Andrew Peller Ltd

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

• Made entry in spirits and craft beer categories: The Company has entered the spirits and craft beer industries, as well as produced ciders and seltzers under its own brand labels, thanks to its strategic partnership with Wayne Gretzky. Furthermore, it would also continue to expand its product offerings beyond traditional table wine into other alcoholic beverages, where it can utilize its vast knowledge of the Canadian market's future potential. We believe the company is focused on opening new revenue avenues, which is key positive.

• Acquired Niagara's the Riverbend Inn: The Riverbend Inn and Vineyard in Niagara-on-the-Lake, Ontario, was recently purchased by the group. The estate includes 17 acres of prime vineyards and a 21-room hotel and restaurant, located directly across the street from the Company's Peller Estates Winery. The purchase is a natural progression of the Company's success in offering a luxury wine tourism experience in the Niagara Region.

• 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.

Financial overview of FY2021

Source: Company

• The Company posted revenue of CAD 393.0 million in FY 2021. The revenue increased by 2.8% compared to CAD 382.3 million in the previous corresponding period. The increase was due to a resiliency of diversified trade channel network and launch of new eCommerce platform.
• Gross profit in FY 2021 declined to CAD 146.3 million compared to CAD 156.1 million in pcp because of higher imported wine costs, an increase in consumption of lower-margin products and revenue decline in high margin trade channels.
• The reported period’s gross margins declined to 39.8% of sales compared to 43.5% in the previous corresponding period.
• On the back of lower operating expenses, the company witnessed higher earnings before income tax at CAD 37.4 million compared to CAD 32.4 million in the previous corresponding period.
• Net income posted by the Company stood at CAD 27.7 million, against CAD 23.4 million in FY 2020. The rise in net income was primarily due to the gain on debt modification and lower other operating expenses.
  

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. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The Company believes that sales would 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. Therefore, based on the rationales discussed above and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 9.15 on July 16, 2021.  We have considered Waterloo Brewing Ltd, Big Rock Brewery Inc, MGP Ingredients Inc, etc. as the peer group for the comparison.

*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 July 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

Acadian Timber Corp

Acadian Timber Corp (TSX: ADN) is a Canada-based supplier of primary forest products in Eastern Canada and the Northeastern United States. The company's operating segments include NB Timberlands and Maine Timberlands and generates maximum revenue from the NB Timberlands segment. Its product includes softwood and hardwood sawlogs, pulpwood and biomass by-products.

Key highlights 

• Optimistic macro scenarios: The management expects that softwood sawlogs' demand would boost with an anticipated increase in North American softwood lumber consumption in 2021 mainly due to continued strong repair and remodeling activity and a revival in home construction. Low interest rates, old and underbuilt housing stock, and favorable demographics are supporting this outlook.

• An income play: Despite the tough circumstances, the company continues to provide dividends, demonstrating its financial health and implying that it is a friend to income investors. Notably, at the last closing price, the stock was offering a dividend yield of 6.3%, which is lucrative, considering the current interest rate environment.

Source: REFINITIV

• Industry beating margins: The Company maintained its pace and witnessed spirited performance across its margin matrix. The management’s solid determination helped them leap the industry median margins on many fronts in Q1 2021, which exhibits the competitive advantage of the company within the industry. Although an industry gross margin surpassed the company’s margin by fraction. The chart below gives a glimpse of this. 
  

• Certain changes in management: Recently, the Chairman of the Board Mr. Malcolm Cockwell stated that Acadian’s current Chief Financial Officer Mr. Adam Sheparski would be promoted to President and Chief Executive Officer of Acadian effective July 30, 2021, and Ms. Susan Wood would become Chief Financial Officer.

• Event update: The company will be releasing its FY 2021, second quarter results after market close on July 28, 2021.
  

Financial overview of Q1 2021

Source: Company 

• In Q1 2021, the company reported revenues of CAD 25.8 million, against CAD 31.4 million in the previous corresponding period. The fall in revenues was mainly due to lower sales volume primarily due to temporary road closures caused by unusually mild weather, reduced trucking capacity in Maine, and lower pulpwood sales.
• The company posted operating income of CAD 6.7 million in the reported period compared to CAD 8.2 million in pcp. Although the company posted lower operating income, but it managed to bring down its operating expenses, which was key positive.
• The company reported a decline in the net finance expense at CAD 0.75 million from CAD 1.2 million in pcp.
• Net earnings stood higher at CAD 5.8 million, compared to a net loss of CAD 3.7 million in pcp, primarily due to an unrealized gain of CAD 1.2 million against a loss of CAD 8.2 million in pcp.

Risks associated with investment

Sluggish demand for wood products might result in higher inventory levels, which might restrict the company's capacity utilization. Furthermore, a continuation of the ongoing weak hardwood pulp demand might dampen the sales of the company. 

Stock recommendation

On the back of product diversity, the group maintained operational performance in recent times. The company expects strong demand for softwood sawlogs in the North American market in FY-2021, on the back of, lower interest rates and old & underbuilt housing stock with higher housing construction. This improving demand outlook is a big positive for the company. Additionally, the strong end use markets for hardwood lumber and low hardwood sawlog inventories regionally are expected to support continued strong demand and pricing for the company’s hardwood sawlogs. On top of all, the stock delivers a healthy yield of 6.3%, which is impressive and can be a crucial factor for long-term investors. On the valuation front, the stock is available at a forward price to cash flow multiple of 2.0x, which is significantly lower compared to the industry (Paper & Forest Products) median of 4.3x. Therefore, considering the above rationale, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 18.46 on July 16, 2021 with lower double digit (in percentage terms) upside.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 16, 2021). Analysis by Kalkine Group

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

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.