Corby Spirit and Wine Limited (tse: $CSW/A.to & $CSW/B.to)

As I continue on my full time investor journey, I have decided to start working toward having more passive income. I think it makes sense to dedicate a portion of my portfolio toward dividend paying companies. The goal would be to have 50% of my living expenses coming from dividends as well as having several months of living expenses set aside. I’ve been working through a list of small and microcap dividend paying companies that I think warrant further investigation. I like to stick to small companies because I have a tough time getting comfortable with large complex businesses.

Enter Corby Spirit and Wine

Chart courtesy of TIKR. Check them out here https://app.tikr.com/register?ref=smob7c

Quick Notes

  • Slow and consistent top line growth with strong brands
  • Consistent profitability
  • The company has a conservative balance sheet and runs a net cash position
  • Dual class share structure (A – voting, B – non-voting)
    • 24 mil A shares, 4 mil B shares
  • B class shares trade at slight discount
  • They pay a consistent dividend of 5.5% (for the B class shares)
  • 90% of revenue comes from Canada

Covid-19

I’m not going to spend a bunch of time going over the risks with this business and Covid-19. First of all, the business is pretty much recession resistant. Second of all, I have no idea how the whole Covid thing plays out. They have the balance sheet to survive and any hit to earnings should be viewed as temporary in my opionion.

They actually switched some production capacity to produce hand sanitizer.

Business Background

From their website:

Corby Spirit and Wine Limited is a leading Canadian manufacturer, marketer and distributor of spirits and imported wines. Corby’s portfolio of owned-brands includes some of the most renowned brands in Canada, including J.P. Wiser’s®, Lot 40®, and Pike Creek® Canadian whiskies, Lamb’s® rum, Polar Ice® vodka and McGuinness® liqueurs, as well as the Ungava® gin, Cabot Trail® maple-based liqueurs and Chic Choc® spiced rum and Foreign Affair® wines. Through its affiliation with Pernod Ricard S.A., a global leader in the spirits and wine industry, Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine’s® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob’s Creek®, Wyndham Estate®, Stoneleigh®, Campo Viejo®, and Kenwood® wines.

The Corporation’s activities are comprised of the distribution of owned and represented spirits, liqueurs and imported wines. More specifically, 80% of Corby’s revenue is derived from sales of the Corporation’s owned spirit brands, while commissions earned from the sale of represented brands totaled 18% in 2019. The Corporation also supplements these primary sources of revenue with other ancillary activities incidental to its core business, such as logistics fees and miscellaneous bulk whisky sales to rebalance its maturation inventories

Many of the brands I recognize, some I don’t.

Business Performance

As mentioned, this is not a high growth company. This is a (slow and) steady grower with seasonality, but consistent annual margins.

 

Consistent top line growth from the trough in 2015 and consistent margins as well.

The company has been able to earn a good return on the existing brands of the business.

Honestly, I think it’s worth taking a moment to appreciate that the company hasn’t done anything foolish with the business. They seem focused on consistent ROIC over low quality growth at any cost. It’s not sexy, but it’s appreciated.

Valuation

For the valuation, I’m using the price of the B class shares.

Not mind blowing cheap, but not overly expensive. Given the equity-bond nature of the business, one could make the case that this should trade at a higher valuation should be higher. One could also make the case that given the slow growth of the business, shares should trade at a cheaper valuation.

Management, Ownership & Board

The current CEO (Patrick O’Driscoll) will be retiring in June this year and a new CEO from outside the business has been announced. I always find it interesting when an established company hires from outside the business for a C-suite position.

Compensation for the CEO position has averaged 1.5mil for the last 3 years. The company lists a fair amount of senior leaders in the management information circular. Here is what compensation looks like as a percentage of the income statement and cash flow.

The CFO (Edward Mayle) has been with the business for about 1.5 years.

No one from the executive owns a large amount of shares. The CEO (leaving in June) owns about 1/5th of his annual comp in common shares.

A subsidiary of Pernod Ricard (HWSL) owns over 50% of the A shares and essentially controls voting decisions for the company. Pernod Ricard is considered Corby’s parent. So far, this seems like a symbiotic relationship as Corby sources over 90% of spirits from them in Ontario, while Corby outsources various admin to the parent. They have a supply agreement with HWSL for another 6 years.

From AIF:

Corby engages in a significant number of transactions with its parent company, its ultimate parent and various affiliates. Specifically, Corby renders services to its parent company, its ultimate parent, and
affiliates for the marketing and sale of beverage alcohol products in Canada. Furthermore, Corby outsources the large majority of its distilling, maturing, storing, blending, bottling and related production
activities to its parent company. A significant portion of Corby’s bookkeeping, recordkeeping services, data processing and other administrative services are also outsourced to its parent company. All of these
transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Transactions with the
parent company, ultimate parent and affiliates are subject to Corby’s related party transaction policy, which requires such transactions to undergo an extensive review and receive approval from an Independent Committee of the Board of Directors.

Some Risks

  • Even if you purchase the A shares, HWSL controls the votes for this business
  • New CEO coming on may take the business in a direction that isn’t conducive with generating wealth for stakeholders
  • Executive team does not own many common shares
  • Intertwinement with HWSL is deep and would be disruptive to the business if that changed

Closing

Given that HWSL owns the majority of the A shares, I would purchase the B shares to get a slightly higher dividend.

What do you think of Corby? And what are you favorite dividend paying companies in Canada?

I don’t own shares in Corby, but may initiate a position soon.

 

Dean

2 Comments

Filed under Company Analysis

2 responses to “Corby Spirit and Wine Limited (tse: $CSW/A.to & $CSW/B.to)

  1. Really like this in depth style of article looking into specific businesses. So many posts are general (which is great) but I enjoyed looking at your data. While I’m not Canadian so i don’t really have any reference to the company, I’d definitely go for the B shares too. Constant growth over time is the easiest way to guarantee your growth and is always a safer bet with measured risk! I’m looking forwards to your next article like this as it really got me to think!

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