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Marlborough Wine Estates — Update 29 July 2016

Marlborough Wine Estates — Update 29 July 2016

Marlborough Wine Estates

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Written by

Marlborough Wine Estates

KOMs for FY16 in line

Food & beverage

NXT Company Spotlight

29 July 2016

Price

NZ$0.36

Market cap

NZ$106m

Share price graph

Share details

Code

MWE

Listing

NXT

Shares in issue

293.3

Business description

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

Bull

Bull

■

Marlborough white wines, particularly sauvignon blanc, have a 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, particularly in securing water supply, could improve grape yields.

Bear

■

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

■

All distribution in Asia being made by related parties, albeit that the related party is purchasing bottled wine at a premium of 30% to the average NZ export price for white wine.

■

Greater demand for MWE’s products may depend on conversion of Asian markets from red wines to premium white wines.

Analysts

Moira Daw

+61 (0)2 9258 1161

Finola Burke

+61 (0)2 9258 1161

Marlborough Wine Estates (MWE) was formed in March 2015 to acquire vineyard assets comprising the Otuwhero Estate from Min (James) Jia. The purchase was satisfied by the issue of 240m shares. Products sold in FY15 (pro forma) include bulk grapes (67.6% of revenue) and bottled wine into China (21.1%), New Zealand (4.3%) and other markets (7.1%). MWE undertook a compliance listing. The key operating milestones (KOMs) suggest that management expects to create value from increased volumes of grapes harvested and from an increase in the proportion of product sold as higher-margin bottled wine.

Key operating milestones largely met for FY16

Given its recent listing and the information contained in its listing document, MWE was not required to release a Business Update for the June 2016 quarter provided it made a short form announcement showing the company’s annual performance against its KOM targets. The gross grape harvest was 1,653 tonnes (KOM of 1,660 tonnes), the bulk grape sales were 1,187 tonnes (KOM 1,190 tonnes), international bottled sales were NZ$1,604,500 (KOM of NZ$1,600,000) and NZ bottled wine sales were NZ$150,400 (KOM of NZ$137,293).

Production increases to drive growth

MWE plans to increase vineyard production from the 157ha vineyard by 5% per year until production reaches 2,000 tonnes of grapes pa (1,653t in FY16). The strategy is to continue to position its O:TU brand wine at the premium end of the market, increase the sales of bottled wine through increased market penetration in China and Hong Kong and expand into new markets. Growth is also expected from acquisitions and by expanding into other NZ-sourced food and beverage products.

Valuation: Price up 80% since listing

MWE is a young company that reported an NPAT of NZ$0.59m for the period from 18 March 2015 to 30 June 2015. The unaudited pro forma NPAT for the 12 months ended 30 June 2015 was NZ$0.170m. Management expects that, as production volumes ramp up and sales of bottled wines increase from NZ$0.78m in FY15 to the company’s KOM estimate of NZ$3.4m in FY17, profitability will increase significantly. MWE has not provided any forecast material other than the KOMs. Since listing on NXT, MWE’s share price has climbed 80% from the last issue price of NZ$0.20 to NZ$0.36 currently.

Historical performance

Year
end

Revenue
(NZ$000)

NPAT***
(NZ$000)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15 PF*

2,788

170

0.1

0.0

N/A

N/A

06/15**

1,865

590

0.2

0.0

N/A

N/A

Source: Marlborough Wine Estates. Note: *Pro forma for 12 months; revenue includes sales revenue and other revenue; **Actual from 18 March 2015 to 30 June 2015; ***NPAT includes positive fair value adjustment of NZ$1.054m, according to management.

Key operating milestones

The key operating milestones (KOM) are required under the NXT listing rules to be reported on a quarterly basis. This requirement is to allow investors and potential investors to track the performance of the company and to gain some insights into the key growth and profit drivers of the business.

MWE has set four key metrics by which investors should be able to assess performance:

■

Gross harvest, or grape production from the vineyards. This measure shows the vineyard’s grape supply capacity, which in the opinion of the board is sustainable for at least 15 years. Grape production is expected to increase as the vines mature and the board’s longer-term forecasts are for a gross annual harvest of 2,000 tonnes (5% annual growth rate). At a 5% growth rate of annual production, the current production of 1,653 tonnes should reach 2,000 in 2023. The KOM forecasts are for grapes produced from the existing vineyards and do not factor in future vineyard development where the time to full production could take five years. The FY16 harvest yielded 1,653 tonnes due to extremely favourable climatic conditions. The FY17 forecast of 1,544 tonnes assumes normal growing conditions and is therefore 5% pa growth from the FY15 production baseline. FY16 is considered to be an exceptional year.

■

Bulk grape sales have been expressed in tonnes because of the difficulty in forecasting the price, which can vary materially depending on supply/demand factors. Bulk grape production as a percentage of the total harvest is expected to increase from 71.8% in FY16 to 74% in FY17. The tonnage of bulk grape sales is governed by how much of the harvest is put into bottled and bulk wines. It is MWE’s intention to increase bottled wine sales because they offer higher margins than grapes sold in bulk or grapes processed into bulk wine. An increase in the sale of bottled wines will mean a reduction in the amount of wine sold as bulk wine to other NZ wine producers.

■

International bottled wine sales, which management expects to double between FY16 and FY17, are underpinned by the minimum purchase requirements that form part of the distribution arrangements with related party HK based distributor Great Esprit Limited (GEL). In FY16, GEL is contracted to undertake minimum purchases of NZ$1.4m of bottled wine out of total international sales of NZ$1.6m; this rises to a minimum of NZ$3.0m of total international sales of NZ$3.2m in 2017. The minimum purchase requirements mean it would be very unlikely for the international wine sales KOM not to be met.

■

NZ bottled wine sales are expected to be driven by the Music Bay brand, launched in 2016. The Music Bay brand has been developed as a brand that is likely to have appeal in the local NZ market. (The O:TU brand is used for the premium wines produced by MWE). NZ wine sales accounted for 8.6% of total wine sales in FY16 and are expected to account of 6% of total bottled wine sales in FY17.

Exhibit 1: Key operating milestones defined by company

FY15 (pro forma)

FY16 target

FY16 actual

FY17 target

Gross harvest (tonnes)

1,401

1,660

1,653

1,544

Bulk grape sales (tonnes)

955

1,190

1,187

1,144

International bottled wine sales (NZ$)

679,806

1,600,000

1,604,500

3,200,000

NZ bottled wine sales (NZ$)

104,407

137,293

150,400

205,940

Bulk grapes % of total harvest

68%

72%

71.8%

74%

NZ wine sales % of total wine sales

13.3%

7.9%

8.6%

6.0%

Source: MWE Listing Document, page 34; MWE announcement 26 July 2016; Edison Investment Research

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G3 Group — Update 29 July 2016

G3 Group

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