Company Overview: Australian Vintage Ltd (ASX: AVG) is primarily involved in wine making, wine marketing, and vineyard management. The company has a dynamic and award-winning portfolio of Australian wine brands, including The McGuigan, Tempus Two, Nepenthe, etc. The company supplies packaged wine within Australia, New Zealand, Asia, and North America through retail and wholesale channels. The company was listed on ASX in March 1992.

AVG Details

Key Takeaways from FY21 Results:

• Rise in Revenue: In FY21, the company reported revenue of $273.96 million, up 2.6% on a Y-o-Y basis, mainly driven by the decent rise of the brand portfolio in the UK and Australian market.
• Increase in Operating Cashflow: Due to the improved result and a slight reduction in working capital, the company’s cash flow from operating activities increased by $22.8 million to $45.0 million in FY21 compared to FY20.
• Rise in NPAT: For FY21, the company reported an NPAT of $19.6 million, up 79% on the previous year, supported by the decent performance in core UK and Australian businesses as well as improved production efficiencies.
• Increased Investment in Brand Marketing: During the year, the company increased the investment in its brands, with marketing spend up 46%.
• Reduction in Net Debt: As at 30 June 2021, the company had net debt of $42.8 million, down by $24.5 million from $67.3 million as at 30 June 2020.

Five Year Financial Summary (Source: Analysis by Kalkine Group)

Decent Dividend History: Over the years, the company has a decent track record of paying dividends to its shareholders. In FY21, AVG has declared a 60% franked final dividend of 2.7 cents per share with a record date of 26 November 2021 and payment date of 17 December 2021. The dividend is in line with FY20 dividend of 2.7 cents. Notably, from FY17 to FY21, the company’s dividend has grown at a CAGR of ~28.19%, demonstrating the company’s focus on rewarding its shareholders via dividends. At the CMP of $0.84, the company’s annual dividend yield stood at~ 3.21%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 31.5%, up from 28.5% in FY20. EBITDA margin for FY21 stood at 16.8%, up from 13.4% in FY20. EBITDA margin for FY21 stood at 16.8%, up from 13.5% in FY20. ROE for FY21 stood at 6.4%, up from 3.6% in FY20, reflecting the company’s improved profitability. Debt to equity ratio for FY21 stood at 0.32x, down from 0.44x in FY20.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 53.74% of the total shareholding, while the top four constitute the maximum holding. Allan Gray Australia Pty Ltd and Yuan (Jiang Dixon) are holding a maximum stake in the company at 19.58%, and 13.91%, respectively, as also highlighted in the chart below:                                    

(Source: Analysis by Kalkine Group)

Completed Share Restructure: In July 2021, the company completed a share restructure involving the capital return of 8.5 cents per share and a 10% share consolidation. By doing this, the company has returned a capital of around $23.9 million to its shareholders.

Key Risks:

• COVID-19 Uncertainties: The company is exposed to the risks associated with the impact of COVID-19 pandemic as it could disrupt the company’s supply chain logistics.
• Imposition of Tariffs: The company’s inventory management and profitability could be impacted by the current imposition of tariffs on Australian wine exported to China and the potential ongoing tariff polices.
• Foreign Exchange Risk: The company’s wines are exported to offshore markets, exposing it to foreign exchange risk.

Outlook: Looking ahead, the company is focused on improving its return on assets by leveraging its world class assets for competitive advantage and by delivering on all financial metrics. The company believes that its ongoing investment in its pillar brands and people capability will help it in growing sales, improving the mix of sales and driving an improved balanced scorecard in the long term. In the medium term, it expects to achieve high single-digit ROCE (Return on Capital Employed).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has provided a return of ~20.07%. The stock has a 52-week high and low of $0.472 and $0.922. The stock has been using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight premium to its peers, considering the expected growth in its ROCE, improvement in its balanced scorecard, decent long-term outlook. For the purpose of valuation, peers such as Treasury Wine Estates Ltd (ASX: TWE), United Malt Group Ltd (ASX: UMG) and Lark Distilling Co Ltd (ASX: LRK) have been considered. Considering the stock’s improved financial performance in FY21, decent performance in core UK and Australian businesses, decline in net debt, modest outlook, current trading level and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $0.84 as on 16 September 2021.

AVG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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