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

• Expecting elevated sales: Due to the sheer solid positioning of major brands, the continuing launch of new and creative products in both its core wine business and new product categories, as well as overall growth in the Canadian beverage alcohol market, the Company believes that its sales will rise over time. It is also focused on measures to cut costs and improve production efficiencies through a continuous evaluation of its operations and cost structure with the goal of increasing profitability, which is a major plus.
  

• 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 will 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 will 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. The Company will also make packaging design changes that are more appealing to its target markets and are consistent with its initiative to be more environmentally friendly. New product launches and key brands through all the Company’s distribution channels will continue to receive increased marketing and sales support.
  

• 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. Moreover, at the price of CAD 7.23 the company is delivering a healthy dividend yield of 3.40%. 
  

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. 

 Financial overview of Q3 FY22

Source: Company filing

• In Q3 2022, the company reported slight lower revenues at CAD 103.4 million, against CAD 111.0 million in the previous corresponding period. The decline was primarily due to a slide in demand due to a change in purchasing pattern of the consumers.

• The company posted lower gross profit at CAD 34.0 million in Q3 2022, compared to CAD 38.8 million in pcp mainly due to higher cost of sales.

• Higher amortization cost and increase in interest expense dragged earnings before income taxes to CAD 4.6 million in the reported period compared to CAD 12.2 million in pcp.

• Net income in the reported period stood at CAD 3.1 million against CAD 10.2 million in pcp, primarily due to above discussed rationales.
  

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group 

Stock recommendation

The COVID-19 outbreak has created a series of unexpected market and operational hurdles, which have hindered the company's performance this year. However, it anticipates that long-term sales will increase due to excellent brand positioning and overall expansion in the Canadian beverage alcohol sector. Furthermore, the company is diversifying its product offerings beyond typical table wines to include other alcoholic beverages, which is a significant plus. Additionally, it is concentrating on attempts to cut costs and improve production efficiencies in order to increase profitability, which is a major feature. Moreover, it is offering a healthy dividend yield, which is also a key positive. Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 7.23 as on March 4, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 4, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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