Canadian licensed cannabis producer Organigram (Organigram Stock Quote, Chart, News, Analysts, Financials TSX:OGI) has a new deal with British American Tobacco, with the world’s second-largest tobacco company taking on a 19.9 per cent stake in the Moncton, New Brunswick-based Organigram. But will BAT stop at 20 per cent or are they after the whole pie? Portfolio manager Bruce Campbell says a full buyout could be in the cards.
“Organigram now has a fairly significant partner in British American Tobacco,” says Campbell, president of StoneCastle Investment Management, who spoke on BNN Bloomberg on Thursday. “They came in with less than that 20-per-cent ownership so that they don’t have to make any of the legal declarations. We think that probably the opportunity down the road is that something like British American Tobacco just takes them out.”
“In the meantime, Organigram continues to operate really well and have some efficiencies that some of the other companies don’t necessarily have. It’s one that we do own in our cannabis fund and we like it,” Campbell said.
It’s been a tough slog for fans of OGI in recent years, with Canadian cannabis stocks mired in a long drought dating back to early 2019. That was when the shine started to come off the newly-minted (legal) cannabis industry, which showed signs of a supply glut, cratering wholesale prices and a slower-than-expected rollout of retail across the country. All that led to significant losses for cannabis companies still finding their footing and eating through their respective bankrolls at a feverish pace.
Stock prices plummeted, with the Horizons Marijuana ETF (Horizons Marijuana ETF Stock Quote, Chart, Analysts, Financials TSX:HMMJ), which tracks the space as a whole, losing about three-quarters of its value between late 2018 and late 2020.
But the sector has picked up since this past October as the market spies a corner being turned in the fledgling sector which is gaining ground on the black market through the accelerated opening of retail outlets, especially in Ontario, where the Alcohol and Gaming Commission has committed this. year to authorizing 30 new stores per week across the province.
The good vibes have helped Organigram, as well, which went from $1.69 per share on January 1 to now $4.61, a gain of 173 per cent over less than a three-month period.
The stock has also been buoyed by the BAT deal, announced on March 11 and involving a $221-million strategic investment by BAT for its 19.9-per-cent equity stake and a collaboration on product development.
BAT said the strong management team and culture at Organigram was part of what drew it to the company.
“We believe this collaboration has significant potential to enhance our activities, allowing us to combine our world-class expertise while enabling scientists from both BAT and Organigram to work closely together and share information real-time. We know that in R&D this is how you make real breakthroughs and accelerate progress,” said Dr. David O’Reilly, director of scientific research at BAT, in a press release.
Campbell also has praise for management at OGI, which has perennially boasted one of the lowest cost-per-gram cannabis operations in the country.
“Organigram is one that has always kind of flown under the radar in some respects,” Campbell said. “It doesn’t really rank in the top of the tiers just because of its size, but we’ve always had tremendous respect for the management team, both back when Dennis Arsenault was in charge and now with with Greg [Engel] in charge.”
“We think that they’ve done a phenomenal job of operating. They’ve been very efficient,” he said.
Organigram saw revenue drop last year as the company cut back staff and production in the midst of COVID-19’s early lockdown days. The company’s top line has remained choppy over recent quarters, with OGI showing a 25-per-cent year-over-year boost in revenue in its fiscal fourth quarter ended August 31, 2020, followed by a 23-per-cent year-over-year decline in revenue for its fiscal first quarter 2021 ended November 30. The Q1 2021 also featured an adjusted EBITDA loss of $6.4 million versus a gain of $5.7 million a year earlier.
But Campbell says Organigram and the cannabis sector as a whole have brighter days ahead as the industry matures.
“Anytime Organigram has had any challenges, which, of course, we know pretty much everyone in the cannabis sector has had, they’ve been able to deal with them quickly and resolve them efficiently. That’s probably one of the reasons why British American Tobacco made that investment,” Campbell said.
“We were quite enthusiastic about another large player coming into cannabis, and it continues to reinforce our view that cannabis is here to stay and that it’s going to continually grow and probably will be one of the fastest growing sectors over the next decade,” he said.