Raymond James analyst Rahul Sarugaser is sticking with his call on Canadian cannabis licensed producer Organigram (Organigram Stock Quote, Chart, News TSX:OGI) after the company’s latest quarterly earnings.
In an update to clients on Monday, Sarugaser reiterated his “Market Perform 3” rating for OGI as well as his $3.00 target price, which as of publication represented a projected 12-month return of 76 per cent.
Moncton, New Brunswick-based Organigram, which manufactures cannabis using a refined indoor cultivation process for the recreational and medical markets, reported its fiscal fourth quarter 2020 results on November 30 for the period ended August 31, 2020.
The company saw quarterly net revenue increase 25 per cent year-over-year to $20.4 million and up from $18.0 million in the previous quarter and an adjusted EBITDA loss of $2.7 million compared to a loss of $7.2 million a year earlier and a loss of $24.7 million in Q3 2020.
Over the quarter, OGI reported write-offs of excess and unsaleable inventories of $11.1 million, with $8.3 million of that related to excess trim and concentrate and $2.8 million in write-downs and adjustments to net realizable value. Lower production volumes resulted in $3.5 million in unabsorbed fixed overhead and $0.2 million related to lump-sum payments paid to temporarily laid-off workers in Q4 2020.
Organigram launched 40 new stock keeping units (SKUs) since July, with expectations to launch up to 18 more in the fiscal second quarter 2021 related to the company’s product portfolio revitalization.
“We had higher flower sales in Q4 2020 as the large-format value segment continue to grow, and our expanded offerings in this segment resonated well with consumers,” said CEO Greg Engel in the quarterly conference call. “And of course, Rec 2.0 sales contributed to our growth, as a year ago the products were not yet legal.”
“We are extremely pleased to make our first shipment to Israel under our supply agreement with Canndoc, a leading Israeli medical cannabis producer. To date, this is OrganiGram’s largest international deal, and we’re Canndoc’s exclusive supplier of indoor grown cannabis,” Engel said.
By the numbers, OGI’s Q4 narrowly beat Sarugaser’s estimate while missing on EBITDA. The company’s $20.4 million in revenue and negative $2.7 million in EBITDA compared to Sarugaser’s estimates at $18.9 million and negative $1.9 million, respectively, and to the consensus expectation for $20.3 million and negative $1.4 million, respectively.
Sarugaser said the road may be bumpy for a while yet but the future looks better over the long term, with the analyst calling for OGI to grow its market share from about four per cent at present to about 6.5 per cent through 2025.
“As we had estimated in our preview note (on November 20), OGI has seen its Canadian market share diminish to ~4 per cent, slipping from ~6 per cent in 1Q20. While the company rationalizes and revitalizes its product offerings, we expect continued short- to medium-term pain — OGI saw $11.1 million of write-offs of unsalable inventories this quarter — for what we hope will be long-term gain,” Sarugaser wrote.
“A bright spot we do see is OGI’s increasing adjusted gross margin (excluding write-offs), which jumped to 30 per cent this past quarter after a challenging 3Q20, which saw (118 per cent) gross margins before fair value adjustments,” he said.
Sarugaser has made adjustments to his forecasts and is now calling for fiscal 2021 revenue of $102 million (previously $87 million) and EBITDA of $3 million (previously $8 million) and for fiscal 2022 revenue of $139 million (previously $121 million) and EBITDA of $19 million (previously $28 million).
“Given the shorter-term market share headwinds OGI continues to experience, we maintain our Market Perform rating,” Sarugaser said.
Subsequent to the quarter’s end, Organigram announced $2.5 million in further investment in biotech company Hyasynth Biologicals, which is producing cannabinoids biosynthetically and made its first commercial sale in September. OGI’s investment now totals $7.5 million, with the company having the right to purchase potentially all of Hyasynth’s cannabinoid or cannabinoid-related production at a ten-per-cent discount to the wholesale market price for a period of ten years from the start of commercialization.
“While we believe there will always be a sizeable market for dried flower and derivative based products produced at our indoor facility, it is exciting to watch Hyasynth’s progress in biosynthesis. We believe biosynthesis has the potential to redefine the cannabinoid production landscape by setting a scalable and reliable platform of supply that cannabis producers and pharmaceutical companies can leverage for success,” says Engel in a press release on October 23. “As the demand for large-scale, pure and consistent supply grows in both the pharmaceutical and consumer sectors, we are pleased to continue to support Hyasynth’s work.”
Sarugaser estimated that as of the end of August Organigram had debt of $104 million and cash of $74.7 million. Since the quarter’s end, OGI has raised $69 million and announced the $2.5-million Hyasynth investment.