Is Organigram a buy?

New quarterly results have Rahul Sarugaser of Raymond James staying bullish on cannabis play Organigram Holdings (Organigram Holdings Stock Quote, Chart, News, Analysts, Financials TSX:OGI). In an update to clients on Tuesday, Sarugaser maintained his “Outperform 2” rating and $5.00 target price, which at the time of publication represented a projected one-year return of 52 per cent.

Headquartered in Moncton, New Brunswick, Organigram is a licensed producer using an indoor cultivation process for Canada’s medical and adult-use markets. Organigram’s portfolio of brands includes the Edison Cannabis Company, Indi, Bag o’ Buds, SHRED and Trailblazer.

The company reported fiscal third quarter 2021 results on Tuesday for the period ended May 31, 2021, featuring net revenue up 13 per cent year-over-year and up 39 per cent sequentially to $20.3 million. OGI’s EBITDA loss for the quarter was $10.2 million compared to a loss of $2.1 million a year earlier.

“We are pleased with the growth in revenue in Q3 as we were better staffed to fulfill the demand for our revitalized product portfolio, which continues to resonate well with consumers,” said Paolo De Luca, OGI’s Chief Strategy Officer, in a press release.

“The ongoing investment in our genetics and cultivation program has yielded some exciting new dried flower products with more genetics and derivative product launches planned for the near term. Sales are trending higher to date in Q4 supported by a strong outlook for the industry as the number of cannabis retail stores continues to grow and existing stores are permitted to re-open their doors to customers,” De Luca said.

Organigram said its SHRED value-brand cannabis stayed in the #1 spot as most-searched brand on the Ontario Cannabis Store for eight consecutive months, while the company reported the launch of 84 new SKUs since July 2020 including two new high-potency strains under its higher-margin Edison Brand. OGI also acquired over the quarter The Edibles and Infusions Corporation, a Winnipeg-based licensed manufacturer of cannabis-infused soft chews and candy, with its first soft chews expected to be in retail stores in August.

Looking at the quarterly numbers, Sarugaser said the $20.3 million in revenue was a beat over his estimate of $18.2 million and the consensus call for $17.0 million, while the EBITDA loss of $10.2 million was larger than his negative $7.3 million estimate and the Street’s negative $6.3 million forecast. The analyst noted OGI’s cash at the Q3’s end of $196.5 million compared to $232 million at the close of its fiscal Q2 2021, while debt was at $0.3 million at the end of the third quarter.

Sarugaser noted that strong SHRED sales drove revenue for the quarter while the company’s restaffing program impacted cost of goods sold, resulting in the greater-than-expected EBITDA loss. SHRED was the sixth-highest-selling single brand in Canada for the month of May, according to Sarugaser’s channel data

“While we appreciate OGI’s revenue ascendance, much of this revenue is coming from relatively low margin products: value-priced cannabis and derivative products (many of which still fetch thin margins today),” Sarugaser wrote.

“For improved margins, we will be looking to OGI’s soon-to-launch infused gummies from The Edibles and Infusions Corporation (very high-capacity, low-cost operation). Next, we will be watching closely to see how OGI leverages its particularly strong balance sheet to gain position in high-margin categories such as premium craft flower,” he said.

“Since craft cannabis must come from small growers <10,000 kg/yr), be hand-trimmed, hand-dried, and hand-packaged, it makes sense in our view for OGI to enter this category by partnership or M&A,” Sarugaser wrote. The analyst said that according to his channel data for the month of June, OGI’s fiscal fourth is “off to a big start” as well, and with reduced COVID restrictions and the company’s improved capacity to fulfill demand via increased staffing, the next quarter should be even stronger. “The company's new product offerings seem to be gaining the traction OGI needs, organically pushing OGI into the #5 market share position among all Canadian LPs, despite its largest peers' M&A-driven market share growth,” Sarugaser wrote. Sarugaser also noted the impact of OGI’s British American Tobacco (BATS) partnership whose cash injection has helped OGI establish a product development centre of excellence, repay all its balances under its former BMO credit facility (saving $2.7 million annually) and to go ahead with allocating about $38 million to completing the construction of Phase 4C of its Moncton campus. “OGI continues to evaluate opportunities to enter the U.S. THC and CBD markets, and expects to continue its high-margin medical cannabis shipments to Israel in 1Q22. Further, the company expects to see increased SG&A costs during 4Q21 related to its product development collaboration agreement with BATS,” Sarugaser wrote. “Finally, the search for a CEO after Greg Engel’s departure continues, while Peter Amirault (prior chairman of the board) is acting as executive chair, and Chief Strategy Officer, Paolo De Luca—for now—appears to be stepping into a more public-facing role,” he said.