Calling Organigram (Organigram Stock Quote, Chart, News TSX:OGI) a fundamentally compelling investment story, analyst Corey Hammill of Paradigm Capital reasserted his “Buy” rating in an update to clients Monday.
Ahead of third quarter fiscal 2020 results from Moncton, New Brunswick’s Organigram on Tuesday, Hammill is expecting a hit to the company’s top line along with significant impairment charges from its stockpile of inventory which could add up to an EPS miss for the quarter.
“As a result of operational inefficiencies associated with the ongoing COVID-19 pandemic, we are looking for a sequential low single-digit decline in net revenue, flat to slight decline in gross margins and a material q/q reduction in total OPEX, which could collectively lead the company to report its second consecutive EBITDA negative quarter,” Hammill wrote.
“Furthermore, as a result of OGI’s recent workforce and production cuts, we expect it to realize what could be fairly sizeable impairment charges related to inventory on hand and to the value of its Moncton production facility. These charges could contribute to a sizeable bottom-line/EPS loss,” he said.
The analyst is calling for revenue of $22.4 million for the Q3, which would be down from $24.8 million a year earlier, and an EBITDA loss of $1.2 million compared to gains of $7.7 million a year earlier.
Hammill said that while OGI should see a more meaningful contribution from its derivatives products this quarter, the company is likely to see a dip in pre-roll sales and continued market-wide price compression related to increased competition with other LPs as well as the still-functioning illicit market.
Organigram’s share price hit a high of $11.30 last May but has since been on a downward trend, trading between $2.00 and $3.00 over the past few months. Year-to-date, the stock is down 36 per cent.
For the company’s second quarter, delivered on April 14, Organigram’s net revenue fell to $23.2 million compared to $26.9 million a year earlier and EBITDA came in at a loss of $1.1 miilion. OGI finished the Q2 with $41.2 million in cash and short-term investments.
Hammill said a flat to slight decline in gross margins over the Q3 along with reduced opex related to the temporary layoff of about 400 workers during the early months of the COVID-19 pandemic will likely contribute to a second consecutive quarter of negative EBITDA.
Along with the gloomier near-term, however, Hammill sees a brighter future for OGI, which should have a number of catalysts upcoming. These would include the receipt of EU GMP certification, which would allow for international export, the continuation of its derivatives product rollout which will soon feature the launch of Organigram’s beverage powder product in the calendar third quarter and higher THC strains.
Hammill is also optimistic about the expansion of Canada’s bricks-and-mortar network of cannabis shops, which should support OGI’s growth.
On the stock, Hammill sees OGI as underperforming its peers.
“Despite its fundamental strengths and macro industry tailwinds, OGI shares have been disproportionately beaten up, underperforming relative to our Canadian Cannabis Licensed Producer (LP) tracking based on the last month, down 18.5 per cent versus down 3.5 per cent, respectively,” Hammill wrote.
With his “Buy” rating Hammill reasserted his $4.00 target price, which at press time represented a projected 12-month return of 90 per cent.