Organto Foods has a 167 per cent upside, says Beacon

Softer quarterly numbers are not a problem for Organto Foods (Organto Foods Stock Quote, Chart, News, Analysts, Financials TSXV:OGO), according to Beacon Securities analyst Doug Cooper, who remains optimistic on the produce company in an update to clients on Monday.

Headquartered in Vancouver, Organto Foods, in conjunction with its strategic partners and supply chain, provides fresh organic fruit and vegetable products to over 125 retail customers in 16 countries while also owning the I AM Organic and Fresh Organic Choice brands.

Cooper’s latest analysis comes after the company released its third quarter 2021 financial results on Friday.

“Organto reported its Q3/FY21 results that were dampened by logistics issues that have plagued many companies in many industries,” Cooper said. “We believe these are transitory and will not have an impact on the company in FY22 and beyond as it dramatically expands its SKU count, transitions into a greater percentage of higher margin branded and private label products and services a significantly higher number of doors.”

Organto’s financial reports were headlined by $4.3 million in revenue for the quarter, marking a 59 per cent year-over-year increase, though it also represented a 20 per cent sequential drop. Cooper attributes some of the drop to seasonality as the third quarter is typically Organto’s slowest with its European clients being able to buy seasonal fruit and vegetables locally.

He also made reference to a few logistical issues the company had in the quarter, in particular with securing shipping containers. In all, the company believes it left 20-25 containers ‘on the dock,’ which would translate to between $2 million and $2.5 million of ‘lost revenue’; Organto also reported a loss of $900,000 in adjusted EBITDA for the quarter.

However, the company also achieved a record gross margin of 12.3 per cent on account of the portfolio shift to more branded and private label offerings, which accounted for nearly 10 per cent of Organto’s total revenue, without accounting for the launch of I AM Organic in October. The increase stands in contrast to industry peers like Fresh Del Monte, who reported a gross margin of 4.9 per cent. 

“We continue to invest responsibly in our platform as we expand our product portfolio and branded capabilities via both internal growth and acquisitions,” said Steve Bromley, Chair and Co-CEO of Organto in the company’s November 26 press release. “As we look forward, we are encouraged by the initial response to the launch of our I AM Organic brand which has been well received combined with continued worldwide demand for healthy foods that are produced in a sustainable and transparent manner. Our recently completed acquisitions will add to our portfolio and our strong balance sheet positions us to drive continued growth.”

Prior to the end of the quarter, Organto also acquired a pair of Dutch companies to solidify its business model: Beeorganic BV, a year-round provider of fresh fairtrade organic bananas based in Den Hoorn, and Zimbabwe Marketing Services, which serves a variety of European customers with non-GMO and organic raspberries, snow peas, sugar snaps and fine green beans sourced from a number of African-based growing regions; Organto Co-CEO Rients van der Wal was one of the company’s initial founders.

The slower quarter prompted Cooper to revise his more immediate financial projections, lowering his 2021 revenue estimate from $34 million to $25 million. 

From there, Cooper projects a sizable jump to $71.5 million in 2022 for a potential year-over-year increase of 186 per cent, then projecting to jump into nine figures at $118.2 million for a potential year-over-year increase of 65.3 per cent.

Meanwhile, following a projected $3 million loss for 2021 (previously a $2.4 million loss projection), Cooper projects Organto’s adjusted EBITDA to turn positive in 2022 at $1.3 million for a 1.8 per cent margin, followed by a jump to a projected $9.3 million in 2022, good for a 7.9 per cent margin.

In terms of valuation, Cooper projects positive movement for the EV/Sales multiple, forecasting a drop from 2.7x in 2021 to a projected 0.9x in 2022, then dropping again to a projected 0.6x in 2023. Cooper’s first EV/EBITDA multiple forecast comes in 2022 at 53.7x, then plummeting to a projected 7.3x in 2023.

“The organic fruit and vegetable market continues to exhibit strong growth. The more accessible organic food becomes, the more its popularity grows,” Cooper said. “OGO continues to expand both its relationships with farmers around the world as well as buyers (grocers, specialty retailers) as it executes on its plan towards exiting 2022 at $100 million in revenue.”

Overall, Organto’s stock has dropped off a bit of late, resulting in a ten per cent loss for the year to date, reaching a high point of $0.50/share on June 30.

With the update, Cooper maintained his “Buy” rating and target price of $0.80/share for a projected return of 167 per cent at the time of publication.