Chapel Down Group‘s (LSE:CDGP) a penny stock and it’s offers investors a unique and fairly compelling investment opportunity.
While the share price has collapsed over the last 12 months, the stock offers a combination of tangible assets, premium brand value, and strategic growth in the English wine sector.
However, investors must also weigh operational risks tied to agricultural volatility and market dynamics.
A potential undervaluation
In 2023, Chapel Down reported £34.3m in net asset value — this is where a lot of my interest lies. This includes high-quality, appreciating assets such as 1,023 acres of planted vineyards (414 hectares), with over 595 acres on Kent’s chalk-rich North Downs — a terroir comparable to Champagne.
Interestingly, the board noted that book values likely understate market prices for these strategic land holdings and production infrastructure.
The company’s recent £32m Canterbury winery expansion, approved despite its Area of Outstanding Natural Beauty status, will boost production capacity to 9m bottles annually by 2032. That’s up from 1.5m in 2021. The group’s assets include £22.6m in wine stock.
This is all particularly intriguing given the company’s currently valued at £57m. Subtracting the net debt position (£9.2m) from the company’s assets (which will have appreciated given the debt-funded planting of 118 acres in Buckwell), the actual value of operations is around £30m.
Is the business worth more than £30m? Well, there’s a lot of maths to do here and some unknowns. Will it need to take on more debt to reach that 9m bottle target for 2032? However, assuming modest debt growth, my feeling is that the brand’s undervalued, based on asset value, potential earnings growth in the 2030s, and its very strong brand value — Chapel Down enjoys unrivalled brand prestige in English wine.
Risks: agricultural volatility and market pressures
Nevertheless, there are some risks that need to be accounted for. Wine production remains a very climate dependent operation and the harvest for 2024 is expected to be half the size of that achieved in 2023. Management has already downgraded its sales guidance.
This adds a degree of jeopardy to the company’s expansion plans. What’s more, the firm has abandoned plans to put itself up for sale, putting some downward pressure on the stock — buyouts typically lift shares higher. Moreover, even after a blowout harvest, the stock was trading around 50 times earnings. Clearly, this business is valued on future earnings potential.
A risk worth taking?
Chapel Down combines scarce, appreciating agricultural assets with a luxury brand positioned to benefit from English wine’s global emergence. While exposed to sector-wide climate risks, its scale (largest UK producer), vertical integration, and brand equity create margin advantages versus peers.
It’s certainly an interesting proposition. What’s more, with 2,000 shares (£700’s worth at the current share price) I’d get 33% off all full-priced wines bought directly from Chapel Down. Needless to say, if you serve it at your wedding, which I did, this shareholder benefit can pay for itself.
Bring this all together, and weigh the risks involved in the expansion, the stock could be vastly undervalued. It’s one I’m considering carefully at the moment.
This post was originally published on Motley Fool
