A risky yet rewarding opportunity

Andrew Peller Inc. is now considered a “higher risk” stock due to its size, sector, and current lack of earnings. But, with the potential of “hidden assets” and a high dividend, this could be a risky yet rewarding opportunity for investors.


A risky but rewarding opportunity

For Andrew Peller Ltd. (TSX—ADW.A), we’ve now lowered this rating to “higher risk” from “average”. Keep in mind, though, that this excludes the company’s “hidden assets”.

Two-Step Approach

Andrew Peller Limited is a major producer and marketer of wines in Canada, with wineries in three provinces. We calculate a company’s quality rating using a two-step approach. This first step is based on the size of a company’s assets, excluding intangible assets.

Companies with assets of $150 million or less are rated “speculative”. Those with assets of $150 million to $750 million are “higher risk”. Companies with assets of $750 million to $1.5 billion are “average”. Those with assets from $1.5 billion to $3 billion are “conservative” and companies with assets of $3 billion or more are “very conservative”.

The second step looks at a company’s fundamental factors and economic sector. Companies in the stable Financial and Utilities sectors can get their quality rating raised by one notch. On the other hand, those in the volatile Resources and Manufacturing sectors may get their rating lowered.

As of September 30, 2022, Peller’s assets stood at more than $547 million. Subtract goodwill of less than $54 million and its adjusted assets were $493 million. This gives Peller a step one rating of “higher risk”.

One great aspect of this quality-rating system is that it’s harder for managements to manipulate assets than earnings. The latter can often be reported in unconventional ways, and can be affected by the size of performance bonuses.

Peller’s quality rating is now down by one notch, to “higher risk”. But, the company also has “hidden assets” that don’t appear on its balance sheet. These can include land that has gone up in value due to desirability, or other assets that may be worth more than what the books say.

Currently, Peller’s shares trade at $5.02 each – substantially below their book value of $6.09 a share. This could be because of the potential for its attractive dividend to be cut or eliminated entirely.

For the fiscal 2023 year ending on March 21, Peller is expected to earn only a penny a share. This falls short of its dividend of 24.4 cents a share. Additionally, the company’s net debt-to-cash-flow ratio is 7.6 times – well above our comfort zone of two times or less.

So, while Andrew Peller Ltd. may be a “higher risk” stock, it could still be a risky yet rewarding opportunity for investors. With hidden assets, potentially high dividend yields, and a discounted stock price, it could be the right stock for the right investor.

This is an edited version of an article that was originally published for subscribers in the January 27, 2023 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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