Australia gears up for the second wave
After a period of sustained growth, the Australian wine industry has suffered a number of prominent reversals recently as the combination of oversupply and heavy discounting has taken its toll. However, when Chris Brook-Carter met with Franklin Tate, he found the chief executive of Evans & Tate, Australia's eighth largest winemaker, in bullish mood regarding the industry's future.
The rise of the Australian wine industry and its mutual love affair with the British and American markets is one of the more remarkable episodes in recent drinks industry history. However, a confluence of events has shaped to deal the sector a heavy blow in the last two years, bringing this extraordinary honeymoon period to an abrupt end.
Unabated planting and a slowdown in the world's economy has created an oversupply problem, the effects of which have been compounded by an aggressive discounting policy by the country's leading players in both the US and UK. The result has been falling retail prices and a mounting number of profit warnings.
Despite the leaps forward made in technology and what many have described as the corporatisation of the companies at the top, the fact remains that the wine industry is still fundamentally an agricultural business, open to all the vagaries of nature that come with that territory, and with much of its cash tied up in maturing stocks.
As a result Southcorp, Peter Lehmann Wines, Xanadu and Cranswick Premium Wines (before it was bought by Evans & Tate) have all issued warnings, dragging their share prices down and bringing into question the suitability of the entire sector to the stock markets. Unfortunately this has led to a situation where more interest now surrounds the next profit warning from Australia than the next wine release.
And yet against this backdrop, while talking to just-drinks at this year's Vinexpo, Franklin Tate, chief executive of Evans & Tate, the country's eighth largest winemaker, predicted that there would be another 10 listed wine companies on the Australian stock market within two years.
Evans & Tate itself floated some 10 years ago and has by and large been one of the success stories of the last decade, seeing its revenues almost triple in a little over four years. But having acquired the struggling Cranswick Premium Wines last year it is also fully aware of the questions the industry has posed those looking for solid investments in the last 24 months. That said, Tate remains ultimately confident that the wine sector and the City can maintain a mutually beneficial relationship.
"Is there more demand for Australian products than we can see today in the next 10 years? Of course. And Australia has got the capacity to deliver on that demand," says Tate. "But if that is going to happen it's got to find the money from somewhere. The investment market has got to be there."
Certainly if Australia is to continue its extraordinary march forward on the international scene it is going to require funding. "I think our industry's achievements overseas have been extraordinary when you consider that we have spent what is to us a lot of money to conquer markets like the UK. We have done very well but it has come at a cost," says Tate. "Growth to these companies has come with quite a drain on resources. As the industry has grown in size we have had to attract a lot more capital."
But while the need for public money is clearly there, the market may take more persuading before it parts with its money.
"The market sentiment will become positive to the point when wine companies will become welcome there [the Australian Stock Exchange]," says Tate. "Will there be risks? Yes. Will there be downturns? Yes. But is the market willing to support another wave of wine companies? Without a doubt."
This argument requires the market to take a longer-term view of its investment than is currently fashionable as well as the faith that the recent bear market is all but over.
"History tells us that equity markets are always in more robust times than negative times - the bulls have more days in the sun than the bears," says Tate. "The wine sector is well suited to those times as are technology companies because you are asked to extend your thinking beyond the horizon of what you can see.
"Wine companies have shown they can stand the test of time. They are well suited to the equity markets, but they get greater support during the bull times."
"We have these expectations of these long term industries that can deliver strong capital results in the long haul that somehow they can respond in a very short term way," argues Tate.
As the world's only pure wine investment company, The International Wine Investment Fund has a unique perspective of the financial potential of the Australian wine industry. It has shareholdings in wine companies all around the world and up until the recent sale to Constellation Brands was the very successful major shareholder of BRL Hardy. CEO of Berren Asset Management, which runs the company, Chris Day agrees the sector is primed for further IPO activity, but also recognises the unique hurdles the industry must jump if it is to succeed in the public domain.
"It is important that if a wine company is public, it acts like a public company and not in the interests of family members, executives or major shareholders," says Day. "This is particularly relevant because
"The wine industry is capital intensive and the time to full returns is longer than the average industrial company"
He goes on: "Having said that, a well run company which is appropriately geared can provide suitable RoCE, IRR and EVA for its shareholders. There are several professional managers who run wine companies who understand this relationship."
The importance of management is not lost on Tate either. "The companies that have done well like BRL Hardy have done so because they are extraordinarily well run companies."
"There are more good investments in the Australian wine industry than any other time in the last 10 years," says Day. "The reason is that the ridiculous multiples being sought have nearly disappeared. While the big boys control around 70% of the total game, making our industry the most consolidated in the world, there are huge opportunities for the rest of the 1,500 to merge, acquire, takeover and rescue."
As Tate argues, just because the top four producers control 70% of production now, there is nothing to say they will still control that amount of the industry in a decade.
Tate says: "That is not to say that the big guys aren't going to grow, but can we assume that they are going to grow in line with the industry size, or
"Are there going to be other smaller fish who are now only A$100m in size that are going to grow to A$0.5 billion?"
In short it is these companies, and not the likes of Southcorp or what was BRL Hardy, who are going to offer the better growth proposition to potential investors.
"Just because BRL Hardy produces 25% of all Australian wine now, there is nothing to say it will still do so in 10 years time," Tate continues. "By logic to sustain 25% alone would be an enormous challenge. For them to be 20% with other new things born is probably more likely."
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