Organigram’s headwinds are gone, says Raymond James

Canadian cannabis name Organigram (Organigram Stock Quote, Chart, News TSX:OGI) took a tumble after its latest earnings report but Raymond James analyst Rahul Sarugaser says the pullback should represent a buying opportunity for the savvy investor.

In an update to clients on Tuesday, Sarugaser reviewed OGI’s second quarter results and reiterated his “Outperform” rating and $6.50 target price, which at press time represented a projected 12-month return of 154 per cent.

Moncton, New Brunswick’s Organigram released its Q2 ended February 29, 2020, numbers on Tuesday morning, showing a net revenue decline to $23.2 million versus $26.9 million a year ago and compared to $25.2 million for Q1 2020.

The quarter was the company’s first in the so-called Cannabis 2.0 era, with OGI shipping its first vape cartridges in December 2019, followed by ready-to-go distillate vape pens and cannabis-infused chocolates in February. Subsequent to the quarter’s end, OGI announced its corporate action plan relating to COVID-19, which had the company temporarily laying of 45 per cent of its workforce.

In his Q2 commentary, CEO Greg Engel said the results show OGI continuing to execute despite ongoing challenges to the cannabis industry, which has faced supply issues and a slower-than-expected rollout of adult-use retail across the country.

“[In the Q2], we introduced new products such as our Edison Bytes chocolates, Edison Limelight dried flower and Trailblazer vape pens and continue to elevate the Canadian consumer’s cannabis experience. These products have been well received with strong customer demand to date and we look forward to further roll-outs in the space,” Engel said in a press release.

On the numbers, Sarugaser said OGI’s top line of $23.2 million was a modest beat of his $21.8-million estimate but a miss of the consensus $24.6 million, while the company’s adjusted EBITDA loss of $1.1 million (versus a gain of $4.9 million for the Q1 2020) missed his $2.4-million estimate and the Street’s $3.4 million.

Sarugaser called the quarter a bellwether moment for Canada’s cannabis industry as it reflected the first picture of adult-use 2.0 product sales, which for OGI, saw sales of its Trailblazer Torch vapes account for 13 per cent of quarterly adult-use sales.

Yet the analyst didn’t like what he saw in the adult-use 1.0 sales, which declined by six per cent from the previous quarter despite growing retail across the country and a broader market over the time period. The company attributed the decline in part to provincial distributors selling their existing inventory of OGI’s lower velocity SKUs during the quarter, but Sarugaser thought the drop in sales was notable nonetheless.

“While adult-use 2.0 sales are reason for future-quarter positivity, especially in the case of a strong manufacturer like OGI, we find the company's tapering adult-use 1.0 sales worrisome, indicating sliding market share for its 1.0 products. We will watch the performance of OGI's ‘high-velocity' 1.0 and 2.0 SKUs closely,” Sarugaser wrote.

“We think OGI's headwinds are largely in the rear-view and the quarters ahead looking rosy with respect to sales of new adult-use 2.0 products, an uptick in wholesale business, and the potential of much-mitigated costs moving forward; we expect this stock's bottom to be near. Last time OGI was trading at these prices was in Oct. 2016. In the absence of near-term financing, we see today's dip as a favourable entry point for the stock,” he said.

For OGI’s full fiscal 2020, Sarugaser is now calling for revenue of $109 million (previously $111 million) and EBITDA of $3 million (previously $17 million).