It’s been a tough year for cannabis stocks! While some have recovered, most have declined. Stocks that seemed cheap became cheaper. The one I really like, Organigram (NASDAQ:BREAD), was in sharp decline in 2023, but it recovered since I last talked about it in October. I called him a great stock for value investors, and it remains so despite an increase of 14% since then. Today, I’m explaining to you why I still love the title so much.
Fourth quarter results
Organigram’s fiscal year end date changed from August to September, and the fourth quarter reported in December was a four-month quarter in a thirteen-month year. The company reported its fourth quarter on December 19 and reported revenue of CA$46.0 million, well above consensus. Adjusted EBITDA was, however, lower than expected, at -C$2.4 million.
The 13-month exercise had net sales of C$161.6 million, up 11% from FY22. Adjusted EBITDA for the year improved from C$3.5 million to 6 million Canadian dollars. Operating cash flow was -C$17 million in the fourth quarter and -C$38.8 million for the full year, slightly worse than the full year 22. The balance sheet remained very strong, with cash and short-term investments of C$33.9 million. Tangible book value ended the year at C$261 million (C$3.13 per share).
The outlook declined after the release of the fourth quarter report. For FY24, 7 analysts, according to Sentieo, expect revenue of CA$165 million with adjusted EBITDA of CA$6 million. The revenue estimate is slightly higher than when I wrote about the company in October, when adjusted EBITDA was then forecast at CA$13 million. For FY25, five analysts expect revenue to increase to CA$187 million with adjusted EBITDA of CA$14 million. In October, 3 analysts expected revenue of 198 million Canadian dollars with an adjusted EBITDA of 22 million Canadian dollars. Even though the forecasts are lower, the company continues to grow.
A larger investment from BAT
I mentioned in the last article that British American Tobacco (RTC), which owns nearly 20% of the company, could potentially buy out the rest of the company. BTI fell short of this goal, but is paying a high price for a larger stake. This was first announced on November 6, just a few weeks after I shared this article.
BTI will purchase 124.6 million Canadian dollars at a price of 3.22 Canadian dollars, an 87% premium to the current price of 1.72 Canadian dollars. The money will be invested in three tranches between January and August. Organigram shareholders have a meeting scheduled for Jan. 18 to approve the transaction, which will give BTI a roughly 45% stake.
The majority of BTI’s investment will fund the Jupiter Strategic Investment Pool which will help accelerate OGI’s growth. An amount of 41.5 million Canadian dollars will be used for general corporate purposes.
While it seems like a great move for the company to sell shares to a strong partner at a very high price, the move left the company independent. This would have worked better if BTI had bought the entire company!
In my October article, I shared a per year goal of $2.75, which was much higher than the price at the time. I also noted that the price-to-tangible book value ratio was way too low, at just 0.45X. By this measure, the stock has become a bit more expensive, now trading at 0.55X due to the higher price and lower tangible book value. I think that’s way too low. I think BTI too! BTI buys at a price slightly above tangible book value.
By adjusting my outlook based on the weaker expected results for FY25, I am reducing my target somewhat. I was using a higher adjusted EBITDA than analysts forecast (a 15% margin), and the current projection is only a 7.2% margin. My target is based on a projected 12X adjusted EBITDA for enterprise value, and I’m using a slightly higher adjusted EBITDA for 2025 of CA$18.7 million, a 10% margin. This works out to CA$2.65 or US$2.00, or 53% more.
OGI is down 59.1% in 2023, far more than the decline in the NCV Global Cannabis Stock. He lagged behind BTI’s investment announcement, but quickly backed down. It was definitely a lot of volume that day!
I would expect the stock to have bottomed just below $1. It traded a long time ago at a lower price than the recent low. To me, this looks like a rock bottom stock. This open gap is greater than my one-year target, but I think it’s very possible that the stock can close it.
I view this stock as less risky than most cannabis stocks given its very strong balance sheet and market position, but, as I mentioned in the last article, there are some risks. The company may never scale to successfully penetrate the US cannabis market. The markets in which it operates are mainly Canada, but also Israel, Australia and soon Germany and the United Kingdom. Canada has been and could remain a very difficult market. Finally, while it’s nice to see lots of cash and no debt, the company might not spend it on acquisitions.
I really like Organization Chart. The position represents approximately 20% of my model portfolio. Beating the Global Cannabis Stock Index, which was down a little less than the index in 2023. This is my largest holding, but I have a few others that are also important. I like that BTI is buying more at a very high price and should continue to be a good partner. The stock is very cheap, close to 55% of its tangible book value, and could do very well in the future.
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