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.

Recent Updates:

• The group has recently signed its largest international deal to date with Canndoc, an Israel based Cannibis Company. It is a multiyear strategic agreement wherein the group would be supplying 6,000 kg of dried flower to Canndoc. The company will be supplying 3,000 kg of high quality, indoor-grown dried flower product by December 31, 2021, and the rest would be supplied as per requirement.

• The Company has completed its at-the-market equity program announced on April 22, 2020, by issuing ~21,080,229 common shares at gross proceeds of ~CAD 49 million.

Q2FY20 Financial Highlights: OGI announced its quarterly results, wherein the Company reported a lower net revenue of CAD 23.22 million, depicting a decline of 14% over the previous corresponding quarter. Cost of sales increased by ~45% on y-o-y to CAD 15.81 million which resulted in a decline in the gross margin before fair value changes to biological assets & inventories to CAD 7.41 million against CAD 16.04 million. Gross margin surged to CAD 11.28 million from CAD 7.96 million in pcp due to a gain from fair value changes to biological assets and changes in inventory sold. The Company reported elevated SG&A expenses of CAD 14 million, from CAD 9.4 million in pcp, representing ~60% of the revenue. The increase was driven by a higher brand marketing campaign and costs related to the launch of Rec 2.0 products. Net loss from continuing operations stood at CAD 6.83 million, as compared to a loss of CAD 6.38 million in Q2FY19.

Q2FY20 Income Statement Highlights (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/Sales Based valuation metrics (Illustrative)

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

Stock Recommendation: The stock corrected ~28% so far this year and currently trading at the lower range of its 52-weeks trading range of CAD 9.50 and CAD 1.54. OGI strategically acquired and is developing land and buildings adjacent to its main facility, which is expected to result in a differentiated cultivation and production facility. Apart from the retail presence, the products are available through a courier facility, which augers well for the current lockdown scenario, as the customers stay away from the retail stores. 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 multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Aphria Inc, Cronos Group Inc and Hexo Corp etc., as a peer group. Hence, considering the aforementioned factor and risk involved, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 2.12 on June 30, 2020.

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

Charlotte's Web Holdings Inc.

Charlotte's Web Holdings Inc. (TSX: CWEB) is engaged in the production and distribution of hemp-based cannabidiol (CBD) wellness products. Its product categories include tinctures (liquid product), capsules and topical products.

Recent Highlights:

• The group recently raised CAD 77.62 million via public offerings, which includes 11.50 million units, at a price consideration of CAD 6.75 per Unit. The funds will be used primarily for the company's business development and general working capital purposes.

• The company announced the acquisition of Abacus Health Products, by purchasing all the subordinate voting shares of Abacus. Each shareholder of Abacus would receive 0.85 of Charlotte's Web Holdings share.

Q1FY20 Financial Highlights: CWEB announced its quarterly results and posted revenue of USD 21.5 million, as compared to USD 21.7 million in pcp. During the quarter, eCommerce sales increased by 29.4% and contributed 65.6% of total sales against 50.2% a year ago. The company added new technology platform and capabilities, which has resulted in a strong Direct to Consumer or eCommerce sale. Gross profit stood at USD 15.1 million, as compared to USD 15.9 million in pcp, primarily attributed to a marginal decline in revenue. The company reported higher operating expenses of USD 23.3 million, as compared to USD 13.2 million in pcp primarily attributed to higher investments for capacity expansion and the group's transition to a consumer-packaged-goods company. The group incurred a net loss of USD 11.5 million, as compared to a net profit of USD 2.3 million in the previous corresponding period, due to a higher input cost. The company ended the quarter with cash and cash equivalent of USD 53 million, while total assets stood at USD 190.2 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/Sales Based valuation metrics (Illustrative)

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

Risks: The group is investing in infrastructure and capacity expansion. Any delay in completion timeline would hamper the group’s performance. Further, any regulatory changes related to cannabis would impact the operations.

Stock Recommendation: The Stock of CWEB corrected ~48% so far this year, due to a stiff correction in the broader market on account of COVID 19 crisis. The company has acquired Abacus Health Products and is expected to enhance its marketing presence in coming days which would likely to improve the sales volume of the company. Furthermore, the company would allocate its CAD 77.62 million funds for expansion opportunities, which is a key positive. The company has an extensive presence, and the products are widely accepted by the customers and reported positive feedback. We believe the market of the hemp-based products are still untapped, and the company would benefit from the growing customer demand. The group is focusing on increasing its eCommerce revenue, which is likely to benefit in short to medium term as the people are likely to follow the social distancing norms in the foreseeable future. We have valued the stock using EV to Sales-based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered Aurora Cannabis Inc, Canopy Growth Corp and Organigram Holdings etc., as a peer group. Hence, considering the aforementioned factor and risk involved, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.23 on June 30, 2020.

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

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