Organigram: Strong Earnings Secure Elite Status In Canada

Summary

• Organigram reported Q1 fiscal 2019 (Nov 30, 2018) results and sales increased 287% to $12.4 million driven by legalization sales.
• Management guided next quarter's sales to at least double from this quarter which would imply a sales of >$25 million.
• Organigram remains one of the best low-key executors in the industry and we reiterate our favorable long-term view of the stock.

Welcome to our Cannabis Earnings series where we break down the latest earnings to help you focus on the most important topics.

Introduction

Organigram (OTCQX:OGRMF) announced its first quarter results for the 2019 fiscal 2019 year which ended on November 30, 2018. The stock jumped 30% last week on the back of a strong quarter and optimistic guidance from the management. We think Organigram remains one of the best executors in the industry and it is building a leading market share in the Canadian market. We rate the stock Buy and included it in our Top 2019 Cannabis Picks.

We reviewed Organigram's last quarter here. All amounts in C$.

F2019 Q1 Review

The company reported net sales (net of excise tax) of $12.4 million which represents an increase of 419% from last year and 287% from last quarter. Gross margin came in at 71% which represented a material improvement from prior quarters. Management guided next quarter's revenue to be at least twice that of the current quarter which would imply a range of ~$25 million, benefiting from the full inclusion of legalization sales.

(Author based on public information)

The increase in sales was driven by the addition of recreational sales since October 17, 2018, which was combined with continued softness on the medical segment. Recreational sales accounted for $9.2 million of the sales last quarter which means medical sales remained stagnant at $3.2 million. Medical patients declined from 15,730 to 13,505 which was caused by the likely migration of existing medical patients to the recreational market for lower prices. We have seen similar trends of weakening medical business at Aurora (ACB) and Canopy (CGC) and we expect this trend to continue as patients continue to switch to the recreational market due to higher costs for medical cannabis.

(Company Filing)

The company ended the quarter with $91 million in inventory including $38 million that are ready for extraction. It is looking at ways to potentially outsource some of these inventories to third party processors, such as extraction specialist Medipharm (OTCPK:MLCPF). The company reported an increase in debt from $2.9 million to $12.6 million and cash decreased from $130 million to $96 million. The $44 million increase in net debt was driven mostly by the $37 million it spent on the Phase 4 Moncton expansion.

Corporate Development

Organigram increased the capital budget for the expansion from $110 million to up to $125 million due to higher input costs and delay. The expansion will increase its production capacity to 62,000 kg by April 2019 and 113,000 by fall 2019. After the expansion is completed, it will become one of the largest domestic producers in Canada and it will rival the announced funded capacity of peers like CannTrust (OTCPK:CNTTF) and The Green Organic Dutchman (OTCQX:TGODF).

(Company Filing)

Outside Canada, Organigram has also been making small moves including its investment in German medical cannabis company Alpha-Cannabis and its investment in Eviana (otcpk:EVNNF), which is a hemp company based in Serbia. Organigram also invested $5 million in Hyasynth, a Montreal-based biotech firm focusing on cannabinoid and biosynthesis, and the deal reminds us of a similar but much larger deal between Cronos (CRON) and Ginkgo Bioworks. Overall, Organigram remains by and large a Canadian cannabis company with a couple experimental international investments.

(Company Filing)

Organigram has secured supply agreements with 9 of the 10 Canadian provinces, with Quebec being the only exception. Quebec only selected four supplies last year with HEXO (HEXO) dominating the local market. We think Organigram has secured its position as one of the leading suppliers in Canada and can compete with most LPs head on. For example, the 1,736 kg Organigram sold compares to 3,409 kg sold by Aphria (APHA) but the latter has three times the market value based on last Friday's closing prices.

(Company Filing)

The stock reacted overwhelmingly positive to the quarterly results despite the fact that management already pre-announced the sales earlier. The stock is trading near its all-time high following a blowout January for cannabis stocks in general. With just over $1.0 billion in market value, Organigram is one of the top 8 largest LPs in Canada. The stock remains cheaper than larger peers but we think a more relevant comparison can only be drawn once other LPs report their Q4 results in the coming weeks.

(Source: TSX)

Looking Ahead

We think Organigram remains one of the best ways to invest in the Canadian cannabis industry. We like the low-key style of its management and the company has proven to be a reliable and grounded executor in an industry filled with highly promotional executives. We think fundamentals will eventually drive the valuation gap between Organigram and other LPs to close and the recent rally was only the beginning. The market will reward good operators and we think Organigram will be one of them.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.