Andrew Peller Ltd (TSX: ADW.A) is one of Canada’s leading producers and marketers of quality wines and craft beverage alcohol products. The Company markets wines produced from grapes grown in Ontario’s Niagara Peninsula, British Columbia’s Okanagan and Similkameen Valleys, and from vineyards around the world. 

Key highlights

• Made entry in spirits and craft beer categories: Thanks to its strategic collaboration with Wayne Gretzky, the company has expanded into the spirits and craft beer industries, as well as producing ciders and seltzers under its own brand labels. Furthermore, the Company expects that sales of higher-priced premium wine and spirits would continue to expand in Canada, resulting in greater margins and profitability than its lower-priced goods, which is a major positive.
• Expanding product offering: The Company would continue to expand product offerings outside the traditional table wine segment into other alcoholic beverages where it is able to leverage its detailed knowledge of growth opportunities in the Canadian market.
• Selling Port Coquitlam property: Recently, the company revealed that it would be selling its Port Coquitlam, British Columbia property and related assets. The Company would receive CAD 9.0 million for the assets. The assets have a net book value of approximately CAD 1.3 million and are reflected as assets held for sale in the Company’s consolidated financial statements.
• Increase in dividend distribution: Despite the adverse situation, when most firms are restricting their dividend payout to maintain solid liquidity, the company boosted its dividend payout by 10%. The annual dividend on Class A Shares was increased to CAD 0.246 per share. This demonstrates the group's financial strength and implies that it is a good friend to its shareholders.

Financial overview of Q1 2022

Source: Company

• In Q1 2022, the company clocked revenue of CAD 92.3 million compared to CAD 98.4 million in the previous corresponding period. The lower revenue was mainly due to government-mandated closures of hospitality sector, also licensee and export channels remained impacted in the first quarter of fiscal 2022 due to and restricted international travel.
• Gross profit for the period stood at CAD 35.0 million compared to CAD 40.1 million in pcp.
• On the back of higher S&A expenses along higher amortization of equipment, the company posted lower earnings before tax of CAD 4.5 million compared to CAD 14.8 million in pcp.
• The company posted net income of CAD 3.2 million in Q1 2022, compared to CAD 11.2 million in pcp.

Risks associated with investment

The Company’s sales of wine and craft alcoholic beverages products are affected by the general economic conditions and social trends as changes in discretionary consumer spending and consumer confidence, future economic conditions, changes to inter-provincial trade laws, tax laws, the prices of its products and health trends. Moreover, it also faces competition from low-priced imported wines. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Sales are expected to rise over time as a result of excellent brand positioning, the continuous launch of new and creative products in both its core wine business and new product categories, and general expansion in the Canadian beverage alcohol industry, according to the company. The management also believes in generating sufficient cash flow from operations to meet its debt servicing, principal payment, and working capital requirements over both the short and long-term through continued profitability and strong management of working capital and prioritization of capital expenditures. Furthermore, it re-opened the recently acquired Riverbend Inn to guests and expects strong and growing contribution from it. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 8.62 on October 7, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on October 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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