Organigram Inc.

Organigram Inc. (TSX: OGI) is a Canadian licensed 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.

Key Highlights:

• Improved Revenue-mix: The company witnessed a strong momentum from its latest offerings like Canadian adult-use recreational products, dried flower value segment and SHRED, a high quality, high potency and affordable dried flower. We believe the momentum within the Canadian adult-use market to continue in the foreseeable future and would add improved prospects for the company.

Source: Company Presentation

• Growth in Retail Stores: In the recent past, the cannabis segment witnessed a sea- change on account of rising demand on account of change in consumer preferences. Since, July 2020, the number of retail stores in Canada’s ten provinces grew one-third and increased by ~140% in Ontario alone. The sector witnessed higher traction across the brick and mortar retail stores during the second half of FY20, and we believe the demand is likely to remain high in the foreseeable future also.

Q4FY20 Financial Highlights:

• OGI reported its fourth-quarter result, wherein the company posted a 32% y-o-y growth in the gross revenue of CAD 25.389 million. The company’s net revenue was up by 25% y-o-y to CAD 20.400 million. The company’s top line was supported by new launches including new high THC strains, and value segment offerings during July 2020 which received improved traction from the customers.
• Gross loss stood significantly higher at CAD 28.756 million, as compared to a loss CAD 11.059 million in pcp. The company’s witnessed a setback from a decline in Fair value changes to biological assets & inventories sold which declined CAD 20.149 million, as compared to CAD 11.059 million in pcp.
• Adjusted EBITDA loss improved to CAD 2.663 million, from a loss of CAD 7.163 million in the previous corresponding period (pcp).
• The company reported a net loss of CAD 38.590 million, as compared to a net loss of CAD 22.456 million in Q4FY19.

Source: Company Presentation

Q4FY20 Income Statement Snapshot (Source: Company Reports)

Risks: Any change in regulations related to Cannabis would affect the group’s operations. Further, a change in consumer preference may affect demand.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The company reported available liquidity of CAD 75 million in the form of cash and short-term investments and CAD 69 million in gross proceeds from an underwritten public offering, which would support the company’s working capital requirements. The company is planning to make new investments across new genetics and improved cultivation processes to increase THC potency and introduce new strains within the highly important dried flower and pre-roll categories, which is impressive and would support the company’s overall performance. We have valued the stock using EV to sales based relative valuation method and have arrived at a target upside of higher double-digit (in percentage terms). For the said purposes, we have considered peers like Aphria Inc, Tilray Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.63 on December 1, 2020.

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

MediPharm Labs Corp

MediPharm Labs Corp (TSX: LABS) is the first company in Canada to become a licensed producer for cannabis oil production.

Key Highlights:

• Agreement with STADA Arzneimittel AG: The company collaborated with STADA Arzneimittel AG, wherein LABS would supply GMP certified medical cannabis products to STADA, combined with manufacturing, logistics and regulatory support. STADA will be responsible for commercializing the company’s products, across Germany, and would provide marketing and medical education utilizing a pharmaceutically experienced field force. STADA is a renowned German company with more than 125 years of operations and has presence across 120 countries. We believe the above agreement would help the LABS to increase its customer base in the foreseeable future.
• Increase in Product pipeline: The company manufactures multiple finished products for several leading names within the cannabis, health, wellness, food and beverage industries. The company offers several products like oils, vapes, softgels, hard capsules, and topical formulations, which are expected to grow in the coming days as the industry is witnessing strong demand for these products on account of changing consumer preferences.

Q3FY20 Financial Highlights:

• LABS announced its quarterly results, wherein the company posted revenue of CAD 4.947 million, declined from CAD 43.386 million in the previous corresponding period (pcp). The decline was majorly attributable to a lower bulk extract volumes and average selling prices, partially offset by growth in formulated finished goods sales.
• The company reported a gross loss of CAD 10.588 million, as compared to a gross profit of CAD 14.754 million in Q3FY19.
• Operating loss stood at CAD 16.747 million, as compared to a profit of CAD 5.365 million in pcp. The dip was primarily attributable to lower revenue, higher General administrative expenses, increase in Marketing and selling expenses, partially offset by lower Research and development expenses and Share based compensation expense.
• Net loss, during the third quarter, stood at CAD 15.308 million, as compared to a net profit of CAD 3.275 million in pcp.                            

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company is exposed to various risks which include regulatory compliance risks, change of cannabis laws, regulations and guideline, inability to sustain pricing and inventory models and reliance on licences and authorizations etc.

Stock Recommendation: The stock of LABS corrected ~85% so far this year and currently trading near its 52-weeks low trading price of CAD 0.52. The company’s performance has been hindered by fall in the realization prices of cannabis products, which has been reflected in the stock performance too. Furthermore, the company has gradually shifted its focus from Canadian wholesale supply contracts of bulk concentrate to pharmaceutical expertise products, in order to produce high quality formulations, finished formulated packaged goods, and active pharmaceutical ingredients (“APIs”) to provincial retailers. We believe the demand would improve gradually as the company’s new offerings is likley to gain higher traction in the foreseeable future. The stock gained from its recent lows and was up ~7% in the last five trading sessions. On the valuation front, the stock was trading at forward EV to Sales multiple 0.5x agains the industry (pharmaceuticals) meidna of 3.8x. Hence, considering the aforesaid facts, we give a ‘Speculative Buy’ on the stock at the current market price of CAD 0.56 on Deceber 01, 2020.

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

Disclaimer

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