Jayson MacLean

Canadian cannabis LP Organigram (Organigram Stock Quote, Chart, News, Analysts, Financials TSX:OGI) dropped sharply in trading as the market reacted to its latest earnings report. But the bottom has been reached, according to Rahul Sarugaser, analyst for Raymond James, who in a quarterly review on Tuesday raised his rating from “Market Perform 3” to “Outperform 2.” Moncton, New Brunswick’s Organigram released its fiscal first quarter 2021 financials (ended November 30) on Tuesday, showing net revenue of $19.3 million, a 23-per-cent year-over-year drop. Adjusted EBITDA was a loss of $6.4 million compared to a gain of $5.7 million a year earlier. Organigram’s share price had been on a long decline since mid-2019 but popped last week from $1.80 to $2.20 last week. The stock lost half of those gains on Tuesday, closing at $2.10. On OGI’s progress in the still-early days of Canada’s cannabis trade, CEO Greg Engel pointed to double-digit sales growth in the rec market over the fiscal Q1, whereadult-use gross and net revenue grew by 42 per cent and 30 per cent, respectively, on a year-over-year basis and by 14 per cent and 11 per cent, respectively, on a sequential basis. Engel said it shows the success of Organigram’s new product launches. “Now we look forward to our new higher margin Edison dried flower offerings contributing substantially to overall revenue with even more new products to come in the next few quarters,” Engel wrote in a press release. “We believe our product portfolio revitalization combined with additional resources to ramp up production and achieve greater economies of scale as well as our relentless focus on increased automation and cost efficiency opportunities position us well to generate further top-line growth and significantly improve gross margins.” In his review, Sarugaser noted that OGI’s share of the Canadian adult-use cannabis market has been drifting downward over the last several years, from about 8.5 per cent on average in fiscal 2019 to 5.6 per cent in fiscal 2020 to about 4.2 per cent for this fiscal Q1 2021. But the decline this quarter was less than expected, according to Sarugaser, who had estimated OGI’s market share for the Q1 at 3.4 per cent. The company’s adult-use sales at $16.8 million were better than the analyst’s forecast of $13.5 million. Sarugaser said the $16.8 million represented a material bump from the $15-million plateau Organigram had settled into over the last three quarters. “We read this uptick in demand for OGI-branded products as a positive: an early success yielded from its long-running SKU revitalization exercise and a testament to the company’s growing brand equity in Canada. (Wholesale sales can be a nice kicker—largely absent this quarter—but adult-use product sales gives us a truer view of consumer demand for OGI's products and brands),” Sarugaser wrote. “And, crucially, OGI revealed that it had left opportunity on the table this quarter; OGI was unable to fulfill $4-5 million of provincial purchase orders due to capacity and staffing constraints during 1Q21 alone. While we view stock-outs like this as a near-term negative, we believe these are relatively simple problems for OGI to solve in order to drive its market share higher: increase capacity (currently operating at 40 per cent), staff up (planning to hire ~100 employees by 3Q21, 30 focused solely on fulfillment). No more stock-outs. Much-reduced unabsorbed overhead,” Sarugaser said. Overall, Organigram’s Q1 revenue of $19.3 million was a beat of Sarugaser’s $17.8-million estimate (consensus was $20.2 million) while the adjusted EBITDA loss of $6.4 million was significantly below Sarugaser’s call for negative $0.9 million (consensus was negative $1.8 million). Sarugaser said investors should take note of OGI’s appointment of Marni Wieshofer to its board, representing the company’s first US-domiciled director whose primary expertise in international M&A and brand-building. Sarugaser said selecting Wieshofer “indicates to us that OGI’s attitudes toward the future of its business are becoming increasingly ambitious and outward-looking” and “is the first significant, public indication OGI has made to suggest that the US cannabis sector is squarely in its crosshairs.” That’s encouraging, says Sarugaser, given that recent shifts in the US Congress composition may be more supportive of cannabis reform. “We believe demand for OGI’s well-curated suite of products is strengthening, and we believe OGI’s market share bottom is in. For these reasons alone, we see today’s stock weakness as an excellent opportunity to build positions,” Sarugaser wrote. With his new “Outperform” rating, Sarugaser has maintained his $3.00 target price, which at press time represented a projected 12-month return of 31.6 per cent. Sarugaser has updated his estimates and is now calling for fiscal 2021 (year end August 31) revenue of $95 million (previously $81 million) and EBITDA of negative $23 million (previously positive $2 million). For fiscal 2022, he is expecting revenue of $132 million (previously $108 million) and EBITDA of $7 million (previously $15 million).