Andrew Peller Limited

Andrew Peller Limited (TSX: ADW.A) is a wine-producing company and is involved in the production and sales of wine and spirit products across Canada. 

Key updates:

• Increase in cash balance: At the end of Q3FY21, the company reported a higher cash balance of CAD 12.613 million, as compared to CAD 2.737 million in Q4FY20. A higher cash balance is a key positive as it increases the overall liquidity of the firm. Moreover, the management expects that the company would generate sufficient cash flow from operations to meet its debt servicing and working capital requirements over both the short and long-term basis.

• Positive, long-term outlook: The company is a manufacturer of premium wines and believes that the higher-priced premium wine and spirits sales are likely to grow in Canada, which would further support the company’s margins and cash flows in the coming days. The group also entered the spirits and craft beer categories through its strategic alliance with Wayne Gretzky, and has introduced ciders and seltzers through its own brand labels, which are expected to gain traction in the coming days.

• Sequentially improved profit margins: In Q3FY21, the company reported its gross margin and EBITDA margin of 40.3% and 15.9%, higher than 37.9% and 12.9% in Q2FY21. Moreover, the company reported its net margin of 13.2% in Q3FY21, significantly higher than 3.6% in Q2FY21. The above is impressive as it indicates improved operational efficiencies.

Q2FY22 Financial Highlights:

• A announced its quarterly results, wherein the company CAD 99.224 million, decline from CAD 104.410 million in the previous corresponding period (pcp). The decline was primarily due to a slide in demand due to a change in purchasing pattern of the consumers.
• The group reported a gross profit of CAD 39.997 million, slightly lower than CAD 41.549 million in pcp. The corporation reported a lower cost of goods sold of CAD 56.816 million v/s CAD 60.245 million in pcp.
• Net profit stood at CAD 13.090 million, as compared to CAD 12.674 million in pcp. The quarter was marked by higher selling and administration costs (CAD 26.587 million v/s CAD 21.727 million in pcp), coupled with a higher Interest expense (CAD 2.478 million v/s CAD 1.813 million in pcp), partially offset by lower other expenses.

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks: A shift in consumer preference due to the introduction of a new product, changes in discretionary spending etc. would take a toll on the overall sales volume and would dampen the company’s performance. Moreover, due to any natural disaster, the group might fail to source domestically grown premium quality grapes, which might impact the company’s production. 

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The stock of ADW.A carries an impressive dividend yield of ~3.071% on an annualized basis, which looks impressive considering the persisting interest rate scenario. Notably, the company reported a higher dividend distribution of CAD 5.026 million in H1FY22, higher than CAD 4.576 million in pcp. We have valued the stock using the Price to Earnings relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the industry (Beverages) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last traded price of CAD 8.01 on December 20, 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 December 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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