Model Update For OrganiGram Holdings: 'Discount To Larger Peers Is Overdone'

Pablo Zuanic, analyst at  Cantor Fitzgerald, offered an updated investment model for OrganiGram OGI OGI for which he maintained an Overweight but lowered the 12-month price target for the stock to C$5.30 from C$5.70, owing to the increased share count.

The Thesis

Zuanic noted the company has several levers that should result in sales growth and margin expansion in 2022. In addition, the firm projects positive EBITDA by the third quarter, in May. OrganiGram recently reported its sales grew 23%, driven by exports and the domestic recreational cannabis sector while gross margin and EBITDA metrics continued to improve (despite average realized flower pricing dropping 20% sequentially).
“We believe the discount to larger peers is overdone (especially now with improving profitability, export growth, and the strategic investment by a large CPG company),” Zuanic said.

Net revenues were up 23% sequentially in the November quarter. The sales mix was 82% domestic recreational, 11% exports and 6% domestic medical.

Exports accounted for 60% of the absolute sequential growth, while domestic recreational sales represented 35%, and domestic medical sales the remaining 5%.

“Management implied exports have similar margins to the domestic business, but we note that, although these exports are supposed to be a premium indoor flower, the average realized flower price fell to $1.88/gram in 1Q22 from $2.33 in the Aug qtr and $3.24 a year ago,” Zuanic wrote. “In the domestic business, OGI.TO gained share, according to management.”

The Company projects “significant” interannual sales growth and positive EBITDA by the third quarter of 2022. OGI.TO projects C$5.9 million in sales in recreational above Cantor’s current estimate of $5.4 million.

“Management sees three growth drivers: the further expansion of derivative formats; more stores (2,800 nationwide now with 1,270 in ON); and lower prices taking share from the illicit market.”

Also, capacity expansion should help drive growth and total sales should also grow due to exports. For the second quarter of 2022, OrganiGram projects significant interannual and sequential sales growth.

“The company projects gross margin improvement from various levers: lower cultivation costs (improved yields, additional capacity, operating leverage, automation in pre-rolls), price increases (especially in SHRED’s pre-milled flower SKUs), and mix improvements (rec innovation; vape expansion; exports),” Zuanic concluded.

Image By Ilona Szentivanyi.