2023-10-16 09:06:59 ET
Summary
- I have been bullish on Organigram for quite some time, but it has dropped significantly.
- The stock is ridiculously cheap in my view.
- I expect that the stock can more than double over the next year.
l have been liking Organigram ( OGI ) for too long! The stock keeps sinking. I last wrote about it three months ago, when it was at $1.56, calling it still my favorite cannabis stock . It has declined since then to a new recent low, while cannabis stocks have lifted since then. This seems par for the course for value investors, as value stocks become cheaper often.
In a model portfolio that I run at my investing group, it is the largest position, currently 19.7%, after several additions at lower and lower prices. The shares I hold now have an average cost of $1.50 per share. Just last week, I shared with my subscribers a review of the stock and why I like it, and it fell again this week. Today, I explain why investors should consider buying this cannabis stock.
What Is Organigram?
Organigram is a Canadian cannabis producer based in Moncton, New Brunswick. I have followed the company since it went public on 2014. It listed on the TSX Venture Exchange until moving to the TSX in 2019. It traded on the OTC until it got a NASDAQ listing in May 2019 just ahead of the move to the TSX in August.
The company is federally legal in Canada, which permits both medical and adult-use cannabis consumption, production and sale. It also has exported to Australia and to Israel. It has announced its plans to begin selling in Germany and in the UK.
OGI has investments in several companies, including Weekend Holdings, which owns vaporization technology company Green Tank Technologies, cannabis genetics company Phylos Bioscience, and biosynthesis company Hyasynth. The investments in Weekend Holdings and Phylos total about C$10 million, and a little more than C$5 million in Hyasynth.
In 2021, British American Tobacco ( BTI ) invested in the company, buying 20% for C$221 million at C$15.17. It later added just a bit in conjunction with top-up rights. The stock is currently down about 90%!
How Is the Company Doing?
Organigram's fiscal 2023 ended at the end of August. The company hasn't yet announced its Q4 earnings release or conference call, but it is due by the end of November.
The company reported its Q3 in July, and there was a double-whammy. First, it missed expectations for revenue and adjusted EBITDA. Second, it had large write-downs of its tangible assets.
Analysts, according to Sentieo, expect that the company ended up FY23 with overall revenue of C$155 million, up 6% from FY22. The analysts believe that the gross profit will be $34 million, up from -C$8 million and a margin of 21.8%. Adjusted EBITDA is projected to be C$9 million, which is up from C$3 million a year ago but a very low margin.
Looking at the balance sheet after Q3, the company had C$53 million in cash. Debt was minimal. Tangible equity was hit hard in Q3 due to C$153.3 million in write-downs, but the company still had tangible equity of C$284 million, which is above its market-cap of C$129 million. One slightly negative note is that the inventory at C$67.8 million may be too high.
Organigram in its first three quarters generated almost all of its revenue from adult-use sales of C$92.9 million. International revenue doubled from a year earlier and represented 15.9% of total net revenue. 2.5% of revenue was from the medical cannabis market, and 1.6% was from wholesale sales to other Canadian LPs.
The Outlook Is Strong
6 of the 7 analysts that share projections for FY23 have an outlook for FY24, while only 3 analysts provide FY25 numbers. For FY24, they currently project that revenue will increase 6% to C$164 million with adjusted EBITDA of C$13 million, up 39%. For FY25, the outlook is that revenue will increase 21% to C$198 million. The adjusted EBITDA is projected to increase 69% to C$22 million, a margin of just 11.2%. The Canadian market is maturing, and the revenue growth for FY25 could be less than what is expected. I think the adjusted EBITDA margin, though, could be higher. The company will be beginning its sales to Germany and to the UK.
This Stock Appears to Be Cheap
The first thing that captures my attention is the price to tangible book value, which is currently just 0.45X. There are several Canadian LPs that trade below tangible book value, so this is not a unique aspect of OGI. The two largest companies, Canopy Growth ( CGC ) and Tilray Brands ( TLRY ) are mixed on this metric. CGC trades at a big discount, but, unlike OGI, it is drowning in debt, which is larger by far than its cash balance. TLRY trades at 3.77X, which is crazy-high given its high amount of debt.
I think tangible book value can help define downside risk. If investors become excited again about Organigram, they will look at its earnings power. I think that adjusted EBITDA is the right metric, and the stock, with an enterprise value of C$76.4 million, trades at just 5.9X projected FY24 adjusted EBITDA. This is very low for a federally-legal company that is growing.
As I look out a year, I think that investors a year from now will be looking at the FY25 adjusted EBITDA. Again, that revenue projection might be too high, but I think that the adjusted EBITDA margin could do better. Making some adjustments to the analyst forecasts, I am going with revenue of C$189 million, up 15%, and an adjusted EBITDA margin of 15% (C$28.3 million). Using a multiple of just 10X yields an enterprise value of C$283 million, which works out to a stock price of $2.75, which is 139% above the current price. While that would be big upside, I think the stock could do better than this, as 10X EV/adjusted EBITDA is not very high.
Risks
With so much cash and so little debt, there is a lot less risk than with other cannabis companies. One risk, in my view, is that the U.S. moves to reschedule cannabis, making American cannabis stocks more attractive to investors. Organigram could enter the American market in the future, but it might not handle that very well.
Another risk is that the company is focused on a maturing market that is highly competitive. It may take a very long time to make a profit.
A final area of risk is that the company spends too much money on poor acquisitions or invests in bad assets. This past quarter, as I discussed above, Organigram suffered tremendous write-downs of assets.
The Chart
Organigram, which conducted a reverse-split (4:1) in early July, is trading way down from the IPO and from the peaks that occurred later:
The stock last week posted a new low since the peak in early 2019, but the all-time low was set in 2015. My read of the chart is that there could be support near $0.75 and resistance near $3.35.
A shorter-term chart reveals a gap in trading that was left behind when the company reported its Q2 in April:
At $1.15, the stock is down 64.1% year-to-date and down 71.5% since its close in early January at $4.04.
The New Cannabis Ventures Global Cannabis Stock Index is down 14.8% year-to-date, so Organigram has fared poorly. Since 2/10/21, the peak in the cannabis sector, OGI has dropped more than 95%, a bit more than the index, which has declined 91.1%.
I think a big part of gaining confidence in the company and its stock requires the investor to understand what's driving the weak performance. Investors should be aware that the weakness in Organigram last week coincided with the finalization of a C$500 million shelf registration. With so much cash on the balance sheet, the likelihood of an equity sale is quite low.
I am not a fan of two of the larger and more popular Canadian LPs, Canopy Growth and Tilray Brands. I believe that their poor performance has weighed on Organigram. Here is the chart of the last five years of price returns for the three stocks:
Owners of Canopy Growth have lost more, but Tilray Brands has done slightly better. I have shared my expectation that TLRY will keep falling , perhaps trading below $1.00. All of these are very down, but OGI is the only one I include in my model portfolio.
Conclusion
I like Organigram a lot, but expressing this hasn't helped yet! The stock trades very cheaply. BTI, which owns 20%, could buy the rest at a much lower price than where it invested initially, but the stock can do well even if this doesn't happen. It trades at a big discount to tangible book value and looks attractive relative to its adjusted EBITDA projections.
The Canadian market is maturing, but there could be some regulatory changes that would help the industry, like lower taxation or liberalization of the rules about edibles. I see lots of ways to win here. With a low valuation and plenty of cash, the company has time for a buyer to emerge or the market to improve.
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Organigram Is A Great Stock For Value Investors