Organigram has a 152 per cent upside, says ATB Capital

Strong quarterly financials are keeping ATB Capital Markets analyst Frederico Gomes in a bullish frame of mind concerning New Brunswick-based cannabis company Organigram (Organigram Holdings Stock Quote, Charts, News, Analysts, Financials TSX:OGI). Gomes delivered an update to clients on Monday where he reiterated his “Outperform” rating on the stock, calling Organigram one of the best operators in the sector.

Licensed cannabis producer Organigram has indoor-grow facilities and sells to the medical and adult recreational markets. The company, which has a number of brands in its portfolio including Edison, Big Bag O’ Buds and SHRED, took on tobacco giant BAT as a strategic investor in 2021. 

Organigram announced on July 14 its third quarter fiscal 2022 financials for the three-month period ended May 31, 2022, where OGI saw net revenue climb by 88 per cent to $38.1 million while delivering positive adjusted EBITDA at $583,000 compared to a loss of $9.2 million a year earlier.

“We achieved record net revenue results which we expect to surpass again in Q4 on the strength of new product listings, increased retail sales momentum and international shipments,” said CEO Beena Goldenberg in a press release. “We have built an enduring brand with SHRED that has proven to attract consumers across multiple product categories. This market strength is bolstered by introducing new SKUs in the derivative space, including Edison JOLTS, which are now available in three flavours, Edison live resin vapes, Tremblant hash, and Monjour soft chews in the wellness segment.”

Over the quarter, Organigram said it was third among Canadian LPs when it comes to Canadian market share at 7.8 per cent, while in June it hit 8.5 per cent of the rec cannabis market. OGI said it continues to hold the number one spot nationwide for dried flower and the number three ranking for gummies. 

Internationally, the quarter saw OGI make two shipments totalling $1.3 million to Cannatrek and Medcan in Australia with a further $5.4 million shipped to Australia and Israel since the quarter’s close. 

In terms of its balance sheet, Organigram said it finished the fiscal Q3 with $127 million in unrestricted cash and short-term investments compared to $184 million as of August 31, 2021, enough to keep the company’s capital position in a healthy state for the near to medium term, OGI said.

“With our increased cultivation capacity and economies of scale from Phase 4C, and our investment in automation at all three of our manufacturing locations, we expect that both our adjusted gross and adjusted EBITDA margins will improve in Q4 and into Fiscal 2023,” CFO Derrick West said in a press release.

OGI’s topline was a beat of analysts’ expectations, with the $38.1 million in revenue coming in ahead of the consensus call of $33.8 million as well as ATB’s forecast at $32.6 million. On EBITDA, OGI’s $0.6 million was under both the Street’s estimate at $2.1 million and ATB’s $1.0 million. Gomes estimated Organigram’s free cash flow for the quarter at negative $23.6 million, broken down to $6.4 million used in operations and $17.1 million in capex.

Gomes said the highlight of the quarter was OGI’s 38.7 per cent sequential increase in recreational sales. The analyst said that number validates his thesis that OGI is one of the best operators in the space and is well-positioned to continue gaining market share.

“Over the last twelve months, OGI gained +111 basis points in market share; the Company is the #3 LP in Canada, and may become the #1 LP over the next few quarters if it maintains the same positive market share trend,” Gomes wrote.

“Considering OGI’s robust capital position, consistent execution, and positive sales momentum, we maintain our constructive stance on the stock,” he said.

On his projections, Gomes raised his rec pot net revenue estimates in response to the quarterly numbers while lowering his near-term EBITDA estimates on a more conservative view on adjusted gross margins due to what he called a persistently challenging pricing environment. Gomes is calling for Organigram to deliver full fiscal 2022 revenue and adjusted EBITDA of $143.3 million and $1.0 million, respectively, and fiscal 2023 revenue and EBITDA of $220.1 million and $21.2 million, respectively.

Gomes concluded his report by saying OGI should continue delivering positive sales and earnings momentum as it has three key tailwinds at its back: (1) scale benefits from cultivation expansion in Moncton from 55,000 kg/year to 80,000 kg/year in dried flower; (2) margin expansion from product innovation and expanded distribution of recently-acquired Quebec cannabis company Laurentian’s premium portfolio; and (3) investments the company has made in automation and cultivation improvement.

With the update and retained “Outperform” rating, Gomes has also stuck with a one-year target price of $3.50 per share, which at press time represented a projected return of 152 per cent.