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. 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.

The company informed that that Randy Powell, President of the company, has resigned from its post, effective July 8, 2020. John Peller, Chief Executive Officer, would resume the responsibilities of President on a temporary basis.

Q4FY20 Financial Highlights: The group posted its quarterly results, wherein the company posted sales of CAD 82.118 million against CAD 79.780 million in the previous corresponding period (pcp). The growth was underpinned by strong momentum from the well-established bottled wine trade channels aided by the introduction of new products and new product categories and innovative sales and marketing techniques. However, positives were partially offset by lower sales within the personal winemaking market driven by rising competition from subsidized lower-priced imported wines and lower duty-free export sales due to trade and political disputes between Canada and China. Gross profit surged to CAD 35.550 million against CAD 31.310 million in pcp. The quarter was marked by a margin improvement as gross margin as a percentage of sales improved to 43.3% from 39.2% in pcp. The increase was primarily driven by a shift in product mix along with cost control initiatives. Adjusted EBITA was reported at CAD 9.92 million, as compared to CAD 6.55 million in Q4FY19 driven by improved gross margin and the lower selling and administrative cost. Net loss during the quarter stood at CAD 0.99 million as compared to a net profit of CAD 0.084 million in pcp, due to higher unrealized gains and losses on derivative financial instruments.

Q1FY20 Financial Highlights (Source: Company Reports)

Risk: Lower discretionary expense from the retail consumer could dampen the demand for the company’s product. 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

Stock Recommendation: The stock of ADW.A corrected ~40% so far this year due to weak investors’ sentiment resulting in a steep correction in the equity market. 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. The products are categorized under the ‘essentials’, and consequently, all the production facilities and retail locations remained operations. Further, to cater to the excess demand for direct-to-home purchase, the company has enhanced its capabilities. We expect the demand for liquor would remain stable in the foreseeable future. The company is bestowed with tremendous brand presence and has popular brands like Peller Estates, Trius, Thirty Bench, Wayne Gretzky, Sandhill etc. which has been widely accepted by the consumer. The group seems to have sufficient liquidity and did not cut or suspended dividend. On the valuation front, the stock is trading at a price to cash flow multiple of 11.9x compared to the industry (Beverages) of 20.4x.  Though the demand is stable in Canada, the Management believes its export, estate property hospitality and personal winemaking sales is likely to be affected by the pandemic. Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 8.38 on July 17, 2020.

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

Corby Spirit and Wine Limited

Corby Spirit and Wine Limited (TSX: CSW.A) is a Canadian manufacturer, marketer importer, and distributor of spirits and wines.

The company has launched a new product named Beefeater Blood Orange, which contains a bittersweet juicy flavor with attractive packaging. The new product falls under the gin category for which the market size stood at ~CAD 420 million (up 19.5% in last year). The product is available across Ontario in the LCBO, in BCLS in British Columbia, NSLC in Nova Scotia and in select retailers in Alberta.

Q3FY20 Financial Highlights: The company announced its quarterly results, wherein the company posted revenue of CAD 33.070 million as compared to CAD 30.955 million in the previous corresponding period (pcp). The increase was driven by growth in the domestic shipments by 5% in volume and 9% in value, which is impressive. However, on the international front, shipment volumes improved 2% on y-o-y, while shipment value declined 16% over the previous corresponding quarter. Earnings from operations stood higher at CAD 6.884 million against CAD 5.936 million in pcp. During the quarter, the group reported higher finance expenses, which increased to CAD 0.18 million from CAD 0.12 million. Net earnings were reported higher at CAD 5.152 million as compared to CAD 4.481 million in Q3FY19. The company reported deposits in cash management pools at CAD 64.691 million, while total assets were reported at CAD 221.348 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: A prolonged closure of restaurants and bars would hamper the demand for the company’s products. Further, a changing in consumer spending pattern might affect the company’s performance.

Stock Recommendation: The stock appreciated ~3% so far this year and outperformed the index by ~10%. The Business is categorized under the ‘essentials’ and is immune to the economic cycle. The Group has a strong brand presence and derives ~80% of the total revenue from its owned brands. The group recorded a strong performance from brands like J.P. Wiser’s Deluxe and Wiser’s Special Blend while the company reported higher volume sales across the international segment, which is a key positive. The company is focusing on brand prioritization strategy to enhance its market share. Furthermore, the company is prioritizing on leveraging the Canadian whisky and gin expertise and launched Beefeater Blood Orange in the recent past. We believe, the above product would ensure product diversifications and would help in gaining market. Notably, the stock is trading above its 200-days simple moving average of CAD 15.85, indicating a bullish trend. We believe, the company is likely to deliver improved business prospects driven by improving demand, higher product-penetration and increase the sale of high margin products across the Canada region. The stock is available at EV to EBITDA of 8.7x on TTM basis, which is slightly lower than the industry (beverages) average of 9.9x. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 16.63 on July 17, 2020.

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

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