Organigram can 'weather the storm' after weak guidance hits shares

Marijuana leaves, cannabis on a dark background, beautiful background, indoor cultivation
Marijuana leaves, cannabis on a dark background, beautiful background, indoor cultivation (GETTY)

Shares of Organigram Holdings (OGI.TO)(OGI) plunged in early trading on Tuesday after the cannabis producer issued guidance suggesting fourth-quarter net sales will be $16.3 million, well below analyst expectations and the $24.8 million reported in the third quarter.

Analysts polled by FactSet had expected fourth-quarter revenue of $27.9 million for the period ended on August 31.

The Moncton, N.B.-based cannabis company blamed slower-than-expected retail store openings in Ontario, Canada’s largest province by population, at a time when supply is increasing across the industry.

Toronto-listed shares fell $0.56, or nearly 13 per cent, to $3.90 after dipping as low at $3.66 in early trading.

“While Q4 2019 did not meet our overall expectations, we have not only emerged as one of the national leaders in the industry with significant growth expected in net revenue and strong market share, we expect to report positive adjusted EBITDA for the year,” CEO Greg Engel stated in a news release late Monday.

Organigram said it expects to report negative adjusted EBITDA in its fourth quarter, after posting profit by that measure in recent periods. Net revenue for the company's full financial year is expected to be $80.4 million.

Beacon Securities analyst Russell Stanley slashed his price target on Organigram shares to $5 from $15 on Tuesday while maintaining his “buy” rating. He said the commentary from Organigram management on oversupply and limited retail channels in Canada is “strikingly similar” to comments from HEXO (HEXO.TO)(HEXO) last month, suggesting those issues will be shared across the sector this earnings season.

“While we have reduced our target price, we believe that OGI will be one of the few to weather the storm,” Stanley wrote in a note to clients. “The Q4/19 forecast aside, OGI is one of few companies with a track record for delivering strong EBITDA margins, and importantly, it has established sales relationships with all 10 Canadian provinces. We therefore expect OGI to eventually benefit from the coming rationalization of producers, and we reiterate our buy rating.”

He also notes the Ontario Cannabis Store has reported that its top three best selling pre-rolls are Organigram products, and that two of those strains are amongst the top five ordered from the province’s online store.

Cantor Fitzgerald analyst Pablo Zuanic maintained his “overweight” rating and $17.10 price target on Organigram shares on Tuesday, reflecting his long-term bullish view on Canadian producers.

Organigram is expected to report its full results for its financial year on Nov. 25.

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