Laurentian Bank John Chu $15.50 Price Target Andrew Peller Ltd. (ADW.A-T) is an investment opportunity that "should pair well with your portfolio," said Laurentian Bank Securities analyst John Chu.
He initiated coverage of the Grimsby, Ont.-based wine maker with a "buy" rating.
Mr. Chu believes the company is in prime position to take advantage from expansion of the Canadian market, noting the country is one of the world's fastest growing regions in wine consumption.
"Wine has been gaining market share in the Canadian and global alcoholic beverage sector for the past 10-plus years and recent trends suggest no signs of letting up; Canadian wine sales volume per capita is up over 30 per cent during that period while total alcohol sales, along with beer and spirits sales volumes were essentially flat (or in the case of beer, down) during that same period," he said. "Canadian whisky sales growth was twice that of the spirits category and cider saw explosive growth, twice that of the cider/cooler/other category.
"Wine outlook is positive with upside: LCBO forecasts are calling for continued strong sales momentum through to 2018/19. Recent trends also suggest Canadian consumers are moving to higher priced wines and domestically produced as well, which should benefit ADW."
Mr. Chu is projecting Andrew Peller to see sales growth that reflects that trend, adding new products and recent M&A, including the $95-million acquisition of three B.C. wineries in September, should provide "additional momentum"
"The company has its own retail distribution network (the Wine Shop, Wine Country Vintners, Wine Country Merchants) in addition to the provincial liquor agencies, the recent addition of grocery stores as well as its wineries and direct to customer capabilities (online, club memberships etc.)," he said. "Sales growth is driven by ongoing wine market share gains, new wine products, new distribution channels (grocery), and recent new product introductions into the fast-growing cider category as well as the spirit category (with Wayne Gretzky-branded whisky)."
"The company has made strong strides recently to improve its margins through cost cutting initiatives and a focus on higher margin products. We expect this trend to continue driven by ongoing efficiency improvements as well as through recent high-margin acquisitions."
He set a price target of $15.50 for its shares. The average is $15.25.
"Industry valuations have been trending higher since hitting trough levels in mid-2009 and have been hovering at the upper end of its historical range since early 2013," said the analyst. "Industry consolidation and rising wine market share are likely key contributors to this trend. We also note that ADW has been trading at a discount to the peer group but has been narrowing the gap for the past couple of years and more so the past few months."
"Our valuation multiple is based more on competitor multiples of 15.5 times forward enterprise value/EBITDA than on ADW's trading history, given the run up in its valuation and narrowing gap with its peer group. We believe a 2-times multiple discount is appropriate and conservative at this time to reflect ADW's lower margin profile vs. its peers. We also take into consideration recent industry transactions (Ontario Teachers Pension Plan acquiring Constellation Brands Canada for 12 times forward EV/EBITDA). As such, we believe our 13.5-times forward EV/EBITA target multiple is appropriate."
SOURCE: Globe and Mail>
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