PI Financial cuts price target on Organigram, keeps “Buy” rating

Canada’s cannabis sector is still facing some headwinds but Moncton, New Brunswick’s Organigram (Organigram Stock Quote, Chart, News TSX:OGI) is one to own through the continued rough period, according to Jason Zandberg, analyst for PI Financial.

In a client update on Tuesday, Zandberg reviewed Organigram’s latest quarterly financials and ended up reiterating his “Buy” rating with the reduced target price of $5.50 (previously $7.00).

Organigram released its second quarter ended February 29, 2020, on Tuesday, reporting net revenue down to $23.2 million from $26.9 million a year ago and from $25.2 million for the previous quarter.

The quarter showed the first glimpse of business during Cannabis 2.0 for OGI, one of the first in the industry to report on edibles and derivatives.

In his commentary, CEO Greg Engel noted the company’s introduction of Edison Bytes chocolates and Trailblazer vape pens, along with the debut of the company’s Limelight dried flower. Engel said the threeproducts have so far been “well received” with strong customer demand to date. OGI’s revenue stream continued to diversify over the quarter, with Rec 1.0 adult-use market having represented 52 per cent of the company’s net revenue for the quarter compared to 91 per cent a year ago.

Wholesale sales to other LP’s over the quarter accounted for 24 per cent of sales, with Canadian medical sales coming in at ten per cent and international sales at one per cent of the total.

In his coverage, Zandberg judged Organigram’s quarter to be underwhelming, saying that the $23.2 million in net revenue was lower than his expectation of $27.0 million, while OGI’s EBITDA loss of $1.1 million (compared to $4.9 million last quarter) was lower than Zandberg’s $5.0 million estimate. The analyst noted that the big EBITDA miss came down to higher-than-expected SG&A, an expense which is expected to drop considerably in upcoming quarters due to the laying off of 45 per cent of OGI’s staff in its response to COVID-19.

On the plus side, Zandberg pointed to OGI’s costs per gram which continued to drop to $0.51 per gram compared to $0.61 per gram for the previous quarter. The improvement came from increased economies of scale and an increase in plant yield from 150 grams per plant to 155 grams per plant.

Yet the misses had their impact on the analyst’s forecasts, where he is now calling for fiscal 2020 revenue and EBITDA of $116.3 million and $20.5 million, respectively, and for fiscal 2021 revenue and EBITDA of $228.3 million and $61.3 million, respectively.

“We are decreasing our outlook for FY20 and FY21. The good news is that OGI has considerable inventory which it intends to supplement revenue with large wholesale transactions. These transactions offer a lower ASP but at higher gross margins,” Zandberg wrote.

“We believe that OGI is among the premier cannabis operators in Canada but the Canadian market is struggling as supply outpaces demand. We believe the macro outlook will improve and OGI is a name to own on the other side,” he said.

At press time, Zandberg’s new $5.50 target represented a projected one-year return of 145.5 per cent.