It has been another terrible week for Australian wine producer, Southcorp, following its third profit warning of the year last Monday. Although CEO, John Ballard, believes the company has now bottomed out, many analysts are predicting worse to come and, at best, it seems Southcorp will remain where it is for some time. Ben Cooper reports.
In areas such as sport and politics, it is sometimes refreshing to see the favourite brought down to earth. The humbling of a dominant force often means that worthy underdogs are given opportunities they would not previously have had while there is a certain schadenfreude in seeing the mighty brought down to size.
Sometimes, this applies in business too, but there can be few in the Australian wine industry who, in the cold light of day, can be rubbing their hands in glee at the shocking reversal of fortune at the country’s leading wine force, Southcorp.
The announcement last week that it would be registering a net loss for 2002/2003, which followed a succession of profit warnings and the forced departure of its previous CEO, would not only have put the company’s beleaguered shareholders in deep despond. For Southcorp is more than just the largest player in the Australian wine business. With brands such as Penfolds, Lindemans, Rosemount and Wynns, it has four of the flagship brands which have led the way in the transformation of the Australian wine export business.
It would be rather grandiose, not to mention “Old World”, to describe Southcorp as a custodian of icons of national heritage – though with Grange that is precisely what the company is – but there is no doubting the significance of these brands not just as market leaders but as pioneering champions.
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By GlobalDataThe extent of Southcorp’s decline can hardly be overstated. A succession of profit warnings was topped last Monday by the announcement that it was forecasting a net loss of A$12.8m for 2002/2003. That news saw the group’s shares fall below the A$3 mark to A$2.85, before recovering slightly 16.4% down at A$3.10.
Moreover, during the week Southcorp has continued to take a battering from investors, with its share price closing yesterday at A$2.91. The question being asked last week was whether this was the final piece of bad news, as the new CEO, John Ballard, grasped the nettle and put the company on the road to recover, or could things actually get worse.
Judging by the conspicuous lack of recovery in Southcorp’s share price and some of the comment being heard over the past week, the market is by no means confident that we have heard the worst. For Southcorp, it would appear to be premature to say things are darkest before the dawn. They are just dark.
The company has attributed its current woes to the failure of a UK promotional campaign, a domestic downturn, overstocking in Europe and difficult trading conditions. But analysts have questioned the company’s strategy, not least its heavy price discounting and trade loading which led to over-stocking in the supply chain, and warned investors not to expect much in the way of share price recovery, unless a takeover bid emerges.
Among the most scathing attacks came from David Errington at Merrill Lynch. “We have been totally astonished to see the demise of profits in such a short space of time from a leading company in a perceived leading industry,” Errington said.
The Merrill Lynch report, entitled “Disgraceful (Part II)”, went as far as questioning Southcorp’s “long-term sustainability” as a listed company. While the company’s new CEO, John Ballard, has promised an extensive review and revision of the company’s strategy, investors and analysts clearly remain sceptical. Even with Ballard’s new broom, many informed observers believe a turnaround will take some time.
Some analysts are tipping the company’s share price to go below the A$2.50 mark. JB Were said the stock warranted a valuation around the A$2 level, while Tolhurst Noall said institutional selling would put pressure on the shares during the coming weeks, suggesting they would find a level between A$2.50 and A$3.
Ballard has now asserted that the company has hit the bottom and with the strategy review underway was confident that the company would begin to recover. “I am confident that great progress has been already made in identifying the issues which have adversely affected business performance, and in commencing the process of strengthening the organisational capabilities to restore the company’s fortunes.” Ballard said, adding that he believed the company’s problems were “far from insurmountable. Southcorp is blessed with some great inherent strengths. Our brands and their worldwide recognition are the envy of the industry. With sound management, the inherent strengths of the company will enable us to achieve our business goals.”
However, many analysts believe that the situation could get worse for Southcorp, with further write-downs and a cut in its credit rating distinct possibilities. Even if Ballard’s assertion that Southcorp has hit the bottom is correct, many analysts are fairly convinced that that is where the company will stay for some time to come, a fact underlined by some sobering forecasts for 2003/2004.
Merrill Lynch reduced its 2004 net profit estimates by 55% to A$59.3m, while ABN Amro cut its forecast by 43% to $59.8m. “The elimination of the final dividend and the lack of asset write-downs suggest further pain to come,” ABN AMRO said.
Tim Buckley of Citigroup expects $500m of goodwill to be written off and said the company’s credit rating may fall below investment grade. “While the suspension of the dividend payment and a lowering of cap-ex expectations goes a long way to reducing [cash outflow], Southcorp will have very little financial flexibility for some time to come,” Buckley said. Meanwhile, Peter Morgan, head of equities at fund manager 452 Capital, said: “The shares will probably fall further and the company struggle for the next three years.”
So far, there has been relatively little speculation about a possible takeover, other than to list the usual suspects, such as Diageo, Foster’s and Allied Domecq, as possible interested buyers. But if Southcorp is to spend an extended period in its current weakened state, the window of opportunity for a possible takeover is that much larger.
So even though Southcorp has a new CEO in place, is undertaking an extensive review of its strategy and has adopted a depletions-led supply policy, it is still expected to remain in the doldrums for some time to come. In that time, much can, and if the last year is anything to go by, will happen to the one-time shining light of the Australian wine business.
