Waterloo Brewing Ltd

Waterloo Brewing Ltd (TSX: WBR) engages in the production and distribution of alcohol-based products. Its products are distributed to end consumers primarily through The Beer Store in Ontario and Provincial Liquor Boards across Canada. It operates in a single industry segment which involves the production, distribution and sale of alcohol-based products. 

Key Highlights:

• Launch of new products: Recently, the company reported the launch of its new premium collection, which includes three seasonal small-batch brews along with two cans of each Vanilla Bourbon Stout, Chocolate Hazelnut Porter, and Spiced Rum Imperial Stout for the upcoming winter season. The above is expected to diversify the company’s product offerings and would cater to a higher number of consumers.
• Growth in EBITDA: The company reported a higher EBITDA of CAD 11.247 million in H1FY21 compared to CAD 7.912 million in pcp. This was supported by higher net revenue of CAD 56.686 million in H1FY21, as compared to CAD 39.416 million in pcp, coupled with favorable cost efficiencies.
• Improved margins: The company reported higher EBITDA margin and pretax margin of 23.2% and 16.4%, respectively, in Q2FY21, as compared to the industry median of 21.8% and 14.2%, respectively. Moreover, the net margin stood 12.1% in Q2FY21, as compared to the industry median of 10.7%.

Q2FY21 Financial highlights:

• WBR announces its quarterly results, wherein the company posted net revenue of CAD 34.201 million, jumped from CAD 24.573 million in pcp. The growth was driven by 4.3% higher sales volumes from the Seagram brand, coupled with an improved product-mix.
• Gross profit surged to CAD 11.158 million, as compared to CAD 7.585 million in pcp. This was supported by higher revenues, partially offset by slightly higher production taxes and distribution fees.
• The quarter was marked by higher selling, marketing and administration, elevated other expenses, partially offset by a decrease in finance costs.
• Net income jumped to CAD 4.155 million from CAD 2.221 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reported a surge in its total debt, which remains as a key concern for the company, as it would dampen the overall financial flexibility. Change in consumer preferences might lead to lower demand and loss if market share.

Stock Recommendation:

The company operates within the alcoholic beverage, and the demand for the product is immune to the economic cycle, which is a key positive. With the new launches, the company is expected to cater a higher number of consumers, which is further expected to support the upcoming sales volume. On the valuation front, the stock available at a price to cash flow multiple of 13.4x on an NTM basis, as compared to the industry (Beverages) median of 18.4x. Hence, considering the above rationale, we give a ‘Hold’ rating on the stock at the closing price of CAD 6.85 on September 29, 2021.

One-Year Technical Price Chart (as on September 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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