ATB Capital Markets analyst Frederico Gomes is staying neutral on Organigram Holdings Inc. (Organigram Stock Quote, Chart, News, Analysts. Financials TSX:OGI) after the company’s latest quarterly earnings. In an update to clients on Tuesday, Gomes reiterated his “Sector Perform” rating while raising his target price from $2.65/share to $3/share for a projected return of 38 per cent at the time of publication.
The update from Gomes comes after Moncton, New Brunswick-based cannabis licensed producer Organigram released its first quarter financial results for the 2022 fiscal year.
“We believe that OGI is one of the best-positioned LPs due to its capital position, diverse brand/product portfolio, and credible path to profitability,” Gomes said. “We believe, however, that the current market value already prices in OGI’s competitive position and earnings growth outlook, therefore supporting our neutral rating on the stock.”
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 ATB Capital Markets projection of $29.1 million and the consensus estimate of $29.2 million.
Organigram’s gross profit came in at $2.5 million for the quarter, coming in below the ATB Capital Markets projection of $3.4 million and the consensus estimate of $4.1 million. Meanwhile, the company’s EBITDA was a loss of $1.9 million, coming in ahead of the consensus projection of a $5.3 million loss and the ATB Capital Markets forecast of a $10.3 million loss.
“Our record-breaking results in the first quarter of Fiscal 2022 are a testament to our successful strategy to create innovative, high-quality products that align with the evolving preferences of the various segments of cannabis consumers,” said Beena Goldenberg, CEO of Organigram in the company’s January 11 press release. “We are also pleased with our continued progress at improving economies of scale in our operations, thus reducing operating costs and driving significant improvements in adjusted gross margin and adjusted EBITDA.”
Organigram is also working to integrate Quebec-based Laurentian Organic Inc., which it acquired before Christmas for $36 million plus earnout consideration, and its annual run rate of $17 million in revenue and $6 million in adjusted EBITDA, giving the company an approximate 35 per cent margin, which Gomes expects to have a positive impact on the company’s beginning next quarter.
Gomes estimates the company has approximately $155 million in pro forma cash compared to just $300,000 in debt. Of the cash on hand, Gomes notes that the company plans to spend $38 million to expand its Moncton facility, then bringing in an additional $7 million from the Laurentian acquisition.
The updated quarterly results have prompted Gomes to revise some of his financial projections, increasing his 2022 revenue projection from $122.4 million to $132.3 million to imply year-over-year growth of 67 per cent. He has also raised his 2023 projection from $187.2 million to $208.2 million, which suggests year-over-year growth of 57.4 per cent.
Gomes has also raised his gross profit projections for Organigram, with his 2022 estimate now set at $25.7 million for an implied 19.4 per cent margin (previously $20.6 million and a 16.8 per cent margin), and 2023 now projected at $72.5 million for a 34.8 per cent margin (previously $61.6 million and a 32.9 per cent margin).
Gomes’s EBITDA projections also shift in the newest analysis, cutting his loss projection for 2022 from $35.1 million to $13.8 million, then forecasts EBITDA to turn positive in 2023 at $24.5 million for a margin of 11.8 per cent, an improvement on the previous $5.6 million projection for a three per cent margin.
Gomes 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 6.7x in 2021 to a projected 4x in 2022, then to 2.5x in 2023, and finally to a projected 1.7x in 2024. Meanwhile, Gomes also introduces an EV/EBITDA multiple of 21.6x before dropping to a projected 10.9x in 2024.
“We believe that OGI is approaching profitability as it grows its revenue base, continues to gain market share (#4 LP in Canada, closing in to become the #3), and improves its margins,” Gomes said. “In our view, OGI will keep its sales momentum by integrating Laurentian, ramping edibles production, and increasing its cultivation capacity to 70,000kgs/year from 40,000. We expect margins to improve through economies of scale, improvements in cultivation, and automation.”
Organigram’s stock price is down eight per cent over the last 12 months after reaching a high point of $7.62/share on February 10, then recently hitting a 52-week low of $2.06/share on January 6.