Organigram has price target chopped at Raymond James

Raymond James analyst Rahul Sarugaser has dropped his rating on Canadian cannabis LP Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI), arguing in an update to clients on Friday that investors should expect tough times ahead due to COVID-19.

Moncton, New Brunswick’s Organigram, which grows medical and adult-use cannabis via an indoor cultivation process and has expertise in both the pharmaceutical and food manufacturing sectors, is expected to deliver fiscal third quarter 2020 results during the week of July 13, upon which Sarugaser has now put out revised estimates.

The analyst is expecting revenue of $19.4 million, down from $23.2 million in the previous quarter, and an EBITDA loss of $2.6 million versus a loss of $1.1 million for the last quarter. Its cash balance should come in at $79.0 million, according to Sarugaser, which would include proceeds from a $49.0-million now-completed At-the-Market offering.

On the plus side, Sarugaser said OGI was one of the more proactive Canadian LPs in its COVID-19 response, adopting early on operational adjustments in the form of temporary workforce layoffs and reduced overall production, with the analyst expecting to see the impact in the Q3 results.

But Sarugaser predicts OGI will see an increase in its industry-leading cost of goods sold (at an average of around $0.80 per gram) which will hit the company’s gross margins.

That along with fixed SG&A costs will keep the company’s EBITDA in the negative, according to the analyst.

As well, OGI looks to be losing out in the race to provide Canadian customers with low-cost value offerings, Sarugaser said.

“Based on our channel checks, it appears that OG’s operational changes resulted in a slower-than-anticipated roll out of its deep value brand, Trailer Park Buds,” Sarugaser wrote.

“We’ve seen from several other producers — including Aurora Cannabis, Canopy Growth, HEXO Corp — that this deep value segment (cannabis flower retailing for <$5/gram) was critical to driving outperforming sales (or underperforming sales, in the case of CGC) in their 2Q20 results. OGI appeared to be slow to this game, which we anticipate will result in weak overall revenue in its upcoming 3Q20 earnings,” he said.

“This said, we anticipate underperforming cannabis flower sales to be somewhat mitigated by revenue from its strong cannabis chocolate market share,” Sarugaser said.

Looking further out, Sarugaser has revised his forecast, now calling for fiscal 2020 revenue of $92 million (previously $109 million) and EBITDA of $3 million (previously $3 million) and for fiscal 2021 revenue of $119 million (previously $174 million) and EBITDA of $24 million (previously $40 million).

The analyst’s rating has moved from “Outperform 2” to “Market Perform 3,” while his target has gone from $6.50 to $5.00 per share, which at press time represented a projected 12-month return of 110 per cent.

“As we cut our rating today, we feel compelled to emphasize that while COVID-19 has had an outsized impact on OGI, we continue to have confidence in the company's management team, and hence, OGI's long-term (i.e., 2021 onward) prospects,” Sarugaser wrote.