balance sheet. By shoring up cash in this way, OGI improves its liquidity amid unpredictable COVID-19 driven market dynamics and readies itself to pursue opportunities presented by potential reductions in competition and Cannabis 2.0 market dominance,” Sarugaser wrote.

So far, the market response to the capital raise announcement has been neither here nor there (OGI was down one per cent in trading on Wednesday), but Sarugaser said the company is still in a great position.

“However the market reacts in the coming months as the ATM is executed, our thesis remains: OGI continues to be an excellent operator and is well situated to capitalize on the new Cannabis 2.0 era. Specifically, we believe OGI is setting the stage for a very strong 3Q20,” wrote Sarugaser.

Like most names in the cannabis space, Organigram’s share price has been on a depressing slide for about a year now. OGI is down 76 for the past 12 months and down 33 per cent year-to-date.

Organigram recently delivered its fiscal second quarter financials which showed revenue down to $23.2 million from $26.9 million a year ago, even as the company reported its first sales from the highly anticipated cannabis derivatives market.

OGI had an EBITDA loss of $1.1 million for the quarter compared to positive EBITDA of $4.9 million for the previous quarter, with the drop being blamed on higher than expected SG&A.

At the same time, OGI continued to improve efficiencies by lower its cost per gram to $0.51 per gram versus $0.61 per gram over its Q1 2020.

Looking ahead, Sarugaser is calling for third quarter 2020 revenue to climb to $26 million, followed by $34 million by the fourth quarter.

For the full fiscal year, the analyst has estimated revenue of $109 million and EBITDA of $3 million, followed by fiscal 2021 revenue and EBITDA of $174 million and $40 million, respectively.