Marlborough Wine Estates — FY19 KOMs and FY18 preliminary results

MWE reported a net loss after tax of NZ$1.7m for FY18 (FY17 loss of NZ$4.4m). Excluding one-off items and other smaller adjustments, the adjusted net loss was NZ$0.3m against NZ$0.7m in FY17. Exhibit 1 sets out the company’s FY18 results.

Performance against KOMs

MWE’s full-year results were in line with revised guidance at April 2018, overachieving in all milestones except gross harvest (which underperformed by 0.3%).

Operating results

FY17 results have been reclassified in respect of changes in fair value of biological assets and agricultural produce, depreciation on vines and vineyards, and excise duties. These have been reclassified to cost of sales to reflect that they are integral to the production of grapes and bottled wines for sale. There is no net effect on profit.

FY18 sales of NZ$4.0m showed overall growth of 4% against FY17’s NZ$3.8m. Within that there was a 49% decrease in bottled wine sales, which was compensated by a 243% increase in bulk wine sales and an 11% increase in bulk grape sales.

Under the new classification, FY18 gross margin was 140bp higher at 38.7% than FY17’s restated 37.3% (FY17 old classification gross margin 13.9%).

Operating expenses in the business were NZ$1.35m, a 4.1% reduction on FY17’s NZ$1.41m, driven by a reduction in salaries and wages from 47% to 35% of total operating expenses.

Adjusting items

In stating underlying profit, we have adjusted two material items: impairment loss and inventory write down.

Impairment loss

In FY17 MWE announced reduced expectations for its Chinese distributor and as a result made an impairment of NZ$2.6m against the distribution rights, which had been acquired in 2015 for NZ$5.2m. As a result, they were reduced to a carrying value of NZ$1.4m. Due to continued challenging trading conditions in China, management has now concluded that, after amortisation charged through the P/L of NZ$0.2m, the remaining NZ$1.2m valuation of the distribution rights should be impaired.

Inventory write down

Due to the challenging trading conditions overseas, especially in China, MWE’s bottled wine sales were slower than expected, meaning the realisable value of some of its aged wine stock was likely to be reduced. Based on an annual impairment test, a provision of NZ$0.2m has been made at June 2018. This is, however, much lower than the NZ$1.2m provision made at June 2017, which related to bottled wine that had not received certification from Ministry of Primary Industries.

Including some smaller items, the total adjustment was NZ$1.5m.

Favourable conditions coupled with investment in irrigation and new equipment contributed to 23% increase in gross harvest for the 2018 vintage of 1,784t (2017: 1450t). The harvest season started earlier than usual and almost half of the grapes were harvested in Q3 with the remaining in the final quarter. Additionally, yields have been materially improved by continuous investment, which also bodes well for the year ahead.

Product development

MWE has made good progress on competitive product development. In FY18 it launched its first batch of Pinot Noir and Pinot Gris, following product releases of Syrah, Rose and Merlot Cabernet Sauvignon in FY17. In FY19 the company aims to launch a new Chardonnay and sparkling wine product. In addition, management aims to broaden the appeal of its products outside of the premium brands for which it is best known. It is marketing through both local and international trade shows and events, and is stepping up media coverage via editorials, articles and promotional material.

Vineyard investment

Having completed all its planned investment in irrigation, MWE is now shifting the focus of development to new blocks and planting of new varietals. The company reports a start in planting fiver hectares of Pinot Noir, with further planting of Pinot Noir and Pinot Gris planned over the next two to three years. Pinot Noir in particular is gaining good traction in international markets.

International market development

While China remains a key market, premium wine has not developed there as fast as expected. MWE aims to explore new channels and partners in China for its entry-level products. The company also continues to build a stronger presence in the US market, which is number one in terms of revenue of NZ wine exported, and where it has made early shipments. In addition, MWE is hoping for an increase in US bulk shipments from 10 containers of 2017 vintage to 12 containers of the 2018 vintage.

Prospects for growth in exports to Japan are bright after a significant wine award, while MWE has also shipped first orders to the UK, Australia, Taiwan and Finland. The company is focusing on growing its presence in the significant markets of the UK and Australia.

The KOMs are required under the NXT listing rules to be reported on a quarterly basis. This requirement allows current and potential investors to track the key growth and profit drivers of the business. Since listing, MWE has had four KOMs: gross harvest (tonnes), bulk grape sales (tonnes), international bottled wine sales (NZ$) and New Zealand bottled wine sales (NZ$).

Revision of KOM definition

In September 2017, MWE changed one of its four KOMs, international bottled wine sales revenue, to include revenue from all international wine sales. There was no change to its three other KOMs: gross harvest, bulk grape sales and NZ bottled wine sales.

MWE’s key focus for FY19 is to grow international market penetration, offsetting the historical softening of demand in China through adjusting the exporting mix towards the UK, US and Australian markets.

New KOMs for FY19

Details of the KOMs are as follows:

We review MWE’s market valuation against those of comparable companies, although we would caution that such a comparison is of limited relevance. There are three listed peers in the NZ/Australian market, which are all well established and substantially larger than MWE.

The peers trade on an average FY18e EV/revenue multiple of 2.5x, substantially lower than the 19.0x FY18 EV/revenue multiple on which MWE is trading. However, MWE is at an earlier stage in its life cycle, and is also aiming to generate higher sales and profits from increased production and new target markets. These differences in profile detract from the relevance of the comparison.