Constellation brands going well. New boy on NSX

Reaching for the stars

Constellation Brands has released its first-quarter results, and they pleased the market, causing the share price to rise:

  • June 6: US$155.10
  • July 5: US$165.90

Sales totalled US$1.87 billion, up 15 per cent, with profit up an impressive 21 per cent to US$549 million.

Beer was the standout performer, up 19 per cent. Wine and spirits increased 8 per cent. It would be fascinating to see what contribution was made by the 20 per cent of Accolade Wines that Constellation still owns. They are on different financial years so it’s difficult to work out.

Constellation expects the rest of the year to also be strong, projecting overall net sales and operating income growth of 14 to 17 per cent.

Listed and complex

Marlborough Wine Estates (MWE) listed on the New Zealand Stock Exchange on June 30. The listing document makes interesting reading.

China may be noted as a strong red wine drinking nation, and MWE as a white wine producer, but about 76 per cent of MWE’s exports are to China. The company makes the observation that this red dominance means there is plenty of room to grow white wine consumption. It also plans to enter Japan, South Korea and the US.

It helps that the company is owned by Chinese nationals, headed by James Jia, and in essence will continue to be so, as only a percentage of shares will be available for New Zealanders. The listing report contains:

“MWE strives to have an innovative business model which would see customers and distributors owning stakes in the company. To achieve this, once MWE is listed, MWE intends to place and/or James will sell, modest parcels of shares to MWE’s sales and distribution partners in China. It is a growing belief in China that, in order to align the distributor’s interests with shareholders of the producer, contractual sales and marketing arrangements should be linked with equity incentives.  MWE believes this alignment will further entrench these partners loyalty and drive sales growth.”

Sales in the FY 2015:

  • Bottled wine, NZ$784,000 ($747,050), 32 per cent
  • Bulk grape, NZ$1,631,000, 68 per cent

Total revenue for the year amounted to NZ$2.41 million. There were no bulk wine sales in 2015.

The company says there is a strong market for bulk grape sales and is under contract to provide 500 to 560 tonnes each vintage. This contract ends with the 2017 vintage. MWE may continue to sell bulk grapes but doesn’t appear too keen on being involved in contracts. The company produces about 1500 tonnes of grapes from six vineyard sites totalling 336 hectares. Production is forecast to increase to 2000 tonnes.

Wisely, in TKR’s opinion, the company has plans to increase its bottled wine production.

In the 2015 financial year, bottled wine sales were divided into:

  • Domestic: NZ$104,000
  • China: NZ$509,000
  • Others: NZ$171,000

The MWE company structure is split into three parts:

Marlborough Vineyard Group Limited (MVG), MWE’s wholly owned subsidiary, undertakes sales and marketing internationally, including undertaking marketing initiatives with distributors and key customers.

Otuwhero Trustee Limited (OTL), MWE’s wholly owned subsidiary, undertakes sales and marketing of the bottled wine produced by MWE domestically and internationally (O:TU and Music Bay brands). Both the O:TU and Music Bay brands’ principal sales and marketing focus is bottled wine  from its own vineyards. The O:TU brand is focused on the  premium wine market while Music Bay is a sub-brand for MWE and used for volume sales.

O:TU Investments Limited (OIL), MWE’s wholly owned subsidiary, undertakes sales and marketing of the bulk grapes produced by MWE to a range of domestic customers.

The complex web stretches to Hong Kong and then into China. Great Esprit Limited (GEL) is a Hong Kong-based company largely owned by an associate of Jia. It has a non‐exclusive distribution agreement with MWE (through OTL). Accordingly, GEL is considered to be a related party to MWE.

MWE supplies bottled wine to GEL for distribution in China and Hong Kong, and plans to expand distribution into other key Asian markets in the future.  The wine includes both the O:TU and Music Bay ranges.

The agreement provides for GEL to order a minimum of $3 million of wine from MWE in the year ending June 30, 2017. There are more than a few Australian wine producers that would like the following arrangement:

All MWE’s wine sold to GEL has been priced above the average white wine export price to China of NZ$11.86 per litre. The premium percentage depends on the MWE brand and varietal but most of the range is priced at a premium of 30 per cent or more above the NZ$11.86 per litre average price.

The rest of the range is sold at a premium of up to 13 per cent.  This relationship aligns the group with its strategic vision of creating a distribution hub in Hong Kong for key Asian markets (ie South Korea and Japan). Hong Kong provides a tax and customs efficient point for the group’s Asian distribution arrangements. The GEL distribution agreement will be subject to the related party transaction provisions in the listing rules and depending on the materiality of the agreement at the time, future agreement variations may require shareholder approval under the listing rules.

This could prove difficult for the newly listed company, but had to be disclosed in the report:

“The Ministry for Primary Industries (MPI) is currently in dispute with MWE’s former contracted wine processor which may have adverse implications for MWE.

“MPI has withheld approval from the processor for the release for sale to MWE of approximately $1.2 million of bottled wine.

“This stock remains held by a third party storage company while the dispute is determined. The allegation by MPI is that the processor held insufficient records to enable proper traceability of the stock.

“If MPI’s position is upheld the stock will be destroyed. MWE is in continuing discussions with its insurer, however the contractor has not accepted liability and MWE holds insufficient information at this time to form a view on whether any loss will be fully or partially covered by its insurance.

“The carrying value of this stock has not been impaired in the financial statements of MWE at the date of this document. Shares opened at 20c on Thursday morning and climbed to 28c in early trading.”

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