Canadian cannabis licensed producer Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) is staying active on the innovation front but declining market share has Raymond James analyst Rahul Sarugaser staying put with his “Market Perform 3” rating on the stock.
Ahead of quarterly earnings from the company, Sarugaser delivered an update to clients on Friday where he dropped his target price from $5.00 to $3.00 on expectations of flat revenue and a drop in market share.
Moncton, New Brunswick-based Organigram has indoor grow facilities for the recreational and medical markets along with international business and a portfolio of cannabis brands. The company has seen its share price fall over the past year and a half, tumbling from above $10 as of June 2019 to now sub-$1.50 territory.
Expected to report fourth quarter fiscal 2020 results (quarter end August 31) sometime over the next few weeks, OGI last reported in July where its fiscal Q3 featured revenue of $18.0 million compared to $24.8 million a year earlier and an adjusted EBITDA loss of $24.7 million compared to positive $7.7 million a year earlier.
At the time, management pointed to COVID-influenced production delays as a factor in the lower numbers, those coming just at a time when cannabis sales nationwide had been on the upswing during the pandemic.
As for the upcoming Q4 release, Sarugaser thinks a continued decline in market share is in the cards.
“This year, we’ve seen OGI’s market share decline materially — from ~6 per cent in 1Q20 to ~4 per cent in 3Q20 — which we attribute mainly to COVID-19 oriented logistical challenges causing OGI to miss the significant windfall engendered by large-format, deep value cannabis offerings in early and mid-2020,” Sarugaser wrote.
“Channel checks indicate that 4Q20 showed a continuation of in this downward market share trend, with OGI capturing <4 per cent of the Canadian market, which, importantly, has grown ~75 per cent since 1Q20, resulting in flat adult-use cannabis revenue: we estimate $15.6 million. We also anticipate that OGI booked one-third of the total $2.4 million associated with its Israeli medical cannabis export deal with Canndoc, resulting in our total estimated 4Q20 revenue of $18.9 million,” Sarugaser said. For the fiscal 2020 year, the analyst now thinks OGI will generate revenue of $85 million (previously $91 million) and an EBITDA loss of $23 million (previously $20 million), followed by fiscal 2021 revenue of $87 million (previously $114 million) and EBITDA of $8 million (previously $23 million). At the time of publication, Sarugaser’s new $3.00 target represented a projected one-year return of 112.7 per cent. At the same time, Sarugaser highlighted a number of recent developments from Organigram, including the launch of large-format, value-priced cannabis chocolate bars, Trailblazer Snax and several new strains of high-potency flower, with the company aiming for a repeat of the success from its top-selling product Edison Limelight high potency flower, according to Sarugaser. As well, OGI has recently made additions to its deep value line, SHRED (which the analyst noted is the lowest-cost cannabis as of press time at about $4 per gram) and it launched its dissolvable cannabis powder packets, the Edison RE:MIX, to hit the cannabis beverage space. Sarugaser also mentioned Organigram’s new $2.5-million investment in cannabinoid biosynthesis partner Hyasynth Bio, who in October successfully produced CBD via yeast-based biosynthesis and made its first sale. OGI delivered on the next tranche in its $10-million total investment, which is now at $7.5 million. “The launch of OGI's RE:MIX nano-emulsification technology and OGI's reinvestment in Hyasynth signals to us that the OGI innovation engine is back up and running after a period of pandemic- dampened activity,” Sarugaser said. “We believe this is one of the company's core strengths and view this resurfacing with optimism as OGI moves forward.” Organigram announced on November 12 the closing of a previously-announced public offering, selling about 37 million units at a price of $1.85 per including almost five million units in overallotment for total gross proceeds of about $69 million. Each unit comes with one common share and one half of a common share purchase warrant with an exercise price of $2.50, exercisable for a period of three years hence. Management said the funds will go towards paying down its debt, working capital and other corporate purposes. On the launch of its Edison RE:MIX powder, the company said the format allows users to quickly and discreetly mix the powder with beverages for consumers in a wide variety of settings for a “quick, straightforward cannabis experience.” “Edison RE:MIX showcases the creativity, focus, and expertise of Organigram’s product development team and reinforces our company commitment to growth through innovation,” said CEO Greg Engel in a November 17 press release. “We have developed a process and product that blend science and individual tastes to help adult Canadians explore new, personal cannabis experiences.”