Multiple Tailwinds Mounting with a Takeout Kicker in 2017…This is easily my favourite organic growth story for 2017 and 2018 with a Canadian company expanding into Asian Markets and gaining market share domestically.
Organic Growth: Just look at the numbers, accelerating top line growth (Q1:+26.6%, Q2: +28.5%) with international sales already with confirmed orders up 75% YoY. This is going to keep expanding as trade relations with USA and Asia continue to be strained making VQA wines look more attractive globally. Add to that the recent bought deal will expand capacity 50%. Throw onto that distribution in all grocery chains now selling VQA wines and the new wine tasting room opening up next Q and you will have an expanded footprint in the popular Niagara winery map.
Secular Growth: Take a look at volume growth in wine within Canada growing 8-10% YoY with VQA wine volume growth growing at 4x the rate of imported wines. Compare that to beer sales that are flat to down at best. You have a runway for significant sector growth on top of market share gains domestic and Asian markets.
Balance Sheet Recovery: The turnaround in balance sheet is just starting and the going concern note should be off within a year. Now that they have demonstrated an ability to tap capital markets and generate 1M in EBITDA in successive quarters they will be able to service the debt out of cash flow.
Industry Consolidation: I would just note that the big players are struggling to find growth when DWS.TO is accelerating growth at a rate of +25% quarter after quarter. I would just note in Peller Estates in their last Q they stated they spent 800K on consulting fees in looking at an acquisition, they could easily swallow up DWS.TO with a superior growth rate.
Valuation and Analysts Coverage: I would just note the one analyst who covers it on has revenue estimates for 34.3M this year and 36.9M next year. This is just ridiculous, there is no way they are only going to grow 5% in Q3 and Q4 to hit 34.3M when they are accelerating growth north of 28% in Q2. I see them generating over 6MM in EBITDA on sales of 46M next year which on a 12x EBITDA multiple gets you to 0.52/share or more than a double from here.
Just go into an LCBO and talk to some of the people who work there, the product is moving off the shelves as quick as they put it up there. The Eastdell Cabernet can’t be beat at that price point and the 20 Bees line has been real hot according to multiple people I have asked about it.
LONG