Buy Organigram on the dip, says Raymond James

The market may not be favouring cannabis name Organigram Holdings (Organigram Stock Quote, Charts, News, Analysts, Financials TSX:OGI) but that’s no reason to neglect the stock, says Raymond James analyst Michael W. Freeman, who delivered an update to clients on the company on Wednesday. Freeman reiterated an “Outperform” rating on OGI, saying a post-quarter selloff should be taken as an opportunity.

New Brunswick’s Organigram, a licensed producer of cannabis and cannabis-derived products for the medical and adult-use markets, announced its fiscal second quarter 2023 results on Tuesday, showing net revenue up 24 per cent to $39.5 million and adjusted EBITDA of $5.6 million compared to $1.6 million a year earlier.

On operations, OGI touted the company’s market position as the number one company on hash and number three on gummies, nationally.

“Just 12 months after adding hash to our portfolio with the acquisition of our Lac Supérieur facility, we gained the number one position in the hash sector and launched SHRED X Rip-Strip Hash, the first product of its kind in Canada,” said CEO Beena Goldenberg in a press release.

Comparing with the forecast, Freeman said OGI’s Q2 topline of $39.5 million was a miss of his estimate at $42.0 million and the consensus at $43.5 million, while adjusted EBITDA at $5.6 million was a beat of his estimate at $1.2 million and the Street at $4.3 million.

As to Organigram’s merits, Freeman said the company continues to drive strong cannabis sales into Canada with the #3 overall market share, and while the Q2 sales fell short of earlier quarterly watermarks, the analyst said by continuing to post net revenue in the $40 million range during a notably weak post-winter holiday period, OGI is showing its strength as well as its ability to drive sustainable profits. 

Freeman also likes Organigram’s growing international segment, where it posted $10.7 million in high-margin international sales in Australia and Israel over the quarter, representing 27 per cent of total revenue. 

Finally, on the rest of fiscal 2023, Freeman noted management’s expectation to spend $32 million in capex, with most of that upcoming in quarters three and four with its Lac Superior facility expansion and Moncton automation work. Freeman said the capital outlay will give OGI “a defensible efficiency and capacity moat and a sustainable position atop the Canadian cannabis sector.”

“Despite 2Q23 being affected by seasonally soft sales, and the market responding negatively to a higher-than-expected cash burn, we continue to believe OGI as one of Canada’s best-run cannabis businesses and see today’s sell-off as an opportunity,
Freeman wrote.

“With OGI’s consistent investment in product innovation in cornerstone categories, escalating production capacity and manufacturing efficiency, increasingly significant international agreements, and its strong strategic alignment with BAT, we believe OGI has set itself up to be a long-term winner in Canada, and, in our view, will ultimately earn the right to win internationally,” he said.

With the update, Freeman maintained a one-year target price on OGI of $2.00 per share, which at press time translated to an expected return of 117 per cent.