26 Sept

KWV'S LOSS COULD RATTLE MINORITY SHAREHOLDERS

Time for a strong dop.

Shareholders might require several reinforcing tipples before scanning the red splashes that stain the results for the year to end-June from unlisted liquor group KWV Holdings.

The R50m bottom-line loss could rattle the many minority shareholders, who had the opportunity to bail out of KWV in early 2011 when PSG sold its influential stake to Hosken Consolidated Investments (HCI) at R11,80/share.

The share price is now closer to 900c, and over-the-counter trading data shows a spike in average volumes that might suggest HCI or another entity (what chances PSG?) might be accumulating stock offloaded in a panic.

Probably the most worrying development is that KWV burnt through more than R110m of the R168m cash pile, most of which was raised in a R150m rights issue during PSG’s tenure.

The return from that furious cash burn was a 12% kick at top line, which presumably has more to do with the effect of a weaker rand on exported brands than the recent splurge into a ready-to-drink segment dominated by profitable rival Distell.

The balance sheet disturbingly displayed an inventory overflow (largely brandy stock) of R809m - which, unbelievably, is more than KWV’s annual turnover of R762m and equivalent to around R12/share.

If any heart can be taken from the results, it might be that directors are being brutally frank in assessing the business. There is a blunt admission that “KWV did not come close to meeting the expectations of management or its shareholders”.

But there’s no panic in the boardroom - yet. The long-term strategy to diversify KWV away from its traditional wine and brandy offering is reiterated, which means that KWV will not curtail investment in new products or pull back on advertising and marketing spend. Adding in the distribution costs, the latter topped R225m. In other words, shareholders will have to endure a dry patch for a few years. But, in truth, there is no other way to attain sustained profitability.

Simply put, KWV needs to drive additional volume through its vast production facilities to make better use of the considerable fixed-cost base.

What will be critical is not only increasing volume but broadening the portfolio into higher-growth and higher-margin segments. It’s too early to gauge whether the new ready-to-drink brands like Ciao and spritzer jimmijagga are gaining traction, but for at least the next two years shareholders have to accept further (meaningful) costs will be incurred before new revenue streams flow.

Perhaps the only short-term comfort shareholders can take into the new financial year is that nonrecurring costs of R65m were incurred in the past year. Next year’s bottom-line losses, even with increased investment in new products, should be easier to swallow.

Source: Financial Mail - Marc Hasenfuss