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Lion Nathan directors earn themselves a beer

By David McEwen

Friday 6th December 2002

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In theory, beer is the last place a share investor would look to find growth.

The industry is very mature, and all the beer barons can hope to do is take market share from each other.

But that's not what you see when you look into the latest annual report of Lion Nathan.

Over the past five years Lion has delivered compound annual earnings growth of 11.4% ­ exceptionally high for a business that might be expected to grow at little ahead of CPI. What's more, the pace is accelerating.

Net profit after tax of $A162m was 20% up on the previous year's profit of $A135m.

"We have an enriched business model," trumpets chairman Geoffrey Ricketts. "At its foundation is a powerhouse beer business in Australia and New Zealand which last year grew earnings before interest, tax and amortisation (EBITA) by 7% and 5% respectively, improved operating margins to world-class levels and outperformed their respective competitor on the key dimension of profit growth and market share. We will maintain this dynamic into the future by focusing on two key levers: increasing our spend on core brands and deepening our customer relationships."

Despite the upbeat environment for many of its beer brands, the real growth opportunities are elsewhere.

What really interests investors is the company's massive expansion into upmarket wines. It has paid substantial premiums to buy producers like Petaluma and Banksia in Australia and New Zealand's Wither Hills but these also have potential for fat margins and rapid growth.

The company states it is looking for further acquisitions and has the cashflow and balance sheet strength to finance them.

This strength is also reflected in its decision to lift its dividend payout ratio to 70%. Lion is said to have the balance sheet capacity, and the intention, to spend up to $A1 billion on acquisitions over the next four years.

As one would expect, the Lion annual report is a very confident affair. No gripe here about how "tough" the industry is.

Much has been said about Lion's "achievement culture" and the annual report allocates a fair amount of printer's ink to this subject. "This enduring culture is enriched by focusing all our development on leadership, at all levels of the organisation," the report says.

People who have worked there say the company gives you every opportunity to excel, or crash and burn, within a very competitive environment. It works because the best survive and deadwood floats out the door.

This culture also calls for accountability and the annual report is full of that. Every year, the directors set out stated targets in returns and profitability and then review their progress.

"Strategic imperatives" for the next year are clearly spelled out. These are:

* to continue to deliver double-digit earnings growth;

* to get Lion Nathan China into profits; and

* to build a value-creating premium wine business from the assets it has acquired.

Some would say if Lion can make it in China, where larger western breweries have fallen over, it can make it anywhere. Lion has persevered in China to see strong volume growth (up 27% last year) driving its operation closer to break even, the loss having been reduced to $A14.7m last year.

Investors reacted positively in August when Lion delivered a strong third-quarter result and forecast a double-digit earnings growth for the full year.

In a classic case of buying the rumour and selling the fact, the share price has softened since Lion announced its 20% increase in net profit for the year to September.

This trend is unlikely to last. A company that grows its earnings at the rate Lion has done ­ and has a management that states it is confident of more to come ­ should continue to win investor support.

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