Yahoo Finance
June 10, 2024
Q3 2024 Data (Year end: Mar. 31th)
Price: $3.90. Shares: 43m, Cap: $172m.
1. Business
(1) History
(1) History
Andrew Peller, a Hungarian immigrant, created the company in 1961. Originally, it was a winery in Port Moody, B.C. called Andrés Wines. It started to build wineries across the country. Andrew’s son Joe, a medical doctor, joined the family business to help his father grow the business and he eventually succeeded his father as President in 1966.
In the 1960s, low-alcohol sparkling wines became very popular in the U.S. The company went public in 1970 and launched the 7% "Baby Duck" sparking wine. It was a great success with 8m bottles sold in 1973. Following the success of the Baby Duck, the company launched more value wine brands during the 1970s and 1980s.
In 1989 Joe’s son John Peller joined the company and became the CEO in 1995 until today. In the 1990s, the company shifted its strategy to the premium wine categories. It also increased its iced wine and imported wine sales. At the same time, it made acquisitions in wine yards, retail wine stores, home wine-making kits, etc. By fiscal year 1998, it had grown to over $100m in revenue. It hit $200m in revenue in fiscal year 2006. The company's name was changed from Andrés Wines to Andrew Peller Limited in 2006 to honor its founder. For the 13 years since John took over the CEO role(1995) to 2008, the company grew its revenue from $70m to $244m and its net income from $4m to $11m.
Since fiscal year 2009, as the U.S. financial crisis began, the company's margin dropped from over 40% to 37%. The company paused acquisitions and cut down its CapX. Its revenue continues to grow but at a slower rate for the next few years. In fiscal 2016, it generated $334m in revenue and $19m in net income
It started capital investing again in 2017 by opening the Wayne Gretzky Estate Winery. In fiscal year 2018, it acquired 3 estate wineries for $77m. Its margin moved back to over 40% in 2018. By fiscal 2021, into the first year of the pandemic, its revenue topped $391m and net income topped $27m. However, for the next 2 years, it suffered again with high material and international freight costs, along with the reduction of the winery and restaurant sales. Also, it had to pay much higher interest on its $200m+ debt as the interest rate rose. If not for the help of the WSSP program, it could have lost around $10m in fiscal 2023.
For the fiscal year 2022 and 2023, it generated around $30m in real operating cash each year. In both years it spent over $20m on CapX, coupled with $15m in negative working capital changes mainly from high inventory costs. It has to borrow money to pay its dividend. Its debt rose from $175m at the end of fiscal 2021 to $213m at the end of fiscal 2023. If not for the $18m it received from the WSSP program in Q4 2023, it could be much worse.
For the first 3Q of fiscal 2024, the company was able to work through some of the high-cost inventory. With the help of the WSSP funding, it was able to pay down $14m in debt. However, the margin is still low.
During the pandemic, both the icewine export to China and the sales made to tourists from China were greatly reduced. As the pandemic ended, none of the sales have recovered yet.
(2) Product & Business
Wine brands:
*IDB: Peller Family Vineyards, Copper Moon, Black Cellar, and XOXO.
*premium and ultra-premium VQA: Peller Estates, Trius, Thirty Bench, Wayne Gretzky,... Etc.
*Value IDB: Hochtaler, Domaine D’Or, Schloss Laderheim, Royal, and Sommet
*VQA icewine: Mainly for export.
Whisky brands: Wayne Gretzky No. 99
Winemaking products: Global Vintners Inc. (“GVI”):
Retail stores: 101 stores including The Wine Shop, Wine Country Vintners, and Wine Country Merchants
Wine import: Andrew Peller Import Agency and The Small Winemaker’s Collection Inc
Winery Retail & Tour: 3 in BC and 4 in Ontario.
Restaurant & Inn: Peller Estate Winery Restaurant, Riverbend Inn.
Others:
Port Moody property: 5 acres of land 30 minutes from Vancouver were approved for a condo project in June 2023. The property is estimated to be worth around $50m to $100m.
(3) Industry
VQA(Vintners Quality Alliance) wine: Higher quality wine, 100% Canadian grapes. Around 10% of wine market(Ontario)
IDB(International Domestic Blends) wine: Can contain up to 75% of imported grape content. Around 30% of wine market(Ontario)
Imported wine accounts for around 60% of total wine consumption in Ontario.
Competitor:
Arterra Wines Canada: The largest winemaker in Canada which used to be called Vincor. It was acquired by Constellation Brands in 2006 and later was bought back by the Ontario Teachers’ Pension Plan in 2016. According to ADW, it has an 11.1% share of the English Canada market vs 8.5% by ADW.
Excise tax
Previously the Excise tax on wine was exempted. As a settlement between Canada and Australia, Canada resumed excise tax on wine produced in Canada in 2022. The current tax rate is $0.353/liter for alcohol <=7%, and $0.735/liter for alcohol>7%.
WSSP(Wine Sector Support Program)
The program was introduced in 2022 to help Canada's winemakers. It was extended for 3 years in 2024 to Mar. 2027.
Retail expansion of alcohol products: Ontario will expand sales of alcohol products to convenience stores, supermarkets, etc. no later than January 2026.
(4) Employees
Over 1600 employees. 46 of which are unionized. 550 of which are part-time employees of retail stores.
2. Management
(1) Management
John Peller: CEO since 1995. In late 2023, he announced a plan for retirement within the next 1 or 2 years. The company is still actively looking for a new CEO.
Management's compensation is around half cash + half stock. Total compensation for top 6 management in 2023 is around $4m.
(2) Ownership and Compensation
John Peller: 5.2m A shares + 950k B shares.
Peller family: 1.9m A shares, around 5%. + 5m B shares, around 60%.
In total, the Peller family owns at least 10m of total shares( around 23%). And 60% of B shares.
3. Financial data
Notes: debt
Debt: As of Q3 2024, outstanding debt is $201m. The current interest rate is CDOR +2.50% which is around 7.5%. It is a new ABL loan secured by its inventory that was set up in June. 2023. The current inventory value is $193m.
Notes: Share History
In fiscal 1996, the company has around 3.6m A shares + 1m B shares. The Peller family controls 60% of B shares.
In fiscal 2006, the company still only had 3.9m A shares + 1m B shares. Peller family controls 66% of B shares.
In fiscal 2007, it did a 3:1 split. Total A shares: B shares: 3m.
In fiscal 2017, it did a 3:1 split again. Total A shares: 33.6m. B shares: 9m.
Notes: Share Data
As of Dec. 2023, 35.2m A shares + 8.1m B shares are outstanding.
A shares: non-voting, 115% dividend payment vs B shares.
Notes: Dividend
The current dividend for A shares is 24.6c/year which is around 6.4% based on $3.89 shares price.
4. Valuation and comments
(1) The real net tangible asset value of the company should be worth at least $300m which is significantly higher than the current market cap. Also, through history, the accumulated acquisition it made is over $210m which is higher than its current market cap.
(1) The real net tangible asset value of the company should be worth at least $300m which is significantly higher than the current market cap. Also, through history, the accumulated acquisition it made is over $210m which is higher than its current market cap.
(2) The company intends to use the proceeds from the Port Moody Property to pay down its debt. The target debt level is around $100m level.
(3) The last two years have been very difficult for the company. It has to deal with high glass bottle prices, high freight costs, higher interest rates, etc. The company has done quite well compared to other wine companies.
(4) Lately, the company is trying to cut its annual CapX level to $15m which is lower than its maintenance level of $20m. The interest cost is around $15m. It has to generate around $30m EBITDA to just make even.
(5) For the whole fiscal year 2024, it is expected to generate around $10m in real cash. Any WSSP payment and positive working capital change should be able to be used to pay down the debt. It should be around $15m to $20m.
(6) On a normal basis, it should be able to generate 20m+ in income once its margin recovered and its debt has been paid down. A $300m market valuation is well supported on both the income level and the net asset value.
5. Risk
(1) There are concerns about economic recessions in Canada which sure will affect the company. However, based on the past history, it seemed to only affect the business temporarily. Usually, it came out getting better every time.
(1) There are concerns about economic recessions in Canada which sure will affect the company. However, based on the past history, it seemed to only affect the business temporarily. Usually, it came out getting better every time.
(2) The 200m debt with $15m/year interest is quite concerning. But it was better than it looked. The ABL loan is secured on its inventory. The wine inventory usually holds it is value quite well. Plus the company has plenty of asset value to cover the debt. With the help of the WSSP program and lower inventory costs going forward, the debt can be reduced to a much safer level.
(3) The enabling sales of alcohol products into convenience stores in Ontario will be negative for its wine store retail. Overall, I don't know how big an effect on the company's revenue and profit.
(4) The sale of the Port Moody Property might take a long time and even require the company to inject several millions of funds into it first.
6. Conclusion
This is a well-managed company which is suffering a temporary downturn. Both the recession risk and the debt risk are over-worried. The current price is very cheap based on its true asset value or normal earning power. However, it might take quite a while for the company to show signs of recovery.
7. Links
