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Organigram keeps $5.00 target at Raymond James


OrganiGramAhead of third quarter financial reports being released on July 13, Organigram Holdings (Organigram Stock Quote, Chart, News, Analysts. Financials TSX:OGI) has maintained its previous targets with Raymond James analyst Rahul Sarugaser. The analyst’s “Outperform 2” status for the Moncton-based cannabis company comes after Sarugaser cut his price target from $6.00/sh to $5.00/share in April, though he also believed it would continue to outperform its year-over-year projections.

It’s a slightly more optimistic update from Sarugaser than his Q2 analysis, as he projects a Q3 revenue estimate of $18.2 million (a 24.7 per cent increase over the previous estimate of $14.6 million), fueled largely by a spike in retail sales.

“OGI has driven a material adult-use retail sales jump in May and June 2021, leading to a 63% sales increase CQ1 to CQ2,” he said. “Given, however, that the company reports 3Q21 ending May 30, we calculate 2Q to 3Q21 retail sales growth of 45%. That said, provincial buyers—particularly ON—continued to languish in their reorder rates during CQ2, so we moderate OGI’s QoQ adult-use Rev. growth to 30%.”

With a focus on Canada’s adult-use and medical cannabis markets, Organigram uses its strength in pharmaceutical and food manufacturing to achieve very low costs of cultivation through a refined indoor process, all while driving its active adoption of globally relevant next-generation technologies like cannabinoid biosynthesis and nanoemulsion chemistry.

Overall, Sarugaser now projects Organigram to hit $75 million in revenue in 2021, with 2022 shaping up to be particularly profitable, with a revised forecast of $139 million in revenues. The company’s EBITDA also got updated projections, projected to rise to $47 million from the original target of $35 million in 2021, with a jump to $19 million forecast for 2022 as opposed to the original $12 million figure.

However, the EV/EBITDA and EV/Revenue projections have tightened up considerably, with the EV/EBITDA (Aug FY) dropping to 20.8x for 2021 from its original 28.8x, while 2022’s estimates have been revised to 52.1x, a 35.8-per-cent drop from the original figure of 81.1x. The EV/Revenue projection shifts aren’t quite as dramatic, with Sarugaser now projecting the 2021 figure to be 13.0x, down from 14.7x, while he now forecasts the figure for 2022 to be 7.0x instead of 9.0x.

Organigram has been busy from all sides over the last few months, with British American Tobacco (BAT) investing $221 million for 19.9 per cent stake in the company, followed by announcing the acquisition of the Winnipeg-based Edibles and Infusions Corp. on April 6 for $22 million, with an additional $13 million possible in earnouts as Organigram looks to expand its operations in western Canada.

On June 24, the company also announced that it has filed a short form base shelf prospectus with all of Canada’s provincial and territorial securities commissions, potentially qualifying the company to distribute up to $500M in common shares, preferred shares, debt securities, subscription receipts, warrants, and units over a 25-month period.

The investments come in the midst of the resignation of CEO Greg Engel, who remains as a special advisor to the Organigram board until his successor is officially announced, with Organigram Chairman Peter Amirault taking up the reins in the meantime.

Engel’s resignation is part of a turnover period for Organigram, with the company announcing industry veteran Borna Zlamalik as its new Vice President of Innovation on May 10 after serving as the Vice President of Marketing and Communications for The Valens Company, followed by naming Megan McCrae as the new Senior Vice President of Marketing and Communications on May 31.

The company is now in the process of recruiting for as many as 75 additional roles in Moncton to try and meet revenue potential, which Sarugaser notes as a contributing factor in the company’s margins still being under pressure.

“OGI has been staffing up, expecting the benefits of these hires to be realized in 3Q21 and 4Q21,” he said. “This seems to already be benefiting the company in the form of augmented revenue, but we estimate that most of these incremental hires have been in OGI’s cultivation operations, the cost of which would be directly attributable to COGS.”

“As such, with our Rev. estimate of $18.2 mln similar to 1Q21’s Rev. of $19.3 mln, we estimate a similar COGS margin of 95% (1Q21 was 93%), but a slightly moderated SG&A margin of 45% (1Q21was 57%),” he said.

Organigram closed Monday down a penny to $3.28.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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