While OrganiGram Holdings (NASDAQ:OGI) was one of the better performing Canadian cannabis companies in the last year, the cannabis sector up North just remains nearly impossible to produce the type of results to reward shareholders. Cannabis sales haven’t performed well to start 2022 while the main public stocks don’t produce profits. My investment thesis remains Neutral on the stock until the general sector improves due to less fierce competition.
Weak Canadian Market
The Canadian cannabis market is a difficult enough market to make money due to oversupply and tons of competitors. The public LPs continue to struggle to generate much in the way of growth.
For February, the adult-use cannabis market dipped by 2.9% sequentially from January to C$336.4 million. The January results were even revised downward to C$346.5 million.
While these market numbers weren’t exactly horrible considering how much Canadian cannabis grew during prior years, the issue is that OrganiGram and other Canadian LPs aren’t profitable now and market weakness is occurring to start 2022. The company recently reported FQ2’22 sales of C$31.8 million, up a strong 117% YoY, yet EBITDA profits are minimal and cash burn is high.
As with most Canadians, the quarterly results show a period of improving results to only get to breakeven EBITDA. OrganiGram is still losing money and the data for recent months show weakness starting the year evident by the nearly flat sequential quarterly sales.
A long history exists of Canadian cannabis companies taking market share to only lose the gained market share when rivals readjust business plans. The company now claims 8.4% market share in the Canadian recreational cannabis market for March with the market share doubling from last year.
The problem always starts here when market share starts hitting a wall and the company doesn’t have strong financials to fend off competition. For FQ2’22, adjusted gross margins were a meager 26% with EBITDA only hitting C$1.6 million. In essence, OrganiGram only appears to have gained market share by cutting prices instead of via charging premium prices for flower.
The company has regularly boosted gross margins during this ramp up in market share over last year, but additional market share gains are difficult in the competitive market. OrganiGram has the promise of improved economies of scale due to higher production volumes, but these gains only tend to fuel the constant oversupply in the market.
In the last quarter, the company produced 10,037 kilograms of flower, up from 4,467 kgs in the prior year. The volumes are still relatively small, but the market isn’t in need of additional supply and OrganiGram only has 26% gross margins now.
The company closed the Laurentian Organic acquisition back in December with a promise for both accretive revenue and EBITDA growth. At a cost of only C$36 million, the deal is probably too small for a huge impact, but the past Canadian market leaders in Aurora Cannabis (ACB), Canopy Growth (CGC), Tilray Brands (TLRY) and HEXO (HEXO) have all closed deals with similar promises. Both Tilray and Hexo recently had market shares near 20%, but both stocks trades at the lows due to weak financial results and market shares dipping towards 10%.
As with the other Canadians, OrganiGram has some hope with international cannabis sales. Sales surged to C$5 million in FQ2’22, but generating profits becomes tougher when dealing with relatively small revenue volumes and having business in Canada and multiple international locations.
For a company with an 8% market share of a market with running at an annual sales rate of C$4 billion, OrganiGram has relatively small revenue targets. Analyst only forecast the company reaching a meager $145 million in sales by FY23, or the equivalent of C$184 million.
With a fully diluted share count of 347 million, OrganiGram is worth ~$500 million. Like the rest of the Canadian cannabis sector, the stock trades near all-time lows after a very weak period since the peak in February 2021.
The stock isn’t crazy expensive based on current FY23 revenue targets, but too many Canadian cannabis stocks garnering market share with lower gross margins have never generated the expected profits. The company does have a promising business in Israel and Australia with the international sales discussed above.
OrganiGram does have a solid cash balance of C$151 million with no debt, but the company also burned C$17 million in the last quarter. Until the market normalizes with market share taken via quality products sold with high gross margins, one just can’t trust these cash balances won’t bleed over the years.
The key investor takeaway is that OrganiGram remains difficult to own until the Canadian cannabis market becomes more focused on profits. Investors should continue waiting for an inflection point of sustainable higher margins due to some indication of pricing power for leading cannabis brands.