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: Through its strategic relationship with Wayne Gretzky, the Company has also entered the spirits and craft beer industries, and also introduced ciders and seltzers under its own brand labels. Furthermore, it would also continue to diversify its product offerings beyond conventional table wine into other alcoholic drinks, where it can apply its extensive understanding of development prospects in the Canadian market.

• 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 and implies that it is a good friend to its shareholders.

Financial overview of FY2021

Source: Company

• The Company posted revenue of CAD 393.0 million in FY 2021, increased by 2.8% compared to CAD 382.3 million in the previous corresponding period. The revenue increased due to a resiliency of diversified trade channel network and launch of new e-commerce 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 Sales

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. Based on technical analysis, the stock has support at CAD 7.9 level. Therefore, based on the rationales discussed above and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 9.58 on June 18, 2021.  We have considered Waterloo Brewing Ltd, Diamond Estates Wines & Spirit 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 or if the price closes below the support level.

One-Year Technical Price Chart (as on June 18, 2021). Analysis by Kalkine Group

Kelso Technologies Inc.

Kelso Technologies Inc. (TSX: KLS), is a railway equipment supplier that produces and sells tank car service equipment used for the safe loading, unloading and containment of hazardous materials during transport. 

Key Highlights

• Bright future business prospects: Despite the current uncertainty, the Company's future business prospects for the next three years remain optimistic. It holds specialized products to meet the new regulatory requirements for a fleet of over 30,000 ethanol tank vehicles that must be regulatory compliant by early 2023. In addition, the Company has new products that can service a fleet of approximately 85,000 pressure tank cars.

• Development plans for “KXI”:The Company’s KXI Suspension System is going through a detailed engineering design analysis to move from innovative concept to a viable commercial vehicle for a variety of markets. The Company has secured the services of several OEM suspension experts that would support the Company’s R&D schedules to produce prototypes in late 2021 with the goal of pilot production and sales in 2022. Moreover, this Heavy-Duty platform represents a much larger and more accessible commercial market opportunity to pursue.

• Healthy working capital: The Company’s working capital remained at a healthy level of USD 10.18 million on March 31, 2021, compared to USD 6.25 million as on December 31, 2020. The improvement in the working capital position came about on March 4, 2021, when the Company completed a private equity placement whereby 7.0 million units were issued at a price of CAD 0.91 per unit. Moreover, there is no long-term interest-bearing debt, and the Company can currently operate without the need for new equity capital or credit facilities. This implies negligible balance sheet risk.

Financial overview of Q1 2021 (Expressed in US Dollars)

Source: Company

• In Q1 2021, the company reported revenue of USD 1.2 million, compared to USD 5.60 million in the previous corresponding period. The decline in revenue was impacted by the unfavorable circumstances surrounding the COVID-19 pandemic.
• Gross profit stood at USD 0.45 million (36.9% of revenues) in Q1 2021 compared to USD 2.6 million (46.1% of revenues) in the previous corresponding period.
• On the back of lower revenues, coupled with higher office & administration cost, consulting and filling fees and accounting & legal expenses dragged the company to post a net loss of USD 0.8 million against a profit of USD 1.2 million in the previous corresponding period.
  

Risks associated with investment

The company is prone to many risks associated with its business's nature, which could hamper its performance. Some of these risks include a fall in demand from automobile manufacturers, disruptions from the supply chain, technological change, increased prices of raw materials and commodities, etc. 

Stock recommendation

The return to pre-pandemic business volumes is happening slowly. The negative trends from diminished rail tank car activity in 2020 continued to be problematic throughout the first quarter of 2021. This accounts for the Company’s weak financial performance for the three months ended March 31, 2021. However, the future looks bright as the tank car market is entering a period of modest fleet growth coupled with growth in rail tank car utilization. New tank car demand is expected to grow to 14,800 tank cars in 2022 and 19,100 tank cars in 2023. The anticipated upswing in new build and retrofit activity expected to provide new longer-term financial growth opportunities from rail operations. Based on technical analysis, the stock has support at CAD 0.68 level. On the valuation front, the stock is available at forward EV/Sales multiple at 0.9x against the industry (Industrial) median of 1.9x. Hence, considering the aforesaid rationale, we have given a “Speculative Buy” rating on the stock at the closing price of CAD 0.84 on June 18, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Technical Price Chart (as on June 18, 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.