Haywood cuts price target on Organigram, keeps “Buy” rating

Canadian cannabis producer Organigram (Organigram Stock Quote, Chart, News TSX:OGI) has received a price target cut from Haywood Capital Markets analyst Neal Gilmer ahead of the company’s third quarter earnings.

On Monday, Gilmer delivered a Q3 preview on OGI, saying the company should be EBITDA positive in 2020.

Moncton, New Brunswick’s Organigram produces indoor-grown cannabis for the medical and adult-use markets along with a developing edibles and other derivatives set of products. The company has seen its share price drop considerably over the past year, along with the rest of the cannabis sector. OGI is currently down 35 per cent for the year and down 75 per cent over the past 12 months.

OGI will report its fiscal Q3 2020 results on July 21 before market open. The company’s second quarter, delivered on April 14, saw the company post $23.2 million in revenue compared to $26.9 million a year earlier and an adjusted EBITDA loss of $1.1 million.

In April, Organigram temporarily laid off 45 per cent of its workforce (about 400 employees) due to COVID-19 and has said its production and packaging capacity will be impinged, although management said that inventory remains at a suitable level to meet near-term demands. At the same time, OGI more recently (July 4) said its Q3 net revenue will be lower than the Q2 due to a drop in wholesale revenue.

For his part, Gilmer is calling for Q3 revenue of $20.0 million, below the consensus of $22.9 million and representing a 14-per-cent sequential drop, and an adjusted EBITDA loss of $1.1 million, also below the consensus forecast of positive $0.3 million. Gilmer’s estimates have been lowered from $22.9 million and positive $1.5 million, respectively.

Aside from the near term uncertainties, Gilmer says the long-term position looks favourable for the Canadian cannabis sector, as more retail locations spring up (particularly in Ontario) and demand grows. Gilmer says OGI should benefit due to its broad product offering.

“We believe that Organigram is well-positioned for a re-rating within the cannabis sector. Following the addition of Greg Engel as CEO, the Company has added to its management and operations teams, successfully executed on its expansion plan and secured provincial supply agreements with all ten provinces,” Gilmer wrote.

“Going forward we expect continued growth to be propelled by sales into the provinces for recreational adult-use will drive positive EBITDA in Fiscal 2020. In conjunction with its announced intention to expand internationally and potential geographic expansion domestically, we believe Organigram is positioned to outperform some of its peers,” he wrote.

The analyst is calling for fiscal 2020 net revenue and adjusted EBITDA of $92.2 million and $5.0 million, respectively, and fiscal 2021 net revenue and adjusted EBITDA of $159.4 million and $49.1 million, respectively.

With the update, Gilmer has retained his “Buy” rating for OGI but dropped his target price from $4.25 to $3.50, saying his lowered forecast along with increased shares outstanding due to a recent at-the-money offering ($49 million) are cause for the target drop.

As of press time, Gilmer’s $3.50 target represented a projected 12-month return of 72 per cent.