On Thursday, Organigram Holdings Inc. (OGI.TO) OGI, a cannabis company focused on producing high-quality, indoor-grown cannabis for patients and adult recreational consumers in Canada, released its results for the third quarter ended May 31, 2022, revealing net revenue increased 88% to $38.1 million (from $20.3 million in Q3 Fiscal 2021).
After the publication, Cantor Fitzgerald’s Pablo Zuanic provided an overview of the valuation and performance of the company.
The analyst kept an Overweight rating for OGI but lowered its 12-months price target to C$2.90 from C$3.70 due to “sectoral derating.”
“Valued at 1.6x CY23 EV/sales vs. 5x for Tilray (TLRY/N) and Canopy Growth (CGC/N), we think the stock represents good value, given rec share and momentum, improving profit trends, and the optionality from the <20% equity stake held by BATS.LN,” Zuanic said.
“Organigram, the only large LP that continues to gain Canadian rec market share, (…) reported May qtr (3Q22) results that beat FactSet sales expectations (by 13%),” Zuanic added. “Company guidance for fiscal 4Q22 (Aug) implies FactSet consensus needs to go up.”
Meanwhile, the analyst also recognized that: a) OGI remains reliant on “milled flower”; b) it saw a further 10% seq drop in average prices; and, c) its export model remains very much of a B2B nature to Israel and Australia, while other companies may be better positioned for European market growth.
- Sales beat ($38.1Mn vs. $33.7Mn) but EBITDA missed ($0.6Mn vs. $1.9Mn), vs. FactSet consensus.
- Total net sales of $38.1Mn were up 20% sequentially and +88% YoY.
- Net recreational sales increased 39% sequentially to $34.5Mn (compared with the 7% growth implied by Hifyre).
Zuanic noted that the shipments to Australia in 3Q22 were $1.3Mn, and total exports of $1.4Mn “were well below the $3.4-4.4Mn of the prior two quarters.”
Although reported sequential gross margins improved to 22.8% from 21.6%, the analyst highlighted that after adjustments, gross profit per gram actually dropped from C$0.54/gram in 2Q22 to C$0.46/gram in the 3Q, while total grams sold increased 17% sequentially.
“The reported SGA of $17.5Mn was almost 2x adjusted gross profit of $9.3Mn. The company’s so-called adj EBITDA metric of $0.58Mn includes a number of adjustments that we would not ex out (ERP installation, acquisition costs, R&D); on our math, EBITDA would have been -$3.6Mn (-9% of sales) (…) Management implied sell-out and sell-in are in sync, but we believe pipeline fill (new SKUs) helped the qtr too,” Zuanic said.
In addition, Zuanic noted that, although growth, share momentum, and portfolio diversification remain “encouraging”, average realized prices for dried flowers fell a further 10% sequentially to C$1.88/gram, while the company’s flower business remains reliant on “milled flower”.
He wondered if this trend was sustainable in the long term.
Zuanic considered OGI expects higher sequential sales for 4Q23 (Aug) due to recreational and exports. In the recreational segment, the analyst foresees continued market growth and further market share gains, “partly helped by increased capacity/flexibility and new SKUs.” OGI projects gross margin improvement sequentially (on a scale, automation, brand/ product mix, new SKUs, and growing techniques) and improvements in EBITDA trends.
Data from the Hifyre scanner data
Although flower and pre-rolls remain the largest categories for Organigram (66% and 16% of sales respectively), as per Hifyre, the bulk of their quarterly growth can be attributed to the edibles category. OGI’s edible category increased sales 62% sequentially from $6.9Mn (8% of company sales) in Feb quarter to $11.1Mn (13% of company sales) during the May quarter.
“OGI has been one of the few LPs who has been able to gain flower share while having below-average prices. For the May quarter, OGI’s avg flower price per gram was $4.65 with 63% and 18% of flower sales coming from Shred brand ($4.14 per gram at retail) and Big Bag O’ Buds ($4.44 per gram) respectively,” Zuanic concluded.
Image By Ilona Szentivanyi.