Organigram Holdings Inc.

Organigram Holdings Inc. (TSX: OGI) is a licensed Canadian producer of cannabis products. Organigram focuses on producing exceptional, indoor-grown cannabis for patients and adult recreational consumers, as well as developing global business partnerships.

Recently, the Company informed the promotion of Julie Chamberlain as Vice President of Marketing & Communication subsequent to the exit of Ray Gracewood from the above post.

Q3FY20 Financial Highlights: OGI announced its quarterly results, wherein the Company reported gross revenue of CAD 22.241 million, reflecting a decline of 27% on y-o-y basis. The decline was due to Lower flower sales volumes and a lower average net selling price driven by increased competition. The Company’s operations were further hindered by a delay launching Organigram’s large format value product on account of a reduced workforce combined with the earlier delays in packaging material and equipment. The Company witnessed gross loss widened to CAD 50.216 million as compared to a loss of CAD 0.179 million in the previous corresponding period (pcp), due to lower gross revenue and significantly higher cost of sales of CAD 44.375 million, up 256% on y-o-y basis. The increase in the cost of sales was primarily due to excess write-offs of unsaleable inventories amounting CAD 19.3 million and CAD 2.7 million of write-offs due to falling prices. The Company reported an adjusted EBITDA loss of CAD 24.7 million, as compared to adjusted EBITDA of CAD 7.7 million in Q1FY19. The Company reported an extended net loss of CAD 89.871 million from CAD 10.180 million in pcp. The Company reported cash & short-term investments of CAD 44.777 million while total assets stood at CAD 433.677 million.

Q3FY20 Financial Snapshot (Source: Company Reports)

Risks: The Products are new to the consumers and may not receive the acceptability from the consumer or might not meet the consumer requirement. Further, any regulatory changes related to cannabis would hamper the company’s operations.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of OGI tumbled in the recent past a currently trading close to the lower band of its 52-weeks trading range of CAD 7.97 and CAD 1.54. The stock corrected ~49% so far this year. The business went through a few challenges such as falling commodity prices, delay in product launches etc. and the Investors chooses to exit the stock. We believe the company has several innovative products in its portfolio, and we believe the demand would stabilize as the economy starts to improve. The group launched its first value offering of dried flower in a large size format of 28g into the fast-growing value segment of the adult-use recreational market. The company secured its largest international deal to date in June 2020 to supply one of Israel’s largest and most established medical cannabis producers, Canndoc Ltd., with up to 6,000kg of dried flower in a multi-year agreement. The company has completed construction of Phases 4A and 4B and received licensing approval from Health Canada for total licensed cultivation capacity of 70,000 kg per year. The group also gets approval from Health Canada for Phase 5 expansion which includes a dedicated edibles and derivatives facility. The group is diversifying its revenue streams. The group has started deriving revenue from New Rec 2.0 products (chocolates, vape pens) in the adult-use recreational space and Wholesale sales to other large Canadian Licensed Producers. Going forward, the group is expected to continue to pursue additional opportunities to expand its product mix and customer base. We have valued the stock using EV to Sales value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Pharmaceuticals) median on NTM basis. In the past, the group witnessed a delay in product launches; any further delay in schedule launches would hamper the group’s performance. Further, an increase in competition is likely to build pressure on prices. Hence, considering the above facts, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 1.62 on July 31, 2020.

OGI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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