Organigram Inc.

Organigram 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.

Key Updates:

• Growing network presence: In the recent past, the group reported a strong surge in its retail stores, which grew to 2,555 across ten provinces in September 2021, from 963 stores in July 2020. Moreover, the number of retail stores authorization per month increased to 120 in September 2021, from 80 in December 2020. With the increase in demand for cannabis products, we believe the above would lead to higher sales volumes in the coming quarters.

• Growing traction from the Adult-use recreational segment: The demand for the adult-use recreational segment has remained elevated in the recent past, supported by innovative product offerings considering the ongoing demand dynamics. Notably, revenue from adult-use recreational wholesale revenue stood at CAD 64.457 million in H1FY21, higher than CAD 54.091 million in pcp. The group has launched 84 new stock-keeping units (SKUs) since July 2020 and is focusing on launching more than 20 SKUs expected by the end of Q4FY21.
  

• Rise in cash balance: At the end of May 2021, the company reported a higher cash and short-term investments balance of CAD 196.446 million, significantly higher than CAD 74.728 million in August 2020 (FY20). The above is primarily due to a surge in short-term investments.

Q3FY21 Financial Highlights:

• OGI reported its third-quarter results, wherein the company posted gross revenue of CAD 29.105 million, as compared to CAD 22.241 million in pcp. Net revenue as recorded at CAD 20.324 million, as compared to CAD 18.021 million in pcp. The above was primarily driven by strong momentum within the adult-use recreational market, which was partly offset by a decrease in medical revenue coupled with a decline in the lower average net selling price (ASP).
• Gross margin loss stood significantly were recorded at CAD 2.119 million, as compared to a loss of CAD 50.216 million in pcp. The improvement was primarily driven by a positive fair value adjustment to biological assets, inventories sold, and other charges of CAD 5.176 million, as compared to a loss of CAD 23.862 million in pcp.
• Adjusted EBITDA was reported at CAD 10.182 million, from a loss of CAD 2.138 million in the previous corresponding period (pcp).
• Net loss from operations stood at CAD 4.008 million, as compared to a net loss of CAD 89.871 million in Q3FY20.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operation has been hindered by a fall in the fair value changes to biological assets & inventories sold. However, the continuation of the above trend would dampen the company’s margin in the foreseeable future. 

Valuation Methodology: EV to Sales Based (Illustrative)

Stock Recommendation:

The company expects stronger forecasted market growth as stores reopen to foot traffic coupled with the expansion of the retail network. Moreover, the company expects its cultivation costs to remain low due to better plant yields, while expects cultivation to ramp up, which would further lead to several ongoing cost efficiencies, including increased automation. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of single digit (in percentage terms). For the said purposes, we have considered peers like Aurora Cannabis Inc, Canopy Growth Corp etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 2.92 on September 30, 2021.

One-Year Technical Price Chart (as on September 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV. 

Black Diamond Group Limited

Black Diamond Group Limited (TSX: BDI) rents and sells space rental solutions and modular workforce accommodations to business customers in Canada, the United States and Australia. The group also provides specialized field rentals to the oil and gas industries of Canada and the United States.

Key Updates:

• Rise in cash flows: The company reported a surge in cash flow from operation of CAD 33.217 million in H1FY21, higher than CAD 24.536 million in pcp. The above was supported by a higher net profit of CAD 4.0 million in H1FY21, as compared to a net loss of CAD 0.515 million in pcp. The above is impressive and would support the overall liquidity.

• Impressive Outlook: For the rest of FY21, the company expects improved performance from its Workforce Solutions (WFS) segment supported by the company’s continued focus in diversifying its end market and geography, as well as ongoing strength in commodity prices and energy demand. Within its MSS segment, the company is expecting growth in its recurring rental revenue, supported by robust utilization levels across all its operations and expects pricing increase from the above segments, supported by strong bidding activity in both the rental and sales verticals.

• Strong performance from Non-Rental Revenues: The company operates its non-rental revenue its LodgeLink, which is a digital marketplace and ecosystem that allows customers to discover, book, and manage their crew travel and accommodation. The company reported tremendous growth from the above segment and posted total gross booking revenue of CAD 15.2 million in H1FY21, surged from CAD 6.3 million in pcp, aided by strong growth from the U.S. segment due to a 44% increase in the number of US properties.

Q2FY21 Financial Highlights:

• BDI impresses with its quarterly result, wherein the company posted revenue of CAD 68.902 million, jumped from CAD 37.268 million in the previous corresponding period (pcp).
• Gross profit stood at CAD 23.797 million, surged from CAD 17.401 million in Q2FY20. The increase was supported by elevated revenue, partially offset by higher direct costs (CAD 45.105 million v/s CAD 19.867 million in pcp).
• The quarter was marked by higher administrative expenses, increase in share-based compensation costs and higher finance costs. Profit before income taxes was recorded at CAD 2.262 million, as compared to a loss of CAD 0.246 million in pcp.
• The company turned profitable and posted a net profit of CAD 1.259 million, as compared to a loss of CAD 0.401 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The operation of the group is correlated with the oil & gas and energy industry as a part of the company’s clients operates in the above segment. Hence, price international price volatility s likely to take a toll on the company’s order book. 

Valuation Methodology (Illustrative): Price to CF based.

Stock Recommendation:

The company reported a 46% jump in funds from operation of CAD 31.6 million in H1FY21, while adjusted EBITDA was recorded at CAD 26.8 million during the same period, reflecting a 35% y-o-y growth over pcp. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Step Energy Services Ltd, Mullen Group Ltd etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 3.78 on September 30, 2020.

One-Year Technical Price Chart (as on September 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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