Australia | Nov 16 2006
By Greg Peel
In mid-October, analysts at Credit Suisse were quick to suggest that investors should not suddenly eye off potential in the wine sector just because of the drought. There is simply too much bulk wine still hanging about, they argued, and it would take more than just a severe drought to clear the backlog and affect a rise in prices.
Since that time, drought severity forecasts have only become worse, but CS worked off a forecast 20% drop in the grape harvest, and today Deutsche bank analysts are working off a figure of 22% – not much different.
But unlike CS, Deutsche believes the drought will prove beneficial to bulk wine producers.
If there were one stock hit hard by the Australian wine glut, it’s McGuigan Simeon Wines (MGW). Trading merrily at around $6.00 in early 2005, the stock price fell to $2.00 this last August. Once an icon of the Australian wine scene, there appeared a very real danger that McGuigan could even go under.
It all had to do with what could best be described as an Australian wine bubble (sorry). For twenty years Australia slowly built a reputation as a premium wine producer, and when embraced by the UK and US as a source of quality product, there was an Australian wine export explosion.
As with most demand bubbles, it eventually had to happen that supply would catch up, and so it wasn’t long before every man, women and child who’d so much as sipped a chardonnay turned to planting vines. Thus begun the great wine glut.
Adding to the supply problem was a change in demand dynamics as well. Apart from the French fighting back, countries as far flung as South Africa, Chile and Slovakia grew to challenge the global niche Australia had enjoyed. As soon as Australia lost its flavour-of-the-month status, it was all over. Australian wine hit the two-pound bins in the UK, and immediately became tainted as low quality (not because it was, but because with wine the rule is if it’s cheap, it must be rubbish).
Just when it looked like it might be all over for the wine industry, and that the 2006 vintage might as well be poured down a drain, along came the drought.
The McGuigan stock price has bounced back to $2.71 (yesterday’s close) as a result. But while Credit Suisse feels this is a flawed investor reaction, Deutsche has just upgraded McGuigan to Buy.
Deutsche has reduced earnings for FY07, because a lighter vintage in 2007 will see less wine produced. However, the analysts believe it will be 2008 when the 2007 lighter vintage actually translates into higher grape prices. To that end they have set a $3.00 target for McGuigan.
The FNArena database now shows a 2/2/3 B/H/S ratio for McGuigan, with an average target of $2.87. JP Morgan is the high-marker at $3.50, and the other Buy, set when the stock price hit rock bottom.
Said the analysts: “It’s always darkest just before the dawn”.