Raymond James analyst Rahul Sarugaser is remaining upbeat about Canadian cannabis LP Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) after the company amended its credit facility with the Bank of Montreal.
Sarugaser issued an update to clients Friday where he reiterated his “Outperform 2” rating for OGI, saying investors should buy the stock on a dip.
Moncton, New Brunswick’s Organigram announced in mid-April that it was in non-compliance with one of the financial covenants of its BMO term loan which left in doubt whether the company would have access to the remaining $30-million of the loan.
But in a Friday press release, OGI said BMO had agreed to an amendment, effectively leaving the company now with $55 million in available liquidity from credit. That’s in addition to the roughly $40 million the company has in cash on hand.
“In addition to the existing customary financial and restrictive covenants, the Company has agreed as part of the Amendment, to maintain an unrestricted cash balance of not less than $30 million at all times, $8 million of which has been deposited as cash collateral with BMO as security for the Facilities. The Facilities continue to be secured by the assets of Organigram, which primarily consist of the Company’s Moncton campus production facility,” read the statement from OGI.
In his update, Sarugaser commented that the new terms have become “quite restrictive” but ultimately he is treating the event as a positive for the company and stock.
“We are comfortable with and confident in OGI remaining unhindered by these adjustments on account of the company’s very positive current trajectory: OGI has been EBITDA-positive or break-even over the last several quarters; OGI has sufficient liquidity to continue executing its strong, EBITDA-generating operations; OGI’s 3Q20, specifically, will represent the company’s first full quarter of Cannabis2.0 sales, a market in which we expect OGI to be claiming substantial market share,” wrote Sarugaser.
“We view continued access to these BMO funds as positive, and the restrictive covenants we believe should motivate OGI toward driving positive EBITDA today and in future quarters,” he said.
Organigram’s share price has been rising with the rest of the cannabis sector over the past couple of weeks but the stock remains down 14 per cent for the year and down 58 per cent over the last 12 months.
With its latest quarter, released on April 14, OGI recorded revenue of $23.2 million, down from $26.9 million a year earlier and down from $25.2 million in the previous quarter.
Sarugaser thinks Organigram will generate 2020 revenue and EBITDA of $109 million and $3 million, respectively, and 2021 revenue and EBITDA of $174 million and $40 million, respectively.
“In sum, we see these amendments as net neutral, but expect the news to cause some confusion, and, in combination with industry bellwether Canopy Growth reporting 4Q20 earnings [on Friday] that missed consensus estimates, we expect some weakness in OGI’s stock. In light of OGI’s very positive current trajectory, we see any weakness as an opportunity to add positions,” Sarugaser said.