Brewers hold their own

By Peter V O'Brien

Friday 15th November 2002

The two listed brewing companies reinforced their position as defensive stocks in the six months to November. DB's share price was unchanged from its level on May 17. Lion Nathan's went up 3.5%.

Year-on-year changes were 8.1% for DB and 6.5% for Lion with the usual ups and downs common to all listed companies. The brewers' range between highs and lows was narrow, an uncommon feature for most companies.

Defensive stocks such as brewers are unexciting compared to volatile counterparts, which show wide swings between highs and lows. Excitement is present only when there are rises. Excitement turns to gloom on the downside.

Both companies have dominant shareholders, DB's being Asia Pacific Breweries with 76.91%, to which can be added the ACC, which acquired 8.41% and still held them on November 5, when the company issued its preliminary report for the year ended September 30.

Japan's Kirin Breweries has control of Lion Nathan. A relatively low percentage of each company is therefore in the public domain, although the number of shares available for trading is more than the total capital of several listed groups.

Direct comparisons between DB and Lion could be misleading. The former operates predominately in New Zealand but the latter got 51% of its revenue and 59% of profit before interest and tax from Australia in the year ended September 30.

Lion has a drag on profitability in its China operation, which lost $A19.3 million in the period. The company had $A198.8 million of its $A3.46 billion of total assets in China (5.7%), so it had a relatively hefty investment, which showed an equally negative return and has since inception.

Lion remains optimistic about China, saying the outlook for the Chinese beer business was encouraging.

"While the beer market in the Yangtze River Delta remains competitive, Lion Nathan's business has developed a business system and brand portfolio that is delivering results. It also has an asset base and a cost position that will ensure it remains competitive going forward.

"Continued growth in its core brewing business, combined with opportunities to increase the utilisation at the modern Suzhou brewery, should ensure that the recent improvements in financial performance continue into the 2003 fiscal year."

That was probably a reasonable comment given the halving of the China operation's loss (expressed in Chinese currency) since the year ended September 2000. It can be presumed Kirin, as majority shareholder, is happy with the situation. The Japanese group is using Lion to increase the Kirin brand in the Yangtze River Delta region.

Kirin obviously knows what happens in Asia and how to do business there but outsiders should not assume everything will be smooth on the basis that China and Japan are Asian nations. That would be a mistake, similar to the "they all look the same" calumny.

DB and Lion seemed to have similar strategies in their approach to the New Zealand beer market. Hardly surprising. Both companies are experts in liquor marketing.

DB said New Zealand net sales were up 3%, although volume and market share were unchanged from the previous year. "This was driven by continued strong growth in premium brands plus price increases taken in mid 2002."

Lion Nathan said an improvement in earnings before interests, tax and amortisation was the result of "improving beer volumes (up 2% on prior year), mix shift toward high-margin premium products, stronger pricing and a commitment to cost containment." The term "stronger pricing" might an industry euphemism for price increases.

Investment in brewing companies and other liquor groups has an interesting aside after publicity about the ACC's 8.41% of DB. The ACC had a longstanding policy of non-investment in liquor and tobacco companies. That prohibition was removed in recent years. It is unlikely the DB investment would have been known widely outside the relatively few people who track the mandatory reporting to the Stock Exchange of holdings more than 5% of capital if DB had not included it in the preliminary report.

The issue could arise again when the New Zealand Superannuation Fund gets under way.

The fund's "guardians" must "avoid prejudice to New Zealand's reputation as a responsible member of the world community" and have had particular expertise in "socially responsible investment."

Investment in liquor companies could affect New Zealand's reputation among Islamic states and be queried elsewhere as "socially irresponsible."

So could a host of other investments. Those mentioned in NBR on January 18 were chemical, pharmaceutical and food companies, perceived to exploit third world nations through plants using cheap labour and anything else deemed politically incorrect.

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