Delegat's shares slump after earnings miss estimates

Jim Delegat, managing director of Delegat's Wine Estate. Photo / Greg Bowker

Shares in Delegat's Group, the New Zealand winemaker which has been snapping up the distressed assets of rivals, slumped 7.2 per cent to a four-month low after weaker than expected earnings.

Delegat's plunged 30 cents to $3.85, the lowest since May 1, although just 2,371 shares changed hands at the lower price. Delegat's operating profit rose 3 per cent to $26.3 million in the 12 months ended June 30, lagging behind the $27.5 million expected by analysts. Last month, the company said operating profit would be in line with its February guidance of $27 million, not including one-time costs of $1.9 million to buy vineyard assets.

"The bottom line result missed analyst expectations, not by a huge amount, but by enough to bring a few sellers in to the marketplace," said Grant Williamson, a director at Hamilton Hindin Greene "The share price throughout this year has moved significantly higher, mainly on expectations that the company could continue to achieve double digit growth in its earnings and it has missed the mark."

To see Delegat's Group's results announcement to the NZX today, go here.

Shares in Delegat's have surged 41 per cent in the past 12 months as the producer of Oyster Bay wines spent $73.7 million on Kaituna Vineyard in Marlborough, Matariki Vineyard in Hawkes Bay, Barossa Valley Estate in South Australia and additional plant and equipment to provide future earnings growth. The company plans to spend a further $132 million over the next three years to support its sales growth plans, particularly in the key North American market.

"The group has made significant progress in building an internationally successful wine business over the last decade," chief executive Jim Delegat said in a statement. "The group is planning to grow sales from 1.95 million cases to 3.07 million cases over the next six years. This planned growth will be primarily driven by continuing to drive sales growth in North America and through development of the recently acquired Barossa Valley Estate brands."

Delegat's drew down $41.8 million of additional borrowings to fund its increased capital investment during the year, taking total debt to $137.5 million. The company expects to fund its expansion over the next three years using a combination of retained earnings and debt.

"Delegat's are still in a major expansion phase as they look to increase their sales substantially over the next number of years and they have had to increase their debt with the acquisition of an Australian vineyard," said Hamilton Hindin Greene's Williamson. "They are having a few growth pains as they have quite a heavy capital expenditure programme and earnings increases may not keep up with that in the short term."

Sales rose 3.6 per cent to $229.7 million in the past year as a 5 per cent gain in the number of cases sold offset adverse foreign exchange affects, Auckland-based Delegat's said.

Delegat's expects North America will become its largest region by sales volume in the current financial year, overtaking Australia, New Zealand and the Asia Pacific region. North America will be the company's key growth region over the next six years, driven by sales in the US and Canada.

In the past year, North American sales volumes rose by 25 per cent to 670,000 cases. North American sales volumes are expected to rise to 1.01 million cases by 2016 and to 1.39 cases by 2019, providing significant distribution scale benefits.

In the Australia, New Zealand and Asia Pacific region, sales volumes slipped 3 per cent to 672,000 cases. Volumes are expected to decline 8 per cent in the region in the current financial year because of weak economic conditions in Australia.

"The Australian market seems to be a problem for a number of our companies at the moment as the Australian economy still remains pretty lacklustre," said Hamilton Hindin Greene's Williamson.

Wine volumes in the region are expected to return to growth in 2015 and 2016 and will be underpinned longer term by demand from Asia and from the Barossa acquisition, Delegat's said. The company will open sales operations in China and Japan in the current financial year.

In the UK, Ireland and Europe, sales volumes weakened by 3 per cent in the past year to 604,000 cases. Volumes are expected to be stable over the next three years with modest longer term growth, underpinned by price increases and the "super premium" Oyster Bay brand.

In the past year, net income rose 62 per cent to $41.2 million, the company said. That includes a $14.9 million gain in the value of the company's vineyards, grapes and financial derivatives, compared with a $100,000 write down the year earlier.

The company's cash flow from operations declined 21 per cent to $39.2 million as it invested in a higher 2013 harvest, which was 4 per cent ahead of target yields and 42 per cent above the 2012 vintage.

The company will pay a dividend of 10 cents a share on Oct. 11, up from 9 cents last year.