Marlborough Wine Estates — Half-year preliminary results

Marlborough Wine Estates — Half-year preliminary results

Marlborough Wine Estates Group (MWE) has a strategy of growing its sales of bottled wines, both in New Zealand and internationally. The global market is strong and the popularity of quality NZ wine is growing. The company is seeing significant increases in New Zealand bottled wine revenues, as well as healthy increases in China and other overseas markets. Its success to date in growing market share has been encouraging and it intends to build further on this strong momentum.

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Marlborough Wine Estates

Half-year preliminary results

Food & beverages

NXT Company Spotlight

5 March 2019

Price

NZ$0.23

Market cap

NZ$68m

Share price performance

Share details

Code

MWE

Listing

NXT

Shares in issue

290.9m

Business description

Marlborough Wine Estates Group owns and operates six vineyard blocks located in the Awatere Valley in the Marlborough wine district of the South Island of New Zealand (NZ). It sells bottled and bulk wine to NZ and international markets, as well as bulk grapes to wine producers.

Bull

Potential for developing international markets building on the Marlborough region’s global reputation for quality.

Option to improve earnings by converting more of the grape harvest into bottled wine for local and export sales.

Improvements in vineyard management and extensions in planting areas should improve grape production volumes and yields.

Bear

Maintenance of premium pricing is dependent on the quality of the product.

Increased competition and regulatory barriers in Chinese markets.

Development of international markets is still at an early stage.

Analysts

Paul Hickman

+44 (0)20 3681 2501

Sara Welford

+44 (0)20 3077 5700

Marlborough Wine Estates coverage is provided through the NXT Research Scheme

Marlborough Wine Estates Group (MWE) has a strategy of growing its sales of bottled wines, both in New Zealand and internationally. The global market is strong and the popularity of quality NZ wine is growing. The company is seeing significant increases in New Zealand bottled wine revenues, as well as healthy increases in China and other overseas markets. Its success to date in growing market share has been encouraging and it intends to build further on this strong momentum.

Strong revenue growth, operating result held

Total revenue grew by 47% to NZ$1.4m and gross margin was up 6.6 percentage points at 19.9%. As MWE progresses to reposition away from its previous focus on the Chinese market, it is succeeding in opening new marketing and distribution channels. This is necessarily accompanied by an increase in costs, but nevertheless EBIT was slightly improved at -NZ$0.6m, and the net loss before tax was held level at -NZ$0.8m.

Underlying business improvement

Revenue growth was driven by a doubling in bottled wine sales, more than compensating for slightly lower bulk wine sales. This reflects greater customer reach and brand awareness, particularly in the NZ bottled wine sector, resulting from successful strategies to grow the domestic market. There were also healthy increases in China and other overseas markets.

First-half progress on key operating milestones

MWE is tracking well against its key operating milestones (KOMs) on international wine sales at NZ$0.8m to date against a full-year target of NZ$1.5m. Against an upgraded NZ$1.0m target for NZ bottled wine sales, it has so far achieved NZ$0.5m. NZ bottled wine sales are growing strongly, reflecting increased availability, range and marketing success.

Valuation: Little comparability

MWE’s shares trade on an FY18 EV/Revenue multiple of 18.5x, substantially higher than its larger and better-established peers, which trade on an average 2.7x multiple for FY19e. However, it should be noted that MWE is at an earlier stage in its life cycle, and in addition is in the process of repositioning its market focus.

Historical performance

Year
end

Revenue
(NZ$000s)

NPAT
(NZ$000s)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15*

1,840

590

0.2

0.0

N/A

N/A

06/16**

7,424

(481)

(0.2)

0.0

N/A

N/A

06/17

3,822

(717)

(0.2)

0.0

N/A

N/A

06/18

3,985

(316)

(0.1)

0.0

N/A

N/A

Source: MWE. Note: *March to June 2015. FY15 NPAT includes fair value adjustment of +NZ$1.1m. **FY16 NPAT excludes capital raising costs. FY17 and FY18 are normalised.

Preliminary H119 results

MWE has reported constant EPS performance, despite being in the process of major change in its market structure.

Exhibit 1: H118 versus H117

NZ$m

H118

H119

Sales

0.9

1.4

Cost of sales

(0.8)

(1.1)

Gross profit

0.1

0.3

Gross profit margin

13.3%

19.9%

Statutory EBITDA

(0.5)

(0.5)

Adjusted EBITDA

(0.5)

(0.5)

EBIT

(0.7)

(0.6)

NPBT adjusted

(0.8)

(0.8)

NPAT adjusted

(0.6)

(0.8)

EPS adjusted (NZ$)

(0.002)

(0.002)

Source: MWE

Total revenue grew by 47% to NZ$1.4m and gross margin was up 6.6pp at 19.9%. Increased emphasis in sales and marketing into new channels and regions has necessarily entailed higher operating costs. Operating expenses for the period increased year-on-year by 31% to NZ$0.84m. As a result, EBITDA was held steady at -NZ$0.5m, as was the loss before tax at -NZ$0.8m.

Bottled wine sales double

Exhibit 2: Analysis of sales

NZ$000

H118

H119

+/- %

FY18

Bulk grape sales

0

0

N/A

2,213.3

Bulk wine sales

509.9

480.3

-5.8%

987.0

Bottled wine sales

433.8

867.5

100.0%

784.7

Other sales

0.0

43.2

N/A

-

Total

943.7

1,390.9

47.4%

3,985.0

Source: MWE

The revenue increase was driven by a straight doubling in bottled wine sales, which more than compensated for slightly lower bulk wine sales. This reflects greater customer reach and brand awareness in the New Zealand bottled wine sector, as a result of actions to implement marketing strategies to grow the domestic market. MWE launched its products into the Wellington and South Island regions in July 2018 and its products are now available at almost all major centres in NZ, with outlet numbers still in growth.

MWE’s bulk wine business has been steady with five containers of bulk wine sold and shipped to the US in HY19, the same number as in H118.

Growth in all geographies

On a geographical basis, the success of bottled wine sales is reflected in a 188% increase in New Zealand revenues, while there were healthy increases in China and other overseas markets, for example Australia where the first shipments have been made:

Exhibit 3: Geographical sales split

NZ$000

Dec-17

% of total

Dec-18

% of total

+/- y-o-y

Y/e Jun 18

New Zealand

188

19.9%

540

40.1%

188%

2,612

United States

480

50.9%

480

35.6%

0%

985

China

183

19.4%

209

15.5%

14%

296

Others

93

9.8%

118

8.8%

27%

92

Total

944

100.0%

1,348

100.0%

43%

3,985

Source: MWE

First-half results against key operating milestones

Against its key operating milestones (KOMs), MWE has had an encouraging start.

Exhibit 4: Progress against key operating milestones

 

H119 actual

FY19 target

Gross harvest (tonnes)

 

0

1,800

Bulk grape sales (tonnes)

 

0

1,200

International Wine Sales Revenue (NZ$)

807,315

1,500,000

NZ bottled wine sales (NZ$)

 

540,433

1,000,000*

Source: MWE. Note: *Reset on 31 January 2019, up from NZ$610,000.

There was good progress on both international wine sales and NZ bottled wine sales. NZ bottled wine sales are growing strongly, reflecting product availability at most major centres, combined with the wide range of highly rated white and red wines, and marketing success in improving brand awareness and reputation.

The KOMs relating to the gross harvest and bulk grape sales are not applicable in the first half (since the harvest is in the second).

Development perspective opens up

MWE’s core strategy is to continue growing sales of bottled wines. Management aims to gradually allocate more of its production to this market category. Its success to date in growing market share has been encouraging and it intends to build further on this strong momentum.

Internationally, MWE continues a strategy of increasing market presence, and is working to explore new distribution networks and sales channels in Europe, the UK, Canada and elsewhere.

Promising 2019 vintage and incremental planting outlook

The outlook is positive. The 2019 vintage looks promising so far and MWE expects to harvest at least 1,800 tonnes of high-quality grapes. The harvest is expected to start by the end of March.

In addition, MWE is developing its vineyards and has started planting Pinot Noir grapes in its Donaldson and Hammond blocks. Marlborough Pinot Noir is proving to be an important export for New Zealand and is growing steadily in popularity. MWE intends to plant initially in excess of 11ha of Pinot Noir, and further plantings of both Pinot Noir and Pinot Gris are planned for the next two to three years. The first Pinot Noir crop should be harvested in the 2021 vintage.

Valuation: Limited comparability

As a valuation reference for MWE, we review market valuations for comparable companies. There are two listed peers in the NZ/Australian market. Both companies are well established, are substantially larger than MWE and are therefore of limited relevance.

Exhibit 5: Peer group valuation

Company

Currency

Market cap (m)

2019e P/E (x)

2020e P/E (x)

2019e EV/EBIT (x)

2020e EV/EBIT (x)

2019e EV/
Revenue (x)

2020e EV/
Revenue (x)

Australian Vintage

A$

139

17.2

13.7

13.1

10.8

0.8

0.7

Delegat Group

NZ$

1010

19.7

17.7

15.3

14.0

4.6

4.3

Average

 

 

18.5

15.7

14.2

12.4

2.7

2.5

Source: Bloomberg. Note: Prices at 28 February 2019. Both companies have a 30 June year end.

Their shares trade on an average FY19e EV/Revenue multiple of 2.7x, substantially lower than the 18.5x FY18 EV/Revenue multiple on which MWE is currently trading. However, it should be noted that MWE is at an earlier stage in its life cycle, and in addition is in the process of repositioning its market focus.

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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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United Kingdom

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United States of America

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Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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