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Take a pass on Organigram, says ATB Capital

ATB Capital Markets analyst Frederico Gomes is still cautious about Organigram Holdings (Organigram Stock Quote, Chart, News, Analysts. Financials TSX:OGI), maintaining a “Sector Perform” rating and $3/share target price for a projected return of 47.8 per cent in an update to clients on Tuesday.

Founded in 2010 and headquartered in Moncton, New Brunswick, Organigram Holdings produces and sells cannabis for patients and adult recreational consumers.

The update from Gomes comes after Hifyre, a data-powered digital toolset for North American cannabis dispensaries, released an updated report about the Canadian recreational cannabis market. According to Hifyre’s updated data, Organigram has grown to occupy a market share of 8.4 per cent in the Canadian recreational cannabis market, moving past Canopy Growth and into third place among licensed producers and closing the gap on Canada’s top two licensed producers, Tilray and HEXO Corp.

“These data validate our thesis that OGI will continue growing its revenue base, providing a tailwind for margin expansion due to operating leverage and scale economies,” Gomes said.

Gomes said Organigram has gained 430 basis points over the last year, the most of any Canadian licensed producer. The analyst believes the company’s gains are indicative of improving operational performance, attractive asset base and management’s execution under Beena Goldenberg, who took over as the company’s CEO in September.

“We believe that OGI will keep its sales momentum through FY2022e and FY2023e, boosted by the integration of the Laurentian acquisition (strong Quebec presence, annual run-rates of $17mm in net sales and about $6 million in adj. EBITDA, attractive ~35 per cent adj. EBITDA margin), edibles production ramping, new product launches, and cultivation capacity expansion to 70,000kgs/year (from 40,000kgs/year). We expect margin improvements to follow due to operating leverage, economies of scale, and investments in cultivation and automation,” Gomes wrote.

Gomes estimates Organigram to have approximately $150 million in pro-forma net cash available, with an expectation of nearly $38 million being spent on the Moncton capacity expansion, along with an additional $7 million on Laurentian for cultivation growth, processing, and automation.  

“All considered, we view OGI’s capital position as strong relative to its capital needs, such that the Company can comfortably execute its strategy as industry-wide headwinds abate and the Canadian market gradually consolidates,” Gomes said.

Gomes forecasts Organigram’s 2022 revenue projection to come in at $132.3 million to imply year-over-year growth of 67 per cent, with an increase to a projected $208.2 million in 2023, which suggests year-over-year growth of 57.4 per cent.

In terms of EBITDA, Gomes forecasts Organigram to bring in $25.7 million in 2022 for an implied 19.4 per cent margin, while 2023 now projects at $72.5 million for a 34.8 per cent margin.

After projecting a loss of $13.8 million in 2022, Gomes forecasts EBITDA to turn positive in the final quarter of the year, forecasting 2023 at $24.5 million for a margin of 11.8 per cent.

On valuation, Gomes is expecting OGI’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 1.7x in 2024. Meanwhile, Gomes introduced an EV/EBITDA multiple of 21.6x which drops to a projected 10.9x in 2024.

Gomes believes Organigram will continue to increase its place in the Canadian cannabis industry, which he recently forecasted to experience a compound annual growth rate of approximately 13.4 per cent from 2021 to 2030, mostly driven by a higher percentage of cannabis prevalence in Canada to reach a total addressable consumer population of 10.1 million in 2030, up from 6.5 million in 2021.

In that analysis, Gomes pointed to three key drivers for the market, including the average spend per person, addressable population growth, and the idea of converting sales from the illicit market.

Going forward, Gomes believes Organigram is among a few primary companies who will be capable of gaining share and outperform the industry’s growth while the market consolidates.

“We believe that OGI is well-positioned to do so given its strong balance sheet, diverse product portfolio, attractive assets, and positive sales momentum,” Gomes said. “Accordingly, we expect OGI’s sales to increase at a compound annual growth rate (CAGR) of 62 per cent over the next two years versus the industry’s projected CAGR of 25 per cent during the same period.”

Organigram’s stock price has dropped off by 21.6 per cent over the last 12 months and by 11.3 per cent since the start of 2022. Organigram hit a 52-week high of $7.62/share on February 10, 2021, then recently hit a 52-week low of $2.06/share on January 6.

Organigram released its first quarter fiscal 2022 financials on January 11, showing net revenue up 22 per cent year-over-year to $30.4 million, the company’s highest net revenue to date, while its SHRED brand products Tropic Thunder and Funk Master were the #1 and #2 best-selling flower products in Canada over the month of November, 2021.

“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 Goldenberg in a press release.

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Geordie Carragher is a staff writer for Cantech Letter
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