Organigram is a bellwether for Canadian cannabis, Paradigm Capital says

Paradigm Capital analyst Corey Hammill is telling investors to look to Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) for an indication of how the Canadian cannabis space will pan out.

In a morning comment to clients on Friday, Hammill reasserted his “Buy” rating and $3.20 target price for Organigram, which at press time represented a projected 12-month return of 115 per cent.

Moncton, New Brunswick’s Organigram was founded in 2013 and produces indoor-grown cannabis for Canada’s medical and adult-use markets. The company last reported earnings on July 22 where OGI’s fiscal third quarter 2020 brought in $18.0 million in revenue compared to $24.8 million a year earlier. Adjusted EBITDA was a loss of $24.7 million compared to a gain of $7.7 million a year earlier. Analysts’ consensus was for EBITDA of $0.1 million on a top line of $22.5 million.

In his comment, Hammill noted a recent webinar by investment manager Ninepoint Partners on its Alternative Health Fund, with a focus on cannabis exposure. Ninepoint said that while Canada has seen its share of high-profile failures, investment opportunities await in the US, with the industry expected to grow state-by-state regardless of who wins this year’s US election. Further, US has overall advantages to
Canada as it hasn’t seen the same capacity overbuilding, it has a larger total market and product branding, unlike in Canada, is allowed.

Nevertheless, Ninepoint thinks Canadian market players are rightsizing, and the opening up of the Ontario market, where the goal is to get 40 store approvals a month up from 20, will present opportunities for greater sales.

As for Hammill on Organigram, the analyst said, “We continue to see OGI as a bellwether for Canada. Ontario is rapidly opening more stores, which should be positive tailwind.”

Hammill pointed out that Ontario ended last year with less than 75 stores, while Alberta currently has 12 times the store density of Ontario.

On Organigram, Hammill estimates the stock is trading at 1.5x 2021 sales versus the average among Canadian licensed producers of 3.3x.

On the technical side, Paradigm said OGI formed a bullish engulfing pattern on Thursday which suggests the potential for a short-term bottom, with a potential move towards the $1.62-$1.63 zone and with the stock sporting a key resistance in the $1.95 to $2.00 range. Year-to-date, Organigram is currently down 56 per cent, while in 2019 the stock lost 34 per cent of its value.

Organigram announced last month its first shipment of bulk dried flower to Israeli medical cannabis company Canndoc. The shipment is part of OGI’s multi-year deal with Canndoc which is estimated to total about $2.4 million.

“We are proud to offer clients like Canndoc the quality of indoor-grown cannabis,” says Greg Engel, CEO, Organigram, in a press release on August 14. “Our agreement with Canndoc reflects the value of our ongoing investment in state-of-the-art growing technology, and our stalwart commitment to consistency and quality.”