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 MARKET REPORTS |
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Analyst report - shares
Wine still a little sour
July 21, 2007
Brendon Lau, ShareAnalysis
 Recent positive news on the wine industry has led to improved investor sentiment towards wine stocks. The oversupply of grapes is showing signs of coming back into balance, and forecasts of price and export volume increases to some markets is fuelling a buzz in the industry.
While the factors depressing the wine market may be weakening, we think there are many reasons for investors to stay sober as any turnaround for the industry could be at least 12 months away. Considering the better opportunities in the market, we think your investment dollars are better spent elsewhere, at least for the short to medium term.
Foster's Group (FGL)
has received notification from the Australian Commissioner of Taxation that it will receive assessments for total primary tax of $548.7M and penalties and interest of $302M. FGL intends to object to the assessments. This development is another negative for FGL after it failed to realise the forecasted synergies from its multi-beverage strategy. We have a SELL on FGL.
Lion Nathan (LNN) and McGuigan Simeon Wines (MGW)
both are rated a SELL. LNN has outperformed FGL and MGW, thanks mainly to a better than expected 1H07 result. LNN has a wine and spirits business, but makes most of its profits from beer. Although the outlook for beer is brighter than wine's, the stock is overpriced on a PE basis, especially since LNN has not upgraded its profit guidance for the year. MGW announced an earnings downgrade, giving guidance of an FY07 loss of between $4M and $6M. The company said its wine crush is 33% down on last year due to bad weather. We have adjusted our FY07 forecasts to reflect the company’s guidance, which has resulted in a decrease in EPS for FY07 from 5.4 cents per share (cps) to -2.8cps.
Coca-Cola Amatil (CCL)
is planning on expanding into the liquor market, as it attempts to sell its underperforming Korean business. CCL announced an upgrade to its 1H07 earnings outlook, expecting to deliver approximately 12% EBIT growth. We have upgraded our medium- to longer-term forecasts for CCL, but the stock remains overvalued and we maintain our SELL recommendation on the company.
Woolworths (WOW) and Metcash (MTS)
have market power over alcoholic beverage companies. Both companies have also gained market share at the expense to Coles Group (CGJ). However, WOW has suffered a setback recently in its attempt to take over the Warehouse Group after the NZCC declined its application on competition grounds. WOW is appealing the decision through the NZ high court. MTS’s good FY07 result was largely in line with our expectations. Due to a challenging operating environment over the medium term, we have downgraded our FY08 and FY09 EPS numbers, down 6.1% and 4.3%, respectively. We believe that both WOW and MTS are fairly priced at these levels and have a HOLD call on the stocks.
Brendon Lau is the Editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. For more information on these stocks and for a free trial of its web-based investor research services, please go to the ShareAnalysis website.
More articles from this week's CompareShares newsletter:
A comeback for futures trading
Motor vehicle aftermarket ready to roll
A trade explained: biotech frenzy
The rise of the moral investor
Weapons of wealth destruction
Stock of the week: ANG
Forex: managing volatility
Energy stock correction
USD/AUD: rollercoaster to parity
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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