Investors interested in the Canadian cannabis market should be thinking about Organigram Holdings (Organigram Stock Quote, Charts, News, Analysts, Financials TSX:OGI), according to ATB Capital Markets analyst Frederico Gomes, who published on Wednesday a new update to clients on the company. Gomes said Organigram’s ability to grow its market share during challenging conditions solidifies its status as a leader in the Canadian cannabis industry.
Moncton, New Brunswick-based Organigram is a licensed producer (LP) with indoor-grown adult-use recreational and medical cannabis operations and a portfolio of brands including SHRED, Edison and Big Bag o’ Buds. The company has facilities in Moncton, and Lac-Supérieur, Quebec, as well as a manufacturing facility in Winnipeg.
The bulk of the Canadian cannabis sector has been in free-fall for over a year and a half, with most stocks losing well over half of their value during that period. For OGI, the stock went from a high of about $5.50 per share in March, 2021, into a gradual but pronounced slide that’s put it in the low-$1.00 range over the past few months.
But Gomes sees a lot of upside to the name and has reiterated an “Outperform” rating and one-year target price of $3.50, which at the time of his report’s publication on October 5 represented a projected return of 185 per cent.
Gomes said data on the Canadian market now puts Organigram as the second-largest LP in the rec cannabis market with an 8.3 per cent market share, up from 7.7 per cent 12 months ago for a gain of 68 basis points. The analyst said OGI’s market share momentum has carried through to its earnings despite industry-wide pricing pressures on the bottom line.
Moreover, OGI beat top and bottom line consensus estimates in its most recently reported quarter, the company’s fiscal third quarter 2022, released in mid-July. There, net revenue was up 88 per cent year-over-year to $38.1 million and adjusted EBITDA was positive $583,000 compared to negative $9.2 million a year earlier.
Gomes said his investment thesis on Organigram is based on three factors, namely, its proven ability to defend market share and maintain momentum as it expands production capacity and benefits from operating leverage, its status as one of the few LPs to report positive adjusted EBITDA over two consecutive quarters, and its solid capital position, with over $120 million in net cash, which helps minimize dilution risks and give a safety cushion to navigate potential industry headwinds.
“Despite improving fundamentals and good execution, the stock trades at a ~60 per cent discount to its 52-week high and at 1.1x FY2023e EV/Sales, which is a ~40 per cent discount to peers. Our DCF-based price target of $3.50 indicates potential upside of ~180 per cent and would imply FY2023e EV/Sales and EV/EBITDA multiples of 4.4x and 45.2x, respectively,” Gomes wrote.
“While the [68 basis points] market share gains could be seen as modest, we believe they demonstrate OGI’s ability to defend market share amid deteriorating market conditions. As a result, the Company is now the second-largest LP in Canada, supported by a leading (and growing) position in the flower category (where the Company has a 14.1 per cent market share) with top-selling brands Big Bag O’Buds and Shred,” he said.
Looking ahead, Gomes sees OGI’s fiscal fourth quarter coming it at revenue and adjusted EBITDA of $42.9 million and $0.8 million, respectively, making for full-year top and bottom lines of $143.3 million and $1.0 million, respectively. For fiscal 2023, Gomes is calling for $220.1 million in revenue and $21.2 million in EBITDA.
“While the competitive environment remains challenging, we expect OGI—supported by its robust capital position and cultivation and manufacturing capabilities—to remain one of the leading LPs as the market consolidates and a more rational competitive environment emerges,” Gomes wrote.
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