Take a pass on Organigram, says Eight Capital

After quarterly earnings, Eight Capital analyst Ty Collin is staying on the sidelines on Canadian cannabis company Organigram Holdings (Organigram Stock Quote, Charts, News, Analysts, Financials TSX:OGI), saying in a recent update that OGI has taken a big leap in terms of profitability but prevailing headwinds in the cannabis space will continue to weigh on share prices in the sector.

Moncton-based Organigram reported first quarter fiscal 2023 results on Thursday for the period ended November 30, 2022, showing net revenue up 43 per cent year-over-year but down five per cent sequentially to $43.3 million and adjusted EBITDA of $5.6 million compared to negative $1.9 million a year ago. The company upped its adjusted Gross Margin from 18 per cent a year earlier to now 30 per cent while maintaining the #3 position in terms of Canadian cannabis sales for the adult-use market.

“Our first quarter of fiscal 2023 demonstrates the success of our expansion at Moncton and continuing productivity improvements in fiscal 2022,” said Beena Goldenberg, Chief Executive Officer, in a press release.

Collin called the quarterly report a positive for the company and stock, saying that OGI was reaping what it sowed over 2022 through the facility expansion of its Moncton operations. But the analyst nonetheless maintained a “Neutral” rating on the stock, calling OGI a “top-quality operator” in an industry dealing with persistent structural headwinds. 

“We believe OGI’s strong results and fortress balance sheet stand out from several larger LP peers, like Canopy Growth and Tilray, who continue to post declining cannabis sales and margins and carry significant debt loads. OGI currently trades at 1.5x C2023E sales, in-line with the broader LP group but at a significant discount to TLRY (2.5x) and WEED (3.7x), which we expect to narrow,” Collin wrote in his January 12 report.

On the Q1 numbers, Collin said OGI’s $43.3 million topline was ahead of his estimate at $42.0 million, while adjusted EBITDA of $5.6 million was also a beat of his forecast at $2.5 million as well as the Street’s call at $2.8 million.

Collin noted that management continues to explore its options on the M&A front, especially in Europe and the US, while it is still expecting year-over-year sales growth for its fiscal 2023, with potential upside to gross margins if price compression in the industry eases.

By the numbers, Collin is estimating full fiscal 2023 revenue at $186.8 million compared to 2022’s $145.8 million while adjusted EBITDA is expected to come in at $25.5 million compared to 2022’s $3.5 million.

Collin maintained a 12-month target of $1.70 per share on Organigram, which at press time represented a projected return of 45 per cent.