BTAFF - Why Organigram Is My Favorite Cannabis Stock

2023-12-31 11:55:21 ET

Summary

• Organigram's Q4 results exceeded revenue expectations but had weaker than expected adjusted EBITDA.
• Analysts have lowered their projections for Organigram's revenue and adjusted EBITDA for FY24 and FY25.
• British American Tobacco (BAT) is buying a larger stake in Organigram at a significant premium, but not acquiring the entire company.
• I have 20% of my model portfolio invested in OGI.

This was a tough year for cannabis stocks! While some have rallied, most have declined. Stocks that have seemed cheap have gotten cheaper. One that I really like, Organigram ( OGI ), was down a lot in 2023, but it has rallied since I last wrote about it in October. I called it a great stock for value investors , and it remains so despite rallying 14% since then. Today, I explain why I still like the stock so much.

Q4 Results

Organigram's fiscal year ending date has changed from August to September, and the Q4 that it reported in December was a four-month quarter in a thirteen-month year. The company reported Q4 on December 19th, and the revenue of C$46.0 million was well ahead of the consensus. Adjusted EBITDA, though, was weaker than expected at -C$2.4 million.

The 13-month fiscal year had net revenue of C$161.6 million, which rose 11% from FY22. Adjusted EBITDA for the fiscal year improved from C$3.5 million to C$6 million. Cash flow from operations was -C$17 million in Q4 and -C$38.8 million for the entire fiscal year, slightly worse than in FY22. The balance sheet remained very strong, with cash and short-term investments of C$33.9 million. Tangible book value ended the fiscal year at C$261 million (C$3.13 per share).

The Outlook

The outlook fell after the Q4 report. For FY24, 7 analysts, according to Sentieo, are expecting revenue of C$165 million with adjusted EBITDA of C$6 million. The revenue estimate is slightly higher than when I wrote about the company in October, while the adjusted EBITDA was then expected to be C$13 million. For FY25, 5 analysts expect revenue will increase to C$187 million with adjusted EBITDA of C$14 million. In October, 3 analysts were looking for revenue of C$198 million with adjusted EBITDA of C$22 million. While the projections are lower, the company is still growing.

A Larger Investment by BAT

I mentioned in the last article that British American Tobacco ( BTI ), which owns almost 20% of the company, could possibly buy the rest of the company. BTI fell short of this, but it is in the process of paying a high price for a larger stake. This was first announced on November 6th, just a few weeks after I shared that article.

BTI will be buying C$124.6 million at C$3.22, which is an 87% premium to the current price of C$1.72. The money will be invested in three tranches between January and August. Organigram shareholders have a meeting scheduled for January 18th to approve the transaction, which will give BTI about 45% ownership.

The majority of the BTI investment will fund the Jupiter Strategic Investment Pool that will help accelerate OGI's growth. C$41.5 million of the investment will be for general corporate purposes.

While this seems like a great move for the company to sell stock to a strong partner at a big premium, the move left the company as an independent one. It would have worked out better had BTI bought the entire company!

Valuation

In my October piece, I shared a target a year out of $2.75, which was a lot higher than the price then. I also noted that the price-to-tangible book value was way too low at just 0.45X. By this metric, the stock has gotten a little more expensive, trading now at 0.55X due to the higher price and the lower tangible book value. I think that this is way too low. I think that BTI did too! BTI is buying in at a slight premium to tangible book value.

Adjusting my outlook for the lower expected results in FY25, I am reducing my target somewhat. I was using a higher adjusted EBITDA than the analyst forecast (a 15% margin), and the current projection is just 7.2% margin. My target is based upon 12X projected adjusted EBITDA for the enterprise value, and I am using a slightly higher adjusted EBITDA for 2025 of C$18.7 million, a 10% margin. This works out to C$2.65 or US$2.00, which is 53% higher.

The Chart

OGI dropped 59.1% in 2023, which was a lot more than the NCV Global Cannabis Stock fell. It gapped up on the BTI investment announcement, but it quickly pulled back. That sure was a lot of volume that day!

I would expect that the stock has bottomed just below $1. It did trade a very long time ago at a lower price than the recent low. To me, this looks like a bottoming stock. That open gap is above my one-year target, but I think that it's very possible the stock could fill it.

Risks

I view this stock as less risky than most cannabis stocks given its very strong balance sheet and market position, but, as I mentioned in the last article, there are a few risks. The company may not ever adapt to be able to enter the American cannabis market well. The markets that it operates in are mainly Canada, but also Israel, Australia and soon Germany and the UK. Canada has been and could remain a very challenging market. Finally, while it's nice to see a lot of cash and no debt, the company could spend it poorly on acquisitions.

Conclusion

I like Organigram a lot. The position is about 20% of my model portfolio Beat the Global Cannabis Stock Index, which was down a bit less than the index in 2023. It's my largest position, but I have a few others that are large too. I like that BTI is buying more at a big premium and should continue to be a good partner. The stock is very cheap near 55% of tangible book value and could do very well in the future.

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