Andrew Peller Ltd

Andrew Peller Ltd (TSX: ADW.A) is a Canada-based producer and marketer of wines. With wineries in British Columbia, Ontario and Nova Scotia, 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 

• Reduced bank debts: In the reported quarter, the Company brought down its debt level to CAD 143.8 million as against CAD 165.2 million as on March 31, 2020, based on higher cash flows from operations. On the back of regularly scheduled debt repayments the Company’s debt to equity ratio improved to 0.54:1 compared to 0.67:1 as on March 31, 2020.

• Product development: The Company is focusing on the product development and sales and marketing initiatives by capitalizing on alcohol consumption trends and expects to see continued sales growth. The group would closely monitor its costs and would react quickly to changes to mitigate the risks and to capture the opportunities in the marketplace.

• Dividend: The company has announced an annual dividend on Class A Shares of CAD 0.215 per share, that will be paid quarterly to shareholders. The third quarter dividend will be paid on January 8, 2021 with a record date of December 31, 2020. 

Financial overview of Q2 2021

Source: Company 

• The company posted revenue of CAD 104.4 million in Q2 2021 increased marginally compared to CAD 103.3 million in the previous corresponding period. The revenue increased due to a rise in sales at local liquor stores and other retail channels, offset by a reduction in hospitality, licensee sales and lower duty-free export sales due to COVID-19 restrictions.
• Gross margin in Q2 2021, declined to CAD 41.5 million, as compared to CAD 44.4 million in Q2 2020, because of higher imported wine costs, an increase in consumption of lower-margin products and revenue decline in high margin trade channels.
• Gross margins in the reported quarter stood at 42.3% of sales compared to 44.8% in Q2 2020.
• Net income posted by the company in Q2 2021, stood at CAD12.6 million, as against CAD 7.6 million in Q2 2020. The rise in net income was primarily due to the reduction in selling and administrative expenses, partially offset by the reduced gross margin. 

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 such 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. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company believes that sales is likely to grow over the long term due to strong positioning of key brands, the continued launch of new and innovative products in both its core wine business and in the new product categories, as well as overall growth in the Canadian beverage alcohol market. 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. Based on the rationales discussed above and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 10.73 on December 17, 2020. We have considered Waterloo Brewing Ltd, Diamond Estates Wines & Spirit Inc, Cervus Equipment Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

HLS Therapeutics Inc

HLS Therapeutics Inc (TSX: HLS) is a Canada-based company specialized in the pharmaceutical industry. The Company acquires and distributes commercial stage and branded pharmaceutical drugs for the North American markets. The Company focuses mainly on treatment products for the central nervous system and cardiovascular specialties in Canada.

Key highlights

• New products: The company is pursuing to launch an additional product and pipeline opportunities in the central nervous system and cardiovascular therapeutic markets, and potentially in other therapeutic areas, through targeted business development efforts.
• Stable financial position: As on September 30, 2020, the Company has cash of USD 20.9 million and positive working capital. The Company believes that its cash balances and cash flow from operations would be sufficient to fund its operating activities for the ensuing twelve-month period.

Financial overview of Q3 2020

Source: Company

• The company generated revenue of USD 13.1 million in Q3 2020, as against USD 13.4 million in the previous corresponding period. This revenue number reflects the resiliency of the Company’s Clozaril franchises in Canada and the United States as well as the increasing momentum of the Vascepa introduction in Canada, partly offset by royalty revenues.
• In Q3 2020, the company posted an operating loss of USD 1.7 million as against a loss of USD 0.7 million in Q3 2019, primarily on higher COGS and SG&A expenses.
• Net loss stood at USD 1.7 million as compared to a net loss of USD 1.9 million in the previous corresponding period, primarily due to the above rationales discussed.

 Risks associated with investment

The company is exposed to various risks factors, including risks related to the specialty pharmaceutical industry, economic factors, and many other factors that are beyond management control. Future growth of the company is highly dependent on the performance of VASCEPA. Any deviation from the forecasted performance may adversely affect the company. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Company's leading product Clozaril continues to lead the market for treatment-resistant schizophrenia in Canada. The Company is improving and enhancing the CSAN service. During September 2020, the number of Clozaril patients in Canada grew by 2% on a Y-o-Y basis, despite a slower patient arrival due to COVID-19 restrictions. The Company is also working with leading mental health institutions across Canada to make a new blood testing system broadly available to Clozaril patients. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 16.76 on December 18, 2020. We have considered Hamilton Thorne Ltd, Knight Therapeutics Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Slate Office REIT

Slate Office REIT (TSX: SOT.UN), formerly FAM Real Estate Investment Trust, is a Canada-based open-ended investment trust. The Trust focuses on acquiring, owning and leasing a portfolio of diversified revenue-producing commercial real estate properties in Canada with an emphasis on office properties

Key Highlights

• On the daily price chart, shares of SOT.UN were trading well above the crucial long-term as well as short-term support levels of 200-day, 50-day, 30-day SMAs, which implies a bullish price trend in the stock.

Technical Chart. Source: Refinitiv (Thomson Reuters)

• The stock is trading at a discounted valuation as despite a TTM Return on Equity of 4.72% and a positive spread between ROCE and WACC, its shares are trading below its book value. The LTM Price/Book Value multiple stood at 0.48x, which implies that the stock is trading approximately 52% below its book value per share.
• Moreover, the stock is offering a lucrative dividend yield of 9.41%, which is gigantically higher given the lower interest rate environment. More importantly, the company has a track record of dividend payment over the past 5-years, regardless of the operating environment.

Dividend History: Refinitiv (Thomson Reuters)

Risk associated with Investment: The company is exposed to a decline in investment value and rent collection in the wake of challenging macro-economic condition led by COVID-19 pandemic.

Q3FY20 Financial Highlights

• Rental revenue in the third quarter of 2020 declined by 12.7% to CAD 45.85 million from CAD 52.54 million in the corresponding quarter of the previous financial year.
• The REIT completed a total of 142,881 square feet of leasing, comprised of 92,757 square feet of renewals and 50,124 square feet of new lease deals. Notable leasing included a new lease deal with a law firm for approximately 25,800 square feet and an approximately 65,000 square foot renewal of a major Canadian bank, both at West Metro Corporate Centre in Toronto
• Further, Leasing spreads in the quarter were 3.2% above expiring or in-place building rents. Renewals were in line with expiring rents while new deals were 10.7% above in-place building rents.
• Net Income declined 40.4% on a YoY basis to CAD 16.22 M.
• AFFO payout stood at 62% in the third quarter of 2020, against 58.8% in a year-over period.
• Total Assets value at the end of September quarter stood 0.9% lower on a YoY basis to 1694.18M.

Valuation Methodology (Illustrative): EV to EBITDA

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock recommendation: The group’s performance in the third quarter under consideration was moderate, given abnormal business conditions evolved due to COVID-19 pandemic. Further, the company has deleveraged its balance sheet with 2.3% reduction in total outstanding debt to CAD 979.0 million and bolstered interest coverage ratio from 2.2x in Q3FY19 to 2.3x in Q3FY20. Moreover, we believe that stock is undervalued, as despite a positive ROE and positive spread between ROCE and WACC it is available below its book value per share. A 52% discount against the book value looks like a value opportunity for the shareholders. Also, its shares were trading above the long-term as well as short-term support levels, which is a positive technical trend. Therefore, based on the aforementioned facts and valuation, we have given a “Buy” recommendation at the closing price of CAD 4.27 on December 17, 2020. We have considered Inovalis Real Estate Investment Trust, Artis Real Estate Investment Trust and Boardwalk Real Estate Investment Trust etc., as a peer group for the comparison purpose.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.