Organic Garage Ltd. - A Prime Takeover Candidate? - munKNEE.com
Tuesday , 1 December 2020

Organic Garage Ltd. – A Prime Takeover Candidate?

Big food retailers are eyeing the organic sector as evidenced by Amazon’s $13.7B purchase of Whole Foods and Sobeys’ $800M purchase of Farm Boy for $800 million. What would Organic Garage Ltd. be worth in a takeover scenario?

By Lorimer Wilson, Managing Editor of munKNEE.com – Your KEY to Making Money! with Chris Thompson, President and Director of Equity Research at eResearch.com.

Organic Garage Ltd. (TSXV:OG), headquartered in Toronto, is an independent Canadian chain of organic and natural product grocery stores that operate in the Greater Toronto Area. It is focused on providing customers with healthy food, good value, small store convenience, and an overall premium shopping experience in an ever expanding Greater Toronto Area retail footprint.

Fortuitously, in January, the Company entered into an agreement with Cornershop to utilize Cornershop’s app and website for online ordering and home delivery that met the surge in digital demand. Online sales, currently representing 6.0% of sales, should increase as customers embrace the Ecommerce lifestyle.

Organic Garage’s new store, located in the fashionable neighborhood of Leaside in Toronto, is set to open in 2021 and could boost revenue by as much as 25% once fully operational. After the Leaside store is operational, Organic Garage plans to open a new store annually.

The company leverages its strong supplier relationships to keep prices low (our research suggests that their prices are 10-20% less expensive than its competition) and cost reductions implemented during F2020 and the shift to a decentralized distribution model should help further with margins in F2021 and beyond.

Q2 Financial Highlights

The company’s Q2 financial results ended July 31, 2020, are as follows:

  • Sales: increased 1.25% to $8.1M
  • Gross Profit ($): decreased 8.3% to $2.2M
  • Gross Profit (%): decreased to 29.0% from 30.0%
  • Net Income (Loss): increased to $(202)M from $189M
  • Total Expenses: increased 6.8% to $2.4M
  • Total Expenses as a % of sales: increased to 29.7% from 28.2%
  • Net Profit (Loss) per Share: reduced to $(0.01) from $0.01
  • EBITDA: decreased 66.7% to $0.4M
  • Cash/Equiv. Balance: decreased 25% to $0.9M

{The above amounts are expressed in Canadian dollars and in comparison to the previous quarter.)

Q2 Operational Highlights

  • The company is in the process of shifting from a centralized distribution model to a decentralized model which should result in significant cost savings starting at the beginning of 2021.
  • Online sales currently represent 6.0% of sales and should continue to increase as customers embrace the Ecommerce lifestyle.

Looking Forward

  • F2021E: Revenue $29.5M; EBITDA $2.2M;
  • F2022E: Revenue $32.7M; EBITDA $3.2M.

The above numbers were based on an equal-weighted price/share of $0.28 from:

  • a multiple of 0.6x the one-year forward Revenue of $30.0M,
  • a multiple of 9x the one-year forward EBITDA of $2.3M, and
  • a DCF from a multiple of 9x the five-year forward terminal EBITDA of $3.9M at a 10% discount rate.
  • We are Initiating Coverage with a Buy rating and a one-year price target of $0.30

For more information about eResearch’s 29-page initiation equity Research Report on Organic Garage, please visit eResearch’s website.

Stock Performance

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