Shares of Organigram Holdings Inc. soared 44 per cent on Wednesday, as investors bet that the better-than-expected revenues in the recent quarter were a sign the company is faring better than its peers in the battered cannabis sector.
The jump in price for the Moncton-based company’s stock is a rare bright spot in the industry. In recent months, many companies in Canada’s burgeoning cannabis business have been missing revenue targets and struggling to secure financing amid volatile markets. A slow rollout of retail licences in some provinces combined with a still-strong illicit market means that licensed producers, or LPs, have not been able to sell to as many customers as expected more than one year after recreational cannabis was legalized in Canada.
“Given the high bar they had set themselves and two quarters of declining financials, this … should be a relief that headwinds were temporary and supports our confidence which sees [Organigram] as one of our preferred picks in the cannabis industry,” Owen Bennett, an analyst at Jefferies Financial Group, said in a note, adding this puts the company in “a very select group of Canadian LPs.”
“We continue to believe those that can deliver (or are delivering) near-term profit will pull away from the pack in the months ahead.”
In December, licensed cannabis producer Wayland Group Corp. filed for creditor protection after failing to produce positive cash flow since its inception. This followed Ascent Industries Corp., another cannabis producer, which went into creditor protection after Health Canada suspended its licences.
Also in 2019, CannTrust Holdings Inc. shares plummeted after federal investigators discovered it had grown thousands of kilograms of cannabis in unlicensed parts of its greenhouse facility in Pelham, Ont., shaking confidence in the industry.
“Financial distress will be a continuing theme in 2020, as some LPs struggle to secure sources of capital. We believe we are well capitalized and have a strong liquidity position,” Organigram chief executive Greg Engel said while speaking on a conference call with analysts after the release of the company’s quarterly report.
“Unlike some of our peers, our financial results are evidence that we have forged a clear path to profitability."
For the three-month period ended Nov. 30, Organigram reported first-quarter 2020 net revenue of $25.2-million, up 55 per cent from the prior quarter, partly because of a surge in its wholesale transactions to other producers. It posted a net loss of nearly $900,000, or 0.6 cent a share, compared with a net loss of $22.5-million, or 14 cents, in the fourth quarter of 2019 as increasing plant yields lowered per-gram cannabis production costs. (Because the industry was just ramping up a year ago, comparing financial results with the prior quarter provides better insight into cannabis companies’ growth, rather than year-over-year.)
Organigram’s chief financial officer Paolo De Luca told analysts that the company has created the necessary capital and liquidity to ride out future volatility in capital markets.
Investment banking firm Stifel GMP cautioned in a note to clients that there could be some risk of challenges prior to more stores opening in Ontario, but looked beyond these short-term headwinds, citing Organigram as one of the lowest cost cannabis producers with a balance sheet to support expansion plans. It maintains its “buy” rating.
Despite Organigram’s higher-than-expected revenue, BMO Nesbitt Burns views this as “neutral” because revenues from recreational cannabis sales were largely in line with expectations and sales to other licensed producers are what caused the increase.
Recent developments suggest that Organigram may be experiencing relatively weaker demand for its recreational flower products versus some other producers, BMO said in a note.
Organigram’s stock closed at $4.05, up $1.24 on Wednesday.
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