Andrew Peller Ltd

Andrew Peller Ltd (TSX: ADW.A) is a leading producer and marketer of quality wines and craft beverage alcohol products in Canada. 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.

Investment Rationale

• Recorded solid relative strength against the benchmark index over the past 5-days, 1-Month and 3-Month and outperformed the benchmark by ~ 4%, 8% and 31%, respectively.
• Bullish price trend, as the stock traded above the crucial long-term as well as short-term support levels of 200-day, 100-day, and 50-day SMAs.
• Recorded solid EBITDA margin for the quarter ended June 30, with an EBITDA margin of 22.9% against the industry median of 21.6%, implies an outperformance of 130bps.
• Also reported decent Net Margin of 11.4% vs industry median of 8.5%, implies a relative outperformance of 290bps. RoE for the June quarter stood at 4.5% vs industry median of 3.6%. This also reflects the competitive advantage of the company over peers.
• Solid liquidity position, with current ratio at the end of June quarter, stood at 1.74x, outperforming the industry median of 1.46x. Also, the company has a lower debt/equity ratio at 0.70x, vs industry median of 0.91x.
• Offering a dividend yield of ~2%, with a consistent track record of dividend payment since 1979.

Q2FY20 Highlights

• The company’s reported revenue for the second quarter of FY20 at CAD 98.4 million, up from CAD 95.2 million in the prior year. Due to the COVID-19 pandemic, consumer purchasing patterns changed, resulting in an increase in sales to provincial liquor stores, other retail channels and the company’s new e-commerce platform, thewineshops.com. Partially offsetting the increase was the reduction in hospitality and licensee sales due to COVID-19 closures and lower duty-free export sales due to restricted travel.
• Gross margin as a percentage of sales remained strong at 43.4% for the three months ended June 30, 2020 compared to 44.6% in the prior year.
• EBITDA stood at CAD 22.6 million for the three months ended June 30, 2020, up from CAD 18.4 million in the prior year. EBITDA strengthened due primarily to the lower selling and administrative costs.
• Net earnings for the three months ended June 30, 2020 were CAD 11.2 million or CAD 0.26 per Class A Share compared to CAD 8.8 million or CAD 0.20 per Class A Share in the prior year.

Risk

The company’s sales of wine and craft beverage alcohol products are affected by 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. The duration and impact of the COVID-19 outbreak are unknown at this time.

Valuation Methodology (Illustrative) – EV to Sales

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

Stock Recommendation: The company has built upon decent fundamentals, with industry leading EBITDA margin, Net margin and RoE. Further, the company has relatively lower balance sheet risk and track record of consistent dividend payment since 1979.

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.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a ‘Speculative Buy’ recommendation at the closing price of AD 10.80 (on October 13, 2020), with lower double-digit upside potential.

1-Year Price Chart (as on October 13, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Extendicare Inc.

Extendicare Inc (TSX: EXE) is a leading provider of care and services for seniors across Canada and operates across 122 long-term care homes and retirement communities and offered ~9.2 million hours of home health care services on a yearly basis. The group operates under the Extendicare, Esprit Lifestyle, ParaMed, Extendicare Assist, and SGP Purchasing Partner Network brands.

Q2FY20 Financial Highlights: EXE announced its quarterly results, wherein the company reported total revenue of CAD 281.947 million, marginally lower than CAD 284.053 million in the previous corresponding period (pcp). Revenue increased by 4.7%, excluding decline in ParaMed Operations and incremental funding related to Bill 148. The growth was aided by improved performance from Long-term care segment and a slightly higher income from retirement living, while a lower income from home health care remained a drag. The company reported NOI at CAD 19.934 million, down from CAD 35.320 million in the Q2FY19. And, NOI margin fell to 7.1% from 12.4% in Q2FY19, due to a higher cost related to COVID-19 and pandemic pay programs. Adjusted EBITDA took a hit and fell to CAD 8.167 million, from CAD 25.152 million in pcp. The decline was majorly attributable to an elevated cost, sluggish NOI from home health care and higher administrative expenses. The company reported a net loss of CAD 3.659 million, against a net profit of CAD 8.325 million in Q2FY19, on account of the above-mentioned elevated costs coupled with a higher other expense. The company posted an average occupancy of long-term care at 93.5%, down 400 bps from Q2FY19 and 350 bps dip from the previous quarter. 

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing COVID 19 pandemic, new admission took a hit, and the occupancy levels were impacted on account of strict measures formulated by the State Governments and added risk of spreading of the virus. Continuation of such a trend would affect the financial performance of the company.

Valuation Methodology: EV to EBIDTA Based (Illustrative)

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

Stock Recommendation: The stock of EXE plunged ~36% so far this year. The business model is resilient, as it depends upon the overall aged population of the country, which is expected to grow in a gradual manner. The company reported improved performance from other Canadian Operations, driven by an increase of clients in the SGP Purchasing Partner Network (SGP). SGP continues to grow its market share. SGP has continued to expand its footprints during Q3FY20 and added a number of new clients, including Golden Life and Groupe Lokia to its network, bringing its service coverage to approximately 79,000 senior residents across Canada, which is impressive and augurs well for improved business prospects. On the liquidity front, the company has a cash balance of CAD 122.0 million and funds of CAD 71.9 million under undrawn demand credit facilities, which seems sufficient to withstand the current challenging environment. Despite the challenging operating environment, the group continued to distribute the dividend, which is encouraging from an income investor's point of view. At the last traded price, the stock was offering a dividend yield of ~8.9%. We have valued the stock using the EV to EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of double-digit (In percentage terms). For the comparison purpose, we have taken peers like Sienna Senior Living Inc, Chartwell Retirement Residences, etc. Considering the current trading levels, and aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 5.37 on 13 October 2020.

EXE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.