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OGO: Premium Brand Launch Supports Margin Expansion

What you need to know:
• Organto announced the launch of ORO, a brand focused on premium non-GMO fruits and vegetables. This rounds out Organto’s offering and supports the Company’s ongoing transition to higher-margin branded products.
• We view the material pull-back in OGO shares as a buying opportunity given the improved revenue growth profile, gross margins, and future outlook which shifted over the last few months.

This morning, Organto Foods (OGO:TSXV) announced the introduction of its latest innovative brand offering, ORO. ORO focuses on premium non-GMO fruits and vegetables, complimenting the I AM Organic brand (organic fruits and vegetables) and =Awesome Fruits (mid-tier non-GMO fruits).

The new brand plans to focus on enhanced harvest control practices, sizing and quality specifications, and adherence to socially responsible practices. Organto has launched the brand in Austria with a retail partner marketing non-GMO Rain Forest Alliance Certified bananas but plans to expand across Europe and beyond bananas.

The new brand rounds out Organto’s offering to ensure that the business can serve the needs of its customers, dependent on region, customer preference, etc. Furthermore, the announcement supports the planned transition towards branded and private label products which boast 15% gross margins rather than the 10% for bulk. Our estimates remain unchanged as we wait to see the impact of ORO on total sales over the next few quarters.

Insider Buying
We would also like to highlight that CEO Steve Bromley has recently purchased 100K shares in the open market at an average cost of $0.074/share. This follows his purchase of 1M shares at $0.10/share back in October and additional insider buying from Director Joe Riz, Director Jeremy Kendall, and Director Peter Gianulis over the last year.

Valuation
We note that OGO shares are down 50% in the last six months and 26% since our initiation report (read here), while the Company has only improved its revenue growth profile, gross margins, and future outlook based on dissipating macro issues. We view the pullback as a meaningful buying opportunity ahead of another strong quarter in Q2 (we are expecting $10.1M in revenue and 8% gross margin).

Organto currently trades at 0.4x 2024E sales compared to its peers that trade at 0.9x 2024E sales on average. We remind readers that OGO has the highest sales CAGR in the group, but is being punished for its gross margin compression over the last year. Q1 illustrated that gross margins are on track to recover to past levels and EBITDA profitability should happen in the next year, thus providing an opportunity for OGO stock to significantly re-rate. We are maintaining our BUY rating and $0.20/share target on Organto based on 1.0x 2024E sales.