Organigram gobbling up market share, Raymond James reports

Raymond James analyst Rahul Sarugaser holds an optimistic view of Organigram Holdings Inc. (Organigram Stock Quote, Chart, News, Analysts. Financials TSX:OGI), maintaining his “Outperform 2” rating and target price of $5.00/share for a projected return of 111 per cent in an update to clients on Friday.

Founded in 2010 and headquartered in Moncton, Organigram manufacturers cannabis products for the adult-use recreational and medical markets using a indoor cultivation model.

Sarugaser’s latest analysis comes ahead of Organigram’s first quarter financial results for 2022, which are expected on Tuesday.

“With continued strong retail sales—maintaining its #4 spot with about 7.6 per cent market share in CY4Q21, and leapfrogging Canopy Growth for the #3 market share spot during the month of December—we continue to see OGI wresting market share away from larger peers, establishing a durable top-3 share of the Canadian cannabis market,” Sarugaser said.

Sarugaser expects the financial quarter, Organigram’s first full report since Beena Goldenberg took over as the company’s Chief Executive Officer in August, to be solid for the company, projecting revenue of $30.6 million compared to the consensus estimate of $29.8 million. Sarugaser’s projection would also represent sequential growth of 22.9 per cent.

However, Sarugaser also projects deeper losses in EBITDA ($10.4 million loss projection compared to the consensus estimate of a $6.8 million loss) and net income ($16 million loss projection compared to the consensus estimate of a $10.8 million loss).

Despite the overall optimism, Sarugaser did note a concern regarding the company’s cost of goods sold margin, with a hope of the company trending toward a 30 per cent gross margin within the next 18 to 24 months.

Organigram has been making moves in the Canadian cannabis space, particularly in December, where three of the top five products were the company’s value-priced SHRED milled flower. SHRED’s presence in the marketplace put Organigram into the top spot for dried flower sales in December, which accounted for 47 per cent of national cannabis sales in the month, significantly outpacing second-place Village Farms, third-place Tilray Inc, and fourth-place Cronos Group.

Organigram also posted top-five rankings in multiple other categories, including third in edibles, which account for six per cent of the Canadian market, with the fulsome launch of OGI’s SHRED’ems value priced soft chews, as well as being fourth in pre-rolls, which represent 23 per cent of the market.

Another notable Organigram product launch in the quarter was the introduction of Monjour, a wellness brand focused on CBD-incorporating products like vegan and sugar-free CBD gummies, leveraging its April acquisition of Edibles and Infusions Corp.

In addition, the company also announced the acquisition of 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 the total investment from Organigram to $10 million after an initial $5 million investment in 2018 and a $2.5 million follow-up in 2020.

According to Sarugaser, the additional contribution reaffirms the company’s commitment to bringing sustainable, bio-based, CBD/CBDA and other rare cannabinoids to market.

“Organigram continues to be extremely focused on delivering meaningful innovation to cannabis consumers, which is why we are so excited about deepening our relationship with Hyasynth,” Goldenberg said in the company’s December 22 press release. “They have achieved tremendous scientific advancement in the cannabinoid biosynthesis space with technology expected to be protected by intellectual property.”

Ahead of the report release, Sarugaser has modified some of his financial projections for the company, lowering his 2022 revenue estimate from $184 million to $142 million, though the revised figure is still a potential increase of 79.7 per cent compared to the $79 million reported in 2021. He has also cut his target for 2023, as he now forecasts $232 million in revenue instead of $280 million, with the new figure representing a potential increase of 63.4 per cent.

Meanwhile, Sarugaser has raised his EBITDA expectations for Organigram, limiting his 2022 EBITDA loss projection to $26 million from the previous $51 million loss estimate, then projecting a positive turn in 2023 at $16 million compared to a zero projection previously.

In terms of valuation, Sarugaser’s EV/Revenue multiple projections have slightly improved, as he projects Organigram’s multiple to drop from 5.8x in 2021 to 3.3x in 2022 (previously 3.5x), then to a projected 2x (previously 2.3x) in 2023. Looking at the EV/EBITDA multiple, Sarugaser forecasts a negative multiple of (17.8)x for 2022 (previously (12.7)x) before turning positive in 2023 at a projected 28.5x (previously 59.7x).

Organigram’s stock price has experienced a minimal drop over the last year, down 4.1 per cent in that time and falling off after reaching a high point of $7.62/share on February 10.