Andrew Peller president John Peller says he’s aware the shares are tightly held. But investors ‘don’t like to give them up.’Kevin Van Paassen/The Globe and Mail
The shares of Canada's only publicly traded wine maker, Andrew Peller Ltd., are being toasted by investors, with the stock trading at five-year highs.
But even after its recent advances, Peller has further to run. That's the thesis of Montreal-based value investing shop Lester Asset Management.
"The company is trading extremely cheaply, about 10 times earnings," says Stephen Takacsy, Lester's chief investment officer, who says the company is a "very attractive" proposition at its current price around $11.
Most investors can be forgiven for never having heard of Peller, which, despite its low profile in the investment community, operates wineries in British Columbia, Ontario and Nova Scotia. It has a 14-per-cent share of the national wine market, when imports are included, and 38 per cent of the domestic wine category. It has a reputation as an aggressive marketer, recently branding a line of wines Wayne Gretzky Estates to appeal to beer-swilling hockey fans.
There used to be a couple of other publicly traded wineries in Canada, Vincor International Inc. being the most notable, but they've been acquired or taken private, leaving Peller something of an anomaly as the sole market representative of an entire industry.
The company has avoided the takeover fate of rivals because the Peller family has a controlling stake through a dual-share structure.
There aren't many of either the non-voting class A shares or voting B shares available on the open market and the stock is thinly traded. Two institutional value investors – Toronto-based Kernwood Ltd., along with Lester, have recently snapped up much of the available float, and apparently aren't interested in selling any of their holdings.
A few thousand shares typically trade from day to day, making it difficult for large institutions to buy in size without distorting the market, but retail investors do not face this constraint.
The company split the shares three for one in 2006 to increase the float, and has raised the dividend four times in the past decade, for a yield of more than 3 per cent, but that hasn't helped much. But working at cross purposes, Peller also has been buying up its own shares, shrinking the float, contending the market value of the stock doesn't reflect its true value.
"We're aware that the shares are tightly held. It's just the investors that bought them over the years don't like to give them up," company president John Peller says.
Meanwhile, there isn't much interest from the sell side of the Street because low trading volumes mean brokers can't make much in commissions. No sell side investment analysts follow the company, further lowering Peller's profile.
The illiquidity and lack of interest from analysts are signs that Peller remains an underappreciated idea, with significant upside potential. Kernwood declined to be publicly quoted on its interest in the company, but the investment firm is the wine-maker's second-largest shareholder after the Peller family.
One of the draws of investing in the wine business is that it has the winds of consumer preference at its back, with the drink category showing growth while sales of competing beer and traditional spirits stagnate.
Mr. Peller says Canadians currently consume 15 litres of wine on average a year. He expects that figure to increase and get closer to 30 litres, which would put consumption around the same level as in England. That would be a big boon for Peller, given its dominance of the Canadian market. "We're very confident that both the market will continue to grow and our ability to compete in it will continue to grow," he says.
Mr. Takacsy says an added kicker to Peller is that its wineries, vineyards and real estate are carried at historic cost on its books and far below replacement value. He estimates that a Port Moody commercial property owned by the company would add $2 a share in value if sold at current market prices.
The company also owns about 600 acres of vineyards, which can be worth up to $100,000 an acre for those planted with high-end red wine varieties, such as pinot noir, according to Mr. Peller. Most vineyards were originally used for tender fruits, such as pears or peaches, worth only about $5,000 to $10,000 an acre.