Hangover lingers for grog stocks

STOCK prices for alcohol companies have struggled for the first part of the calendar year, as investors hold a cautious view of future earnings.

The earnings downgrade from Southcorp in April and, more recently, Peter Lehmann Wines was one factor behind the 6.6 per cent fall in the Alcohol & Tobacco Index since January 1.

Combined with heavy price discounting in the domestic market, concerns about the outcome of the 2002 vintage, the rising Australian dollar and the general market shift away from high price to earnings, stocks have all had a negative impact on the sector, according to a report on the Australian wine business by Tolhurst Noall analyst, Aaron Muller.

But is the concern justified and what of the future of the sector?

Mr Muller believes opportunities will continue to present themselves, particularly with companies in the export market.

“While caution is warranted when investing in any sector, as far as the wine industry is concerned there is the oversupply situation facing the domestic market and increasing competition in export markets,” Mr Muller said.

“Nevertheless, we maintain a positive outlook for the sector as a whole based on continued domestic demand.”

In the first four months of 2002, exports have grown by 20 per cent, led by a charge in the United States where exports have risen 43 per cent during the four-month period to April 30. The well-established UK market also grew by a healthy 14.1 per cent during the period.

“We continue to prefer those stocks with a high export exposure that are able to take advantage of this growth,” Mr Muller said.

“Those best placed have production scale and low vineyard ownership that allow cost competitiveness. Importance should also be placed on companies with strong brands and an established distribution network.”

Of the stocks available, Tolhurst Noall believes both the Fosters Group and BRL Hardy offer the best rewards for investors.

“While Southcorp has similar attributes, with arguably the strongest brand portfolio, we remain cautious short term about the stock because the Rosemount integration is yet to be bedded down and inventory levels are high,” Mr Muller said.

“Of the smaller wine plays, we continue to favour Brian McGuigan Wines ahead of its merger with Simeon Wines, which we believe will add significant longer-term value to both companies.

Mr Muller believes Foster’s strategy of “small, bolt-on, value-adding investments” demonstrated the group’s commitment to creating value for shareholders.

“With a spread of assets across the alcohol sector, including the fast growing wine and ready-to-drink segments, Foster’s offers an outlook of consistent earnings growth,” he said.

BankWest International trade manager Mike Tompkins, speaking at a recent industry briefing, said even exporting wine may not provide the result many companies and wine producers were looking for. He said the export market was full of dangers if not handled correctly.

“Everyone is trying to sell their products overseas. The overseas agents and distributors are the ones that dictate the terms these days,” Mr Tompkins said.

He said that, because of this, wine exporters often had to accept long credit terms of between 90 and 180 days, which can really affect a company’s cash flow.

Mr Tompkins said exporters typically were working on very low margins.

“Margins are starting to get squeezed and with the appreciation of the Australian dollar this trend is likely to continue,” he said.

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