OGI - Organigram: Structural Issues In Canada Remain

2023-12-20 07:30:00 ET

Summary

• Organigram reported FQ4'23 numbers highlighting structural problems in the Canadian cannabis market.
• The company's net revenue growth was only 1% due to high excise taxes and the additional push into new SKUs again resulted in minimal gross profits.
• Despite a large investment from BTI, Organigram's lack of success and low margins make it an unappealing investment.

Organigram Holdings (OGI) just reported FQ4'23 numbers that further highlighted the structural problems in the Canadian cannabis market. The stock has probably fallen enough to potentially set up a tradable bottom, but investors shouldn't expect any meaningful upside ahead. My investment thesis remains generally Neutral on the prospects for the stock, though Organigram has no compelling reason for investors to own the stock.

Structural Issues

Organigram reported the following FQ4'23 results compared to last year. Investors quickly see how the Canadian government takes such a large cut via excise taxes, the company hardly produces positive gross profits for a sustainable business to reward shareholders.

As with a lot of Canadian cannabis operators, the management team spends a lot of effort on introducing new SKUs and making additional investments, but the end result is a company just spinning its wheels. In the FQ4 earnings release, Organigram highlighted a long list of new products introduced into the Canadian recreational cannabis market.

The company even continues to highlight the amount of new SKUs added to the market. Organigram just introduced 16 SKUs in FQ4'23 alone, for a total of 143 SKUs in the market.

The end result was Organigram generating net revenue growth of only 1% during the quarter due to a C$5.2 million boost in excise taxes. The company only has net revenue of C$46.0 million, or the equivalent of just $34.5 million.

The reported gross margin was just C$3.2 million, but the adjusted gross margin was C$9.0 million, down from C$14.2 million last FQ4. Organigram just produced an adjusted gross margin of only 17% and hardly 10% of the gross revenue in a highlight of how difficult the cannabis market is in Canada.

Investors also need to realize the adjusted gross margin is higher than reality due to nearly standard inventory adjustments. The company has consistently made provisions to inventories due in part to the constantly shifting new products and SKUs leading to high levels of excess inventories.

Not Compelling

Organigram just collected a big investment from British American Tobacco ( BTI ) for C$124.6 million to create the "Jupiter" strategic investment pool. The majority of the money appears targeted at geography expansion, and the desire to expand beyond a weak home base always appears odd considering the general lack of success.

BTI will subscribe for 38,679,525 shares at a price of C$3.2203 per share as follows:

• January 16, 2024 - 12,893,175 million common shares
• August 30, 2024 - 12,893,175 million preferred shares
• February 28, 2025 - 12,893,175 million preferred shares

The company now has a limited cash balance of C$75.0 million to support ongoing investments, but the business still hasn't turned the corner despite an original investment from BTI of C$221 million back in March 2021. Organigram will slowly obtain the large investment over the next 15 months, presumably to match investment opportunities along the way.

The stock has 91 million shares outstanding for a minimal market cap of ~$115 million. The large BTI investment will greatly increase the market cap, though Organigram appears to have initially obtained a favorable price for the shares, with the stock currently trading far below the $2.41 deal price.

The problem is finding a compelling reason to invest in Organigram at any price until the cannabis structural issue with low margins and high excise taxes is resolved. The company's investment in other businesses in different geographies won't necessarily pay off for shareholders unless positive results are consolidated on the income statement.

The company has made interesting investments in Phylos Bioscience as a prime example of where proceeds from BTI might go. The convertible shares and loans might generate an attractive return to Organigram, but the stock will likely to valued based on the operating business, and the lack of promising results while focused on investments won't help the confidence in the business.

Takeaway

The key investor takeaway is that Organigram has too many structural issues in the cannabis business to warrant an investment. The stock appears in a bottoming process, but the new focus on an investment pool with BTI doesn't make the investment case for the stock more compelling.

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