Benefiting from jitters about Fosters and confidence in a new management team, Southcorp's shareprice is currently flying. But analysts believe it is over-priced while BRL is hot on its heels. David Robertson analyses the stockmarket performance of the two giants.

Australia's Southcorp is believed to be the world's most expensive wine asset despite nobody believing the company is worth the share price it is attracting.

The wine maker's share price reached A$8.30 last week and although it has fallen to around A$8 now, this is a meteoric rise from just A$4.92 on the first day of trading this year.

According to analysts, Southcorp is trading at 20 times 2002 earnings before income tax - massively more than its rivals. BRL Hardy, which is something of a darling of the Sydney stockmarket at the moment, is trading at only 15.5 times - and is also considered expensive.

"Southcorp is the most expensive wine asset in Australia and I would guess nobody anywhere else can match it either," said a Sydney analyst who asked not to be named.

Admittedly there are not a huge number of listed wine companies, but Southcorp's share performance has been staggering - particularly as investor sentiment is not overly positive towards the company.

"There is an upside from restructuring but that has more than fully been factored into the share price"

"There is an upside from restructuring but that has more than fully been factored into the share price. There has been no risk factored in and frankly this stock is far too bloated," the analyst added.

Two factors seem to have driven Southcorp; prospects for improved performance following its A$1.5bn merger with Rosemount; and also a general dissatisfaction in Fosters which has prompted investors to switch companies.

A number of senior industry commentators have joked that the Rosemount deal was an expensive way for Southcorp to buy a management team. The reality is that Rosemount was one of the most profitably run wine companies in the world and the merged company's new chief executive, and former Rosemount boss, Keith Lambert is expected to work the same magic.

Southcorp is already undergoing a huge internal cost-cutting exercise with is forecast to produce savings of $50m in three years - up from $20m announced when the deal was completed.

Lambert is also selling Southcorp's water heater business, which, Credit Suisse First Boston says, will add 20c to the share price if it hits its target price of A$800m.

JB Were also points out that Southcorp's notorious inefficiencies provide an opportunity for substantial growth. The broking house says that the revenue per case of wine at Southcorp is A$55 but Fosters' Beringer Blass manages A$90.

Concerns over Fosters' performance have also encouraged investors to switch stocks. Fosters' share price has slipped from A$5.30 a couple of weeks ago to below A$5 despite announcing better than expected results of A$465m. What has really worried analysts is the 40% slip in operating cash flows to A$283m because of interest rate charges following the Beringer deal and a substantial tax bill.

Despite the potential benefits that are flowing, Southcorp's direction analysts feel that it cannot justify its current share price. High on the list of concerns is a potential slip in US investor interest in the stock combined with a rumoured sales drop on the other side of the Pacific.

Southcorp is comfortable with the share price and says the market's confidence reflects the strength of the company's management post-merger. Whether that confidence will remain intact will be a matter for investors in coming months.

Meanwhile BRL Hardy continues to impress and its share price has risen from A$7.50 in October last year to over A$11 - and this despite a deeply discounted rights issue (at just A$9.30) that raised A$145m.

The money is to fund its joint venture with the US's Constellation Brands, called Pacific Wine Partners. According to the Australian Financial Review, this new company has targeted a number of US producers making more than 500,000 cases a year including Rodney Strong Vineyards, Jerry Lohr and Kenwood Vineyards.

Southcorp may be enjoying its reign as the "most expensive" in the world but BRL is breathing hard on its heels and the only thing that seems likely to derail BRL is the likelihood that it will need to raise more money, deflating its share price, in the future to finance its Constellation partnership.

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