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Organigram is still a pass, says Haywood

Haywood Capital Markets analyst Neal Gilmer has slightly altered his outlook on Organigram Holdings (Organigram Stock Quote, Chart, News, Analysts. Financials TSX:OGI), maintaining a “Hold” rating but reducing his target price from $3.00/share to $2.50/share for an implied return of 15 per cent in an update to clients on Wednesday.

Founded in 2010 and headquartered in Moncton, Organigram Holdings engages in the production and sale of cannabis products for the medical and adult-use recreational sectors.

Gilmer’s updated analysis comes after Organigram released its first quarter financial results for the 2022 fiscal year, which Gilmer noted to be ahead of expectations.

“Our Hold recommendation is based on our outlook on modest revenue growth and improving margins, but in our view continued limited visibility towards the goal of sustainable profitable EBITDA,” Gilmer said. “Organigram has recently taken actions to diversify its revenue composition that could support an expedited path to profitability.”

The company’s financial quarter was headlined by $30.4 million in net revenue for 22 per cent growth and 57 per cent year-over-year growth, while also beating the Haywood Capital projection of $26.7 million and the consensus estimate of $29.4 million.

Gilmer points to 14 per cent sequential growth in adult-use gross sales as a primary driver for the revenue beat, with particular strong points including a 265 per cent increase in edible sales ($1.9 million), along with increases in vape sales (13 per cent, $1.1 million) and flower sales (two per cent, $21.3 million). Medical sales also went up by five per cent to $2.1 million, while wholesale revenue dropped to zero.

Organigram also posted $3.4 million in international sales in the quarter after not having any in the previous quarter.

All told, Organigram maintained its hold on fourth place in terms of Canadian market share at 7.5 per cent, an increase from seven per cent in the previous quarter and 4.4 per cent on a year-over-year basis.

Just before Christmas, Organigram made a move to boost its product portfolio, acquiring Quebec-based Laurentian Organic Inc., including its Tremblant premium cannabis brand and Laurentian artisanal craft brand, for $36 million plus earnout consideration payable, if applicable, based on Laurentian surpassing certain EBITDA thresholds in calendar 2022 and 2023.

Organigram also invested an additional $2.5 million of secured convertible debentures in Hyasynth, a private biotechnology company and pioneer in the field of cannabinoid science and biosynthesis, bringing Organigram’s total contribution to $10 million.

“Our strong balance sheet and cash position will ensure that we are well-positioned to execute on our key growth initiatives for fiscal 2022. These include the expansion of our growing facility in Moncton to an annual capacity of 75,000 kilograms of flower from its current capacity of 55,000 kilograms, and the build out of our Centre of Excellence in collaboration with BAT,” stated Derrick West, Chief Financial Officer of Organigram in the company’s January 11 press release. “These initiatives will further enhance our ability to drive innovation and solidify our position as a leading Canadian LP.”

The quarterly results have prompted Gilmer to revise some of his financial projections, increasing his 2022 revenue projection from $121.6 million to $137.6 million to imply year-over-year growth of 73.7 per cent. He has also raised his 2023 projection from $160.1 million to $175.6 million, which suggests year-over-year growth of 27.6 per cent.

Gilmer has also raised his gross profit projections for Organigram, with 2022 now set at $29.8 million for an implied 21.7 per cent margin (previously $23.7 million and a 19.5 per cent margin), and 2023 now projected at $46.2 million for a 26.3 per cent margin (previously $41.3 million and a 25.8 per cent margin).

Gilmer’s EBITDA projections see the biggest change, as he’s cut his loss projection for 2022 from $13.3 million to $1.3 million, then projected EBITDA to turn positive in 2023 at $6.1 million for a 3.5 per cent margin, in contrast to his previous projection of a $2.7 million loss.

Gilmer also forecasts Organigram’s valuation multiples to be in good shape, as he expects the company’s EV/Revenue multiple to drop from the reported 6.5x in 2021 to a projected 3.7x in 2022, then to 2.9x in 2023, where he also introduces an EV/EBITDA multiple of 83.5x.

Looking ahead to second quarter financial results in April, Gilmer points to further expansions and/or partnerships as a potential catalyst for the company, along with launching more products.

“OGI has demonstrated an ability to increase its Canadian market-share while expanding margins over the past couple quarters,” Gilmer said. “We expect the acquisition of Laurentian to result in continued top-line growth and improved margins. International optionality and existing relationships provide additional expansion opportunities.”

Organigram’s stock price has increased by 7.5 per cent over the last 12 months after reaching a high point of $7.62/share on February 10, with a slight rebound after hitting a 52-week low of $2.06/share on January 6.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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