Company Overview: Australian Vintage Ltd (ASX: AVG) is a global wine company with some of the most technologically advanced wine-making facilities in the world. The company is mainly involved in wine making, wine-marketing, and vineyard management. The company supplies packaged wine within Australia, New Zealand, Asia, and North America through retail and wholesale channels. AVG was listed on ASX on 26 March 1992.
AVG Details
2021 AGM Highlights: On 25 November 2021, AVG held its Annual General Meeting (AGM), wherein the management informed that despite significant disruption in sales because of the tariffs imposed by China, the company reported a 79% improvement in net profit after tax (NPAT) to $19.6 million, due to limited reliance on the China market and improvement in core business in Australia and UK. Some of the other key points highlighted at the AGM are as follows:
- Rise in Sales of Pillar Brands: During FY21, the sales of the company’s pillar brands of McGuigan, Tempus Two, Nepenthe, and BVWC increased by 12% to $195.1 million.
- Increased Investment in Brank Marketing: During the year, the company increased the investment in its brands, with marketing spending up 46%.
- Improvement in Operating Cashflow: For FY21, the company reported a record operating cash flow of $45.0 million, up from $22.2 million in FY20, due to improved results and a slight reduction in working capital.
- Rise in ROCE: Over the year, the company’s ROCE (Return on Capital Employed) grew by 70% to 7.5%.
- Reduction in Net Debt: Over the last 5 years, the company’s net borrowings have decreased by 58% from $101.4 million as at 30 June 2016 to $42.8 million as at 30 June 2021, supported by a $18.4 million share placement back in 2017.
Five-Year Financial Summary (Source: Analysis by Kalkine Group)
Decent Dividend Paying History: AVG has declared a 60% franked final dividend of 2.7 cents per share, in line with last year’s dividend. The dividend has an ex-date of 25 November 2021 and a payment date of 17 December 2021. From FY17 to FY21, the company’s dividend has grown at a CAGR of 28.19%, reflecting AVG’s focus on rewarding its shareholders via dividends. At a CMP of $0.755, the company’s annual dividend yield stood at ~3.52%.
Dividend Trend (Source: Analysis by Kalkine Group)
Key Metrics: EBITDA margin for FY21 stood at 16.8%, up from 13.4% in FY20. Net margin for FY21 stood at 7.2%, up from 4.1%. ROE for FY21 stood at 6.4%, up from 3.6% in FY20. Debt to equity ratio for FY21 stood at 0.32x, down from 0.44x in FY20, reflecting a reduction in net borrowings. Current ratio for FY21 stood at 2.89x, down from 3.35x in FY20.
Profitability Metrics (Source: Analysis by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 56.50% 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)
Latest Developments:
- Retirement of CFO: On 8 December 2021, AVG announced the planned retirement of its Chief Financial Officer (CFO) - Michael Noack. Mr. Noack will retire from the role of CFO in March 2022.
- Change in Director’s Interest: On 2nd December 2021, one of the company’s Directors, Peter James Perrin, who holds an indirect interest in the company, acquired 65,000 ordinary shares of the company at a price of $0.7775 per share via on-market purchase.
- Change in Substantial Holding: On 17 November 2021, one of the company’s substantial holders, MA Financial Group Limited, increased its holding in the company from 7.77% to 8.98%.
Key Risks:
- COVID-19 Uncertainties: The COVID-19 pandemic could cause supply chain disruptions and impact the logistic costs of the company.
- Imposition of Tariffs by China: The company has been facing significant disruption to sales to mainland China due to tariffs imposed by China.
Outlook: AVG remains committed to the China market and is currently evaluating options to continue the sale of its pillar brands into China. 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, the company expect to achieve a ROCE of high single-digit.
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 three months, the stock has been corrected by ~10.65%. The stock has a 52-week high and low of $0.627 and $0.922, respectively. 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 over the medium term, and 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), etc., have been considered. Considering the decent performance in core UK and Australian businesses, decline in net debt, modest outlook, track record of paying decent dividends, current trading level and associated key risks with the business, we give a “Speculative Buy” rating on the stock at the current market price of $0.755 as on 9 December 2021, 12:30 PM (GMT+10), Sydney, Eastern Australia.
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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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