Chapel Down Group‘s (LSE:CDGP) a penny stock and it’s affords traders a singular and pretty compelling funding alternative.

Whereas the share price has collapsed during the last 12 months, the inventory affords a mixture of tangible belongings, premium model worth, and strategic development within the English wine sector.

Nevertheless, traders should additionally weigh operational dangers tied to agricultural volatility and market dynamics.

A possible undervaluation

In 2023, Chapel Down reported £34.3m in internet asset worth — that is the place numerous my curiosity lies. This contains high-quality, appreciating belongings corresponding to 1,023 acres of planted vineyards (414 hectares), with over 595 acres on Kent’s chalk-rich North Downs — a terroir akin to Champagne.

Curiously, the board famous that guide values possible understate market costs for these strategic land holdings and manufacturing infrastructure.

The corporate’s current £32m Canterbury vineyard enlargement, authorised regardless of its Space of Excellent Pure Magnificence standing, will increase manufacturing capability to 9m bottles yearly by 2032. That’s up from 1.5m in 2021. The group’s belongings embody £22.6m in wine inventory.

That is all significantly intriguing given the corporate’s at the moment valued at £57m. Subtracting the online debt place (£9.2m) from the corporate’s belongings (which may have appreciated given the debt-funded planting of 118 acres in Buckwell), the precise worth of operations is round £30m.

Is the enterprise value greater than £30m? Effectively, there’s numerous maths to do right here and a few unknowns. Will it have to tackle extra debt to succeed in that 9m bottle goal for 2032? Nevertheless, assuming modest debt development, my feeling is that the model’s undervalued, based mostly on asset worth, potential earnings development within the 2030s, and its very sturdy model worth — Chapel Down enjoys unrivalled model status in English wine.

Dangers: agricultural volatility and market pressures

However, there are some dangers that should be accounted for. Wine manufacturing stays a really local weather dependent operation and the harvest for 2024 is anticipated to be half the scale of that achieved in 2023. Administration has already downgraded its gross sales steering.

This provides a level of jeopardy to the corporate’s enlargement plans. What’s extra, the agency has deserted plans to place itself up on the market, placing some downward strain on the inventory — buyouts usually elevate shares larger. Furthermore, even after a blowout harvest, the inventory was buying and selling round 50 instances earnings. Clearly, this enterprise is valued on future earnings potential.

A threat value taking?

Chapel Down combines scarce, appreciating agricultural belongings with a luxurious model positioned to profit from English wine’s international emergence. Whereas uncovered to sector-wide local weather dangers, its scale (largest UK producer), vertical integration, and model fairness create margin benefits versus friends.

It’s actually an attention-grabbing proposition. What’s extra, with 2,000 shares (£700’s value on the present share price) I’d get 33% off all full-priced wines purchased instantly from Chapel Down. For sure, if you happen to serve it at your wedding ceremony, which I did, this shareholder profit will pay for itself.

Carry this all collectively, and weigh the dangers concerned within the enlargement, the inventory might be vastly undervalued. It’s one I’m contemplating rigorously in the mean time.