Organigram Holdings Has Become a Top Acquisition Target

Organigram Holdings Inc. (TSXV:OGI) stock appears undervalued, trading at 11.4x 2019E EBITDA compared to peers which trade at an average of 19.5x

SmallCapPower | May 18, 2018: Organigram Holdings Inc. (TSXV:OGI) is an efficient producer of premium cannabis products. Leveraging its strategic location in New Brunswick along with efficient use of cultivation technologies, the Company produces quality products at industry-leading yields.

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With production expected to reach 36,000 kgs annually in the near term, Organigram is well positioned to serve both the medical and recreational markets. StoneCastle Investment Management Portfolio Manager Bruce Campbell, in a recent interview with SmallCapPower, asserted that Organigram is the dominant player on Canada’s East Coast. In terms of valuation, Organigram stock appears undervalued, trading at 11.4x 2019E EBITDA compared to peers which trade at an average of 19.5x.

Investment thesis

  • Premium cannabis producer with industry-leading yields
  • Targeting production of over 100,000 kgs by 2020

Premium cannabis producer with industry-leading yields

Organigram is an efficient producer of premium cannabis products in Canada. Aided by its strategically-located centralized facility in New Brunswick (low operating costs and taxes) along with efficient use of cultivation technologies, the Company produces quality products at industry-leading yields. Organigram won two out of six product category awards at the 2017 Canadian Cannabis Awards.

Organigram – Yields and Costs

Source: Company Filings

Dried flower yields increased to 66 grams per plant in February 2018 compared to 43 grams in September 2017. Higher yields, in turn, are driving costs lower, with the February 2018 cost per gram harvested improved to $1.47 from $2.38 in September 2017. In addition to improving yields, higher sales of cannabis oil sold (+297% to 662,000 milliliters in Q2 2018) continue to jack up gross and net margins. For Q2 2018, its gross margin was 58% while net margins improved to 29%.

Planning aggressive production expansion

Similar to other Canadian cannabis players, Organigram is planning an aggressive production expansion to meet the growing medical cannabis market as well as the large recreational opportunity opening up shortly. From the current production capacity of 22,000 kgs per annum, Organigram is aiming to achieve over 100,000 kgs per annum by 2020. In the near future (May 2018), the Company’s production capacity will reach 36,000 kgs after its Phase 3 expansion at the Moncton facility. By April 2020, fully-funded facility expansion through Phase 4 is expected to reach up to 502,228 sq. ft. As of February 2018, Organigram had a cash balance of $53.7 million, which should be used to fund this substantial expansion.

Capacity expansion timeline

Source: Company Filings

Distribution agreements complement production expansion

To complement this production expansion, Organigram has signed two key distribution agreements. In September 2017, the Company signed an MoU with the province of New Brunswick for the supply of a minimum of 5,000 kgs per year for the recreational market. In January 2018, Organigram signed an MOU with Prince Edward Island for the supply of a minimum of 1,000 kgs per annum.

First international agreement: Organigram also aims to sell its product outside Canada and inked its first international agreement to acquire up to 25% of alpha-cannabis Pharma GmbH (ACG) located in Stadthagen, Germany for €1.6 million in cash and €0.875 million worth of Organigram common shares. Organigram is expected to provide ACG with dried cannabis flower and sweet leaf for conversion into extracts for the German medical cannabis market. Organigram anticipates several such international business deals in the future across its target geographies of Europe, South America and Australia.

Outlook and valuation

Organigram is a mid-tier cannabis player with a distinct advantage of higher yields, which has helped it to report strong net margins in the latest quarter. With production expected to reach 36,000 kgs annually in the near term, Organigram is well positioned to serve both medical and recreational markets. In terms of valuation, Organigram stock appears undervalued, trading at 11.4x 2019E EBITDA compared to peers which trade at an average of 19.5x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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