Corby Spirit and Wine Ltd. (CSW.A) is a Canadian manufacturer, distributor and importer of spirits and wines. The group derives its revenues from the sale of its owned brands in Canada and other international markets, and earns commissions from the representation of selected non-owned brands across the Canadian marketplace. 

Key Updates:

• Revival in Demand dynamics: During the third quarter of FY22, the demand for spirit and wines has improved, supported by growth in the Canadian retail channel led by improved consumer demand, lifting of COVID-19 restrictions led to a strong Q3FY22 recovery in the on-premises channel. In Q3FY22, the company saw a 5% y-o-y and 4% y-o-y surge in J.P. Wiser's Canadian whisky and Wiser's Special Blend brands, respectively. Moreover, Ungava Spirits Brands reported a growth of 12% on y-o-y basis. Notably, together these three brands constitute more than 50% of the company’s sales volume.

• Robust Profitability margins: The company commands a higher margin than the industry median, which is a key positive and illustrates improved operational efficiency. Notably, the company reported its EBITDA margin and operating margins at 28.0% and 17.3%, respectively, in Q3FY22, higher than the industry median of 18.8% and 15.1%, respectively. Moreover, the company’s net margin stood higher at 12.6% in Q3FY22, versus the industry median of 9.2%.

• Healthy balance sheet: At the end of Q3FY22, the company reported an impressive debt to equity ratio of 0.02x, as compared to the industry median of 0.75x. This will help the company to use its cash flows for alternative projects, while the lower leverage will help the company to outpace its peers during the rising interest rates environment.

Risks associated with the investment:

The company might face steep competition due to entry of new player within the sector, which might lead to drag the market share of the company. Moreover, due to any shift in consumer taste and preferences, the product of the company might witness a slide in the sales volume. 

   Q3FY22 Financial Highlights:

Q3FY22 Income Statement Highlights (Source: Company Report)

• A announces its quarterly result, wherein the company posted its topline of CAD 34.5 million, improved from CAD 33.8 million in pcp. The growth was supported by increase in gross commissions (CAD 9.2 million vs CAD 7.8 million in pcp).
• Earnings from operations stood lower at CAD 5.9 million versus CAD 8.4 million in pcp. The decline was primarily attributable to an increase in both Marketing, sales & administration costs and cost of sales, respectively.
• Net earnings stood at CAD 4.3 million, slide from CAD 6.1 million in pcp, due to lower earnings from operations as mentioned earlier, partially offset by lower income taxes.
  

 Valuation Methodology (illustrative): EV to Sales based metrics

Analysis by Kalkine Group

Stock Recommendation

As per the management, the group is focusing on product innovation in order to cater to the changing consumer preferences, which is encouraging. Moreover, the company is likely to boost its upcoming performance through improved volumes, prices-increase and better revenue-mix. Additionally, the stock of CSW.A is carrying a dividend yield of ~5.117% on an annualized basis, which looks attractive considering the persisting interest rate scenario.

We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Vintage Wine Estates Inc, Diamond Estates Wines & Spirit Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of CSW.A at the last closing price of CAD 18.76 on May 13, 2022.

One-Year Technical Price Chart (as on May 13, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

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