Liquor makers on expected high

By Peter V' O Brien

42 Below's share price dipped when the stock listed last year but had recovered to the 50c issue price when the sector was last considered (NBR, May 14). The vodka (42 below) and gin (South) producer recorded a $1.12 mill deficit for the year ended March 31 but investors could dismiss that result because it occurred during a development period.

Every company has to grow to critical mass, size, terms of production and sales before it earns profit commensurate with capital investment.

42 Below's annual meeting in mid-August was told it expected to move to a break-even position in the three months ended March, 2005. Chairman Grant Baker said that would happen "primarily because of the excellent margins we make on 42 Below and South compared to other alcoholic beverages."

"We intend to grow from our current base of 6000 cases per month, which will contribute a margin of at least $100 per case, or $600,000 per month."

Baker and his company can be presumed to be comfortable with their considered public statements, but highlighting one's "excellent" margins and stating them in dollar terms might be less than the wisest approach to disclosure.

It had an element of exposing the company to pressure from distributors for reorganisation of margins, either lowering them overall or creating a situation whereby distributors got more dollars.

42 Below and its shareholders could have shrugged off that possibility, because the share price was solid in recent months.
Chief executive Geoff Ross (juvenilely described as "chief vodka bloke") said the company had 5000 outlets for 42 Below in the US. The product had been accepted into DFS Singapore, one of the world's largest duty-free outlets. Investors now wait for the marketing and distribution network effort to show up in profit.

Lion Nathan became New Zealand's only listed brewing company after Dominion Breweries' delisting following the buyout of minority shareholders. Lion's solid price rise since May was ironic, given it resulted partly from the company selling its brewing operations in China and becoming another entry on the growing list of Australasian groups to exit that potentially vast market.

At least Lion got out at a capital profit (A$104 mill), which was a better result than those of many other companies.

The company earned A$202.7 mill for the year ended September 30, before one-off items amounting to A$42.6 mill, the latter being the gain from China less a loss on sale of Victorian hotels, an adjustment to the carrying value of the Australian wine business and its inventory, the writedown of some investments and the writeoff of obsolete beer production assets.

Lion's decision to change the carrying value of the wine business came with an assurance of a "commitment to continuing the development of our premium wine business where much progress has been made over the past year in building a domestic and international premium wine route to market".

The sales and revision of asset values justified the company's flowery comment that they made it "a stronger business, which will continue to deliver solid growth in earnings and cash flow and excellent returns for shareholders".

The New Zealand Wine Company's share price recovered well after a disappointing period following its debut last November.
Net profit for the year ended June 30 was 31.6% lower than in the previous year at $739,000 but there was a "much improved" performance in the second half.

Chairman Mark Peters made a comment applicable to the whole wine industry and related to company profitability and thus to share prices. He said the market was sending strong signals to the wine industry about the "price points" at which New Zealand sat and a need to manage costs effectively throughout the supply chain from vineyard to shelf.

Production growth had to be at the quality end, must be market led and at a controlled cost structure. The New Zealand Wine Co and Oyster Bay Marlborough Vineyards (the latter being a grape producer only) face climatic problems, particularly frost and unseasonal, constant rain, which brewers and distillers can ignore.

Their share prices could therefore be subject to greater volatility than those of 42 Below and Lion Nathan

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