Organigram, Aphria Boosted on Strong Quarterly Results

The Canadian cannabis space got a positive double whammy this week in the form of quarterly results from two licensed producers.

Both Organigram Holdings (NASDAQ:OGI,TSX:OGI) and Aphria (NYSE:APHA,TSX:APHA) issued their latest quarterly reports on Tuesday (January 14), putting up impressive numbers following a taxing few quarters for cannabis equities.

The broader cannabis sector overall saw increases thanks in part to the release of these updates. The ETFMG Alternative Harvest ETF (ARCA:MJ) was up 3.2 percent on Tuesday, while the Horizons Marijuana Life Sciences Index (TSX:HMMJ) was up 3.6 percent that same day.

Organigram now “back on track,” analysts say

Organigram surged over 25 percent across the trading day on Tuesday and into market open on Wednesday (January 15) in Toronto after doubling its quarterly net revenue year-over-year.

The company’s net revenue for the first fiscal quarter of 2020 reached C$25.2 million, up 102 percent from the C$12.4 million reported in the year-ago period.

In a note sent out to investors, CIBC Capital Markets analysts John Zamparo and Krishna Ruthnum said the firm is “back on track” and the results are an encouraging sign in a difficult operating environment.

The pair noted that the company’s dependence on wholesale revenues, which made up a significant chunk of Organigram’s overall cash generation this past quarter, isn’t sustainable in the long term, but does speak to its ability to cultivate low-cost cannabis.

“Our only concerns out of the quarter are a capital projects to-do list that should see spending remain stubbornly high, and questionable timing of equity financing,” the analysts said.

Impressive returns from Cannabis 2.0 products are also mentioned in the note. During an earnings call on Tuesday, Organigram CEO Greg Engel said the company plans to add its line of cannabis-infused chocolates to its portfolio of ingestible offerings before the end of March after receiving licensing approval for chocolate production in December.

$OGI beats analyst headline numbers handily with Adj. EBITDA of $4.9MM vs. $(1.4MM) expected.

BUT burn ~$49MM cash in the Q; cash balance falls to $34MM and debt increases to $85MM.

If a best-in-class operator still exhibits such poor cash economics, watch out for laggards.

— Max Mausner (@MAU5NER) January 14, 2020

Ruthnum and Zamparo have listed the firm as an “outperformer” with a C$5 price target. Organigram’s share price sat at C$4.53 as of 3:23 p.m. EST on Thursday.

Analysts from Haywood Securities are also bullish on Organigram, noting that the company is set for a rerating in the larger cannabis sector.

Neal Gilmer, Ethan Spence and Colin George sent out a note to clients on Wednesday with raised estimates for Organigram’s fiscal 2020 year and a price target of C$6.50.

“Going forward we expect continued growth to be propelled by sales into the provinces for recreational adult-use will drive positive (earnings before interest, taxes, depreciation, and amortization) in fiscal 2020,” the trio said.

The Haywood analysts also said that thanks to the firm’s store of cash, sitting at C$34.1 million by quarter end, Organigram has enough funding to support its ongoing operations.

Aphria upgraded to “neutral” on solid market share gains

While it wasn’t as dramatic as Organigram’s boost, Aphria has also experienced an increase in its trading value on the open market. On Thursday its share price was up 4.8 percent since the firm released a report for its second 2020 fiscal quarter on Tuesday.

Net cannabis revenue for the Canadian producer hit C$33.7 million — C$29 million of which was generated by adult-use cannabis sales — representing a 9 percent increase quarter-over-quarter.

While the quarter’s total net revenue, C$120.6 million, is an increase of 457 percent year-over-year, it is a drop of 4 percent from Aphria’s previous quarter.

Aphria ended the quarter with a healthy store of C$497.7 million in cash.

The pair from CIBC upgraded Aphria to “neutral” and increased its price target to C$7 up from C$6.50.

Zamparo and Ruthnum indicated that Aphria’s ability to increase its market share in Ontario, now up to 13.8 percent, represents an encouraging move.

However, the company’s high spending, particularly at its operations in Colombia and Europe, with no return on capital in sight, is a point of concern for the duo, even though they said Aphria is largely in good shape at the moment.

“We believe current valuation leaves only modest upside, but Aphria should be able to survive regardless of the pace of evolution in Canada’s cannabis market,” said Zamparo and Ruthnum.

In its outlook for 2020, Aphria projects that its net revenue will be anywhere from C$575 million to C$625 million, slashing its old estimates of between C$650 million and C$700 million, which were previously noted in its report for 2020’s first fiscal quarter.

During an earnings call, CFO Carl Merton said the guidance reduction was due in part to the slow rollout of retail stores in Ontario.

The Haywood analysts said they continue to hold that Aphria is poised to become a leader in the cannabis space and currently trades at a discount compared to its contemporaries.

They did, however, drop their estimate to C$10.25 from C$11.75 based on the lowered guidance.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.