Organigram's November 19 earnings have sent its share price on a rip as they beat analysts' expectations on both revenue and EBITDA.
The primary reason for Organigram's November 19 earnings beat was the massive growth in wholesale cannabis revenue and the reduction of operating costs by over a third. Impressive to say the least.
No one is ever perfect, and analysts have pointed to the fact that for the third quarter running, Organigram's recreational sales have declined. However, we're not too concerned about that for the moment, as the right product mix and form factors are starting to take shape in Canada, and Organigram is very well placed to take advantage of these.
Analysts were expecting revenue of $19.4 million and an EBITDA loss of around $1.4 million. The previous quarter had been a shocker for the company, and analysts weren't expecting this one to be too great either. No one told Organigram that, as the company reported $25.2 million in revenue (30% better than expected) and just over $4.9 million in positive EBITDA (which equated to 22% as opposed to analyst's expectations of -7%)
As can clearly be seen, wholesale revenue was the clear winner growing from $0.6 million in the previous quarter to over $9 million. The company sold about 2,600 kilograms of cannabis wholesale, and even though it is at a lower price (~$3 per gram), it does carry comparable gross margins to other cannabis sales.
Yes, recreational revenue did decline for the third quarter in a row, but by a much lower percentage. This trend might be at an end, given the fact that the company does not produce any of the low-THC oils anymore and with the current demand for vapes and edibles showing so much strength, expect the company to deliver increased adult-use revenue over the coming quarters.
With the legalisation of edibles and extracts taking place on October 17, 2019, it is only now that the products are finally hitting the shelves. And already the results have been extremely positive.
According to BNN Bloomberg, "More than 3,000 people were waiting in a "digital queue" on the Ontario Cannabis Store's website before the online sales even began. Due to the high demand, all "soft-chew" items, or gummies, were sold out within the first 30 minutes."
Organigram is well placed to take advantage of this demand, with a focus on the two largest segments (based on US recreational cannabis sales data), which include vaporizer pens, cartridges, chocolates, and powdered drinks. Initially, it's only their TrailBlazer vape cartridges that are in market, with the balance of their product range looking likely to be in the market by June this year.
Ultimately, the delay in getting more products to market is a function of the development schedule and completion of the upgrade to their Moncton Facility. When complete, the new Phase 5 will be the driver behind in-house production of chocolate (up to 4 million kilograms per annum) and vape pen filling capacity.
Organigram ended the quarter with $34 million in the bank and $85 million in the form of a long-term, senior secured loan from the Bank of Montreal. The loan carries a very low-interest rate of 5.2% (some of the US MSO's are being charged more than 12.5%) and allows the company access to an additional $90 million in unused credit, should the company require it.
Disclaimer: Past performance is not an indicator of future performance.
Is Organigram still a buy?
Up over 50% in the past few days alone, OGI stock has been on a tear – no doubt. So the big question remains – is it still a buy? Let's start with the negative (for all you bears out there) and then we can get to the positives.
The company saw declining revenues in the recreational market for the third quarter running and if this is not addressed with its 2.0 product line and sales, then potentially the company is losing ground in a market with the greatest growth potential for the coming years. This is something all investors should be on the lookout for in the coming quarters. We would expect to see the new product mix and sales from 2.0 move the dial in this area.
Another negative is the fact that the company has not pushed more products to market for the launch of 2.0. The primary reason for this is the company's decision to manufacture in-house and not to use third-party white-labelling services. Whilst this does limit the company in the short-term, this will eventually lead to higher margins and greater control over the production line in the longer-term.
On the positive side, the company has shown superb management in reducing operating costs and increasing gross margins. Wholesale revenue growth is a good thing, as it creates a platform for solid (and less-volatile) top-line growth. The increase in wholesale seen to date also talks to the quality of Organigram's product, and this is corroborated with the many online reviews and awards the company has won for its product.
The Bottom Line
Overall the company performed superbly in this quarter. Organigram's November 19 earnings beat analysts on revenue and EBITDA, and more than that, they earned EBITDA profits whilst most of their peers continue to burn cash at an alarming rate.
Nicknamed "The Executioners," Organigram has done it again. They have clearly shown that the disaster of last quarter is behind them, and with 2020 expected to be the breakout year for the recreational cannabis industry, we believe Organigram to be one of the best ways to play the Canadian Licensed Producer market.
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