Could Chapel Down be a millionaire-maker penny share?

Chapel Down Group (LSE: CDGP) is a fascinating penny share. This is the UK’s leading winemaker, with vineyards primarily located on the North Downs of Kent. It only listed on AIM in December 2023.

After falling 51% in 2024, the stock now trades for just 37p. This gives Chapel Down a modest market cap of £64m.

Might this prove to be a millionaire-maker penny stock at today’s price? Let’s ‘pour’ over some details.

Top English wine brand

Just half a century ago, the idea of chardonnay and pinot noir grapes ripening in vineyards across England would have been for the birds. However, the burgeoning wine industry of England — the world’s newest international wine region — is a beneficiary of climate change.

Chapel Down is known for its award-winning sparkling wines, as well as red and rosé brands. It has 1,024 planted acres of vineyards, approximately 10% of the UK’s total.

In 2023, the company sold 887,000 bottles, around 12% more than the year before. Overall, it produced some 3.4m bottles.

That might sound a lot, but it actually translated into revenue of £17.2m and a £3.7m operating profit (when adjusting for AIM-related listing costs). So this is still a small business.

The stock trades at 66 times earnings for 2023, which seems quite a steep valuation. Yet that might not matter if the firm grows strongly.

Uncertain growth outlook

Unfortunately, difficult weather in September and October impacted the 2024 harvest. It was approximately 1,875 tonnes, down from 3,811 and 2,050 tonnes in 2023 and 2022, respectively. The firm expects to create around 1.7m bottles from the 2024 vintage.

We won’t get a trading update until the second half of January. But according to Yahoo Finance, full-year revenue of about £16.5m is expected, which would be a slight decline from the year before. A small pre-tax loss is also expected.

In 2025, revenue is expected to be higher at about £19m (15% growth). From an investing perspective though, I don’t find this forecast particularly exciting.

More vineyards and a new winery are needed to drive growth, leading the winemaker to announce a strategic review of funding options in June. It considered putting itself up for sale, then said it’s remaining a standalone company, at least for now.

However, it only had £1.1m in cash in June. Clearly, it’ll need to raise a significant amount of capital to fund its growth ambitions. This cash deficit adds risk, as does the possibility of unfavourable weather and poor harvests.

Will I invest?

For the stock to be a millionaire-maker, it would have to increase 50 times in value from a £20k investment. All else equal, that would give the company a £3.2bn market cap (similar to Burberry today). I don’t see that happening.

Having said that, I’m a big fan of the brand. In fact, I had a cheeky glass of Chapel Down’s Brut over Christmas. And I’m planning a tour of the winery in the summer, as well as a meal in The Swan (its on-site restaurant).

If I buy 2,000 shares (currently costing about £750), I’d become a Gold shareholder and get 33% of the wine and 25% off food at The Swan. As tempting as that sounds though, this penny share is too risky for my tastes.

The post Could Chapel Down be a millionaire-maker penny share? appeared first on The Motley Fool UK.

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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.