Andrew Peller Limited

Andrew Peller Limited (ADW.A) is one of Canada’s leading producers and marketers of quality wines and craft beverage alcohol products and owns and operates 101 well-positioned independent retail locations in Ontario. The company operates through several front-line brands like Peller Estates, Trius, Thirty Bench, Wayne Gretzky, Sandhill, Red Rooster, Black Hills Estate Winery, Tinhorn Creek Vineyards, etc.

Q1FY21 Financial Highlights: ADW.A impresses with its first-quarter results, wherein the company posted sales at CAD 98.440 million, higher than CAD 95.216 million in the previous corresponding period (pcp). The increase was driven by the company’s new e-commerce platform, thewineshops.com along with a change in consumer purchasing patterns, which supported sales growth in provincial liquor stores and other retail channels. This was partially offset by a decline in sales volume from the hospitality and travel industry on account of restrictions due to COVID 19. Gross margin stood marginally higher at CAD 42.727 million as compared to CAD 42.421 million in Q1FY20. The company’s EBITDA surged to CAD 22.570 million compared to CAD 18.350 million in pcp, driven by higher income and relatively lower selling and administrative expenses. Net earnings grew to CAD 11.204 million, from CAD 8.791 million in Q1FY20, supported by lower interest expense on account of a fall in the debt-levels.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Key Risks: A decline in the discretionary expense by the consumers could take a toll on the sales volume of the company. Further, a prolonged lockdown or any other extended restrictions by the government is likely to weigh down on the group’s sales through duty-free export, restaurant, estate property and personal winemaking channels. 

Valuation Methodology: Price/Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~16% so far this year on account of volatility in the equity market. The products are categorized under the 'essentials', and consequently, all the production facilities and retail locations remained operations. The company did not witness any material impact due to COVID 19 as the consumers were purchasing products through alternative trade channels available during the pandemic, which ensured constant cash flow generation during the period. We expect the demand from the e-commerce segment is likely to remain elevated in the coming days due to a surge in online marketing on account of social distancing measures. Further, the management expects to generate 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. Going forward, we expect a recovery in demand from the hospitality and travel segment as governments across the states are lifting restriction measures and allowing foodservice and hospitality industry to resume operations. Furthermore, as the economy revives, we expect an increase in the demand from the premium segments as well, which is a key positive to the overall margins. Investors' should note that the stock was trading above the 200-days simple moving average of CAD 9.51, indicating a bullish pattern. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (beverages) median on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 10 on September 18, 2020.

ADW.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Village Farms International Inc

Village Farms (TSX: VFF) is one of the largest and longest-operating vertically integrated greenhouse growers in North America and the only publicly traded greenhouse produce company in Canada. The company produces, markets and sells premium-quality tomatoes, bell peppers, and cucumbers. The company’s joint venture, Pure Sunfarms, is a licensed producer and supplier of cannabis products to be sold to other licensed providers and provincial governments across Canada and internationally. The company’s joint ventures, VF Hemp and AVGG Hemp are cultivators of high cannabidiol (“CBD”) hemp in multiple states throughout the United States.

Key Developments

• On September 8, the company announced that it has entered into a definitive purchase and sale agreement with Emerald Health Therapeutics, Inc to acquire 36,958,500 common shares of Pure Sunfarms Corp. owned by Emerald, representing approximately 41.3% of the issued and outstanding common shares. Upon completion of the Pure Sunfarms Transaction, Village Farms will own 100% of the common shares of Pure Sunfarms.

• On August 25, the group announced that its majority-owned joint venture for large-scale, low-cost, high-quality cannabis production, Pure Sunfarms, has begun shipping its first Cannabis 2.0 and bottled oil products. Shipments will initially be to British Columbia, with shipments to Ontario and Alberta planned to begin shortly.

Investment Rationale:

• Cannabis Play: The joint venture between Village and Emerald Health Therapeutics Inc- Pure Sunfarms is One of Canada’s Top Retail Cannabis Suppliers with net recreational cannabis sales of CAD 30.9 million, with Industry-leading gross margin of 44% and Industry-leading EBITDA margin of 30%. Further, the footprint of Pure Sunfarms has been expanded with products now available in 5 of the 6 Largest Provincial Markets in Canada. Moreover, in addition to branded retail sales, the long-term goal of the company is to supply to as much as 1/3 of the Canadian cannabis market on a wholesale basis.

• Bullish Technical Indicators: Its shares are trading above its long-term, short-term and near-term support levels of 200-day, 100-day, 50-day, 30-day, 20-day, 10-day and 5-day SMAs, which indicates a bullish price trend and moving averages are also rising another positive trend. Further, the MACD is rising with the difference between 12-day, and 26-day EMAs is positive another bullish indicator. The 14-day RSI is hovering in a neutral zone.

Source: Refinitiv (Thomson Reuters)

• Higher Institutional holding regardless stock fall under small-cap category: Approximately 18.3% of the company’s outstanding shares are owned by institutional investors and approximately 19% owned by strategic investors. With Horizons ETFs Management (Canada) Inc., Morgan Stanley Canada Limited are among globally well-known names are having stake in the company. 

Risks: The company is exposed to volatility in the agricultural product prices, and the next wave of the outbreak of COVID-19 could have a weigh on demand offtake of cannabis products in the wake of the closure of retail stores.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

All Village Farms' production facilities in Texas, British Columbia, and Pure Sunfarms' facilities in Canada remain open and operational. We believe that Pure Sunfarms is a proven performer with significant growth potential led by Low-cost, high-quality cannabis supply in Canada, along with a leading brand, consistently profitable, Multiple growth drivers in the short and long term. Therefore, based on the above rationale, technical indicators and valuation done using the above methodology, we have given a 'Speculative Buy' recommendation at the closing price of CAD 7.60 (on September 18, 2020), with lower double digit upside potential, based on the NTM Peer's Average EV to Sales multiple of 2.99x, on the FY20E Sales per share.

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.