Challenger Wine Trust has reported a rise in its half year operating profits but warned that it will make disposals in order to remain flexible in the face of the challenging economic times.

The Australian-based vineyard owner said today (5 February) that profits from operating activities after tax reached A$8.4m (US$5.44m) for the last six months of 2008, up 5.6% on the prior year period.

The company said that operating performance was underpinned by an increase in net property income of 5.3%. Net profit after tax was $2.9m, after allowing for an unrealised decrement from property revaluations of $5.6m, the company said, without giving prior year comparisons.

CWT's fund manager, Nick Gill, said: "CWT's core business held up well during the first half of FY09 as evidenced by a solid operating result, with net property income up 5.3%, operating profit after tax up 5.6% and net operating cash flow up 5.8%."

However, he added that the recent steep fall in interest rates resulted in a mark-to-market net liability of $21.7m on CWT's financial derivatives (interest rate swaps) and a narrowing of headroom on bank covenants. In addition, bank lending margins have increased, the company said.

Gill said: "Economic, financial and trading conditions are extremely challenging globally and the wine industry is not immune. Most large wine companies have booked write downs in response to current and projected market conditions.

"To maintain balance sheet strength and flexibility in these uncertain times, CWT is pursuing asset sales."

CWT said that, until it had a clearer understanding of the likely outcome of asset sales, and until it had fully assessed the implications of recent announcements and strategic reviews by several of its major tenants, it was placing FY09 distribution guidance on hold pending further review.

In today's statement, the company warned that it may not be immune from declining vineyard values in some regions, however capital management initiatives will be implemented to maintain and improve CWT's LVR banking covenant headroom.

Gill concluded: "The current predicted oversupply of grapes and recent news of falling export demand for Australian wine in combination with the global uncertainty potentially impacting CWT directly or indirectly has caused us to proactively seek to strengthen the balance sheet by pursuing asset sales. Until we have an opportunity to fully assess the current market and have a clearer understanding of likely assets sales, our distribution guidance for FY09 remains under review."

The company added that, importantly, 94% of its leases (by rental income) do not expire until FY11 and beyond when it anticipates improved profitability for the industry.

CWT comprises a portfolio of 25 vineyard assets in Australia and New Zealand which are primarily leased to wine companies on long term leases with annual rental reviews.