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An investment with a fine nose

Over recent years there has been an increase in the number of wine investments available to the public. Philip Macalister checks out whether putting money into grapes really juices up investment returns.

Tuesday, October 17th 2000, 10:02PM

by Philip Macalister

The attraction for investing in wine as a retirement option is hugely understandable when you think about the images of vineyards. The most obvious is sitting under the sun amongst the vineyards - what a pleasant way to spend your golden years. Another is the relationship between good wine and money - you can't have one without the other.

A third is being part of one of New Zealand's successful new glamour industries.

With these great images in people's minds it's no wonder there has been an upsurge in opportunities to put some money into grapes in recent years.

There's been lots of options too. At the big end of the scale there are (or were) the stock exchange listed companies, Montana, DB (which owned the second biggest producer Corbans) and Nobilos.

At the next level down there have been unlisted offerings such as Villa Maria's Terra Vitae, Delegat's Oyster Bay vineyard, Farmers Mutual's Brackenfield and Medway partnerships and now its latest offering The Crossings.

A successful new industry

The wine sector has become a successful glamour export industry with New Zealand wines winning prestigious competition medals offshore, consequently the wines are keenly sought after in countries such as the United Kingdom and the United States.

The business case for investing in wine is compelling and quite simple from an investor's viewpoint.

New Zealand produces much sought after "New World" wines, and the demand for our wines is growing faster than supply.

Although New Zealand's output is tiny on a global scale, it is increasing its share of the world wine market.

On the price side of things New Zealand wines attract what has been called "super-premium" prices.

In fact New Zealand wines attract prices significantly above its competitors. According to International Wine Associates, a Californian based wine distributor, New Zealand has the highest average price per litre of wine exported at US$3.29 of all New World nations.

Another report points out that New Zealand wines generate 38% more revenue per litre than Australian exports.

So, all the elements; price, demand and supply, argue well for the industry.

How successful has investing in wine been?

The options for investing in the wine sector can be split into four groups, based on size and integration.

The first is buying into the listed wine stocks such as Montana, and DB, and until recently Nobilo.

These are the bigger and more integrated companies that are traded on the main board of the stock exchange.

One popular line of argument is that if you are considering investing in a listed wine company the universe of potential shares should be expanded to include Australian companies such as BRL Hardy and Southcorp.

This makes a lot of sense as one of the trends in wine internationally is for the big companies to snap up vineyards and wineries in other countries so they have truly global businesses and a foothold in each important grape growing region.

That is why there has been so much interest from offshore investors in New Zealand's wine industry.

The next group are those companies that have some integration in their business, such as Lintz, The Crossings, Grove Mill, Palliser Estate and Te Kairanga. Many of this group are quoted on the secondary market and have had reasonable share price rises.

The other group are those companies which are solely grape growers, such as Oyster Bay, Terra Vitae and Seddon. While they have relationships with wineries, such as Delegat's and Villa Maria, they are separate businesses and the investors don't participate in the wine making and distribution.

The fourth option is to invest directly into a wine enterprise.

An investor needs a relatively small amount of money to invest in either of the first three options and a much more substantial sum for a direct investment.

When making the investment decision one of the big questions is what part of the industry do you want to own? The options available are putting your money into a vineyard, or having a stake in the actual winemaking operations.

The clear difference is that when you put your money into the grape growing side you're buying a basic commodity producer and the business has to ensure it grows great grapes, and that it has a good supply contract at a good price.

The real value add in the business is actually in the making and sale of wine. Therefore to get the best returns it makes sense to invest in a business which is involved in the "manufacturing" end of the business as opposed to the "growing" end.

A look at the trading history of some of the stocks on the secondary markets bears this out.

"Companies that are integrated in that they are involved not only in growing but also produce wine have performed better and have been more popular with investors," Craig and Co research manager Cameron Watson says.

Te Kairanga, with its reputation for producing premium wines, has performed strongly, while Oyster Bay, which is just a grape growing business, has a net asset value of $2.40, yet its shares are trading at a 30% discount.

Watson says to realising these discounts the vineyard operators have to develop a wine making arm.

This is the approach Farmers Mutual has taken with its Medway and Brackenfield vineyards. Recently the partners agreed to sell the vineyards to a new company the Crossings, which would in turn plant more land, bringing the total to 300 acres, and establish a winery.

Likewise, Oyster Bay indicated at the time of its float last year that shareholders would, in the future, be offered shares in Delegat's winemaking should this become available.

Who invests in wine?

The perception is that the type of people who plonk their money into wine are either wine snobs, or very rich.

The reality appears to be a bit different.

Farmers Mutual chief executive Michael Millar says the people who invest in wine are mostly people who have a high level of income, are in the workforce (rather than retired) and have other investments.

He says they are also hugely attracted to the idea of owning their own piece of a vineyard.

"Pride of possession counts a lot more strongly (with a vineyard) than it does for one of our property syndicates," he says.

He also says they are not wine snobs: "It's the idea rather than any specific capabilities they have."

While the idea and romance of owning your own vineyard is a strong factor, investors also want their money to perform as a good investment, he says.

Watson says much of the initial strong interest from the investing public has waned in the public vehicles as a means of investing in vineyards (hence the share prices of some have come back).

"It would appear that many people prefer to buy their own block of land and effectively invest directly in a vineyard," he says.

"It is impossible to ignore that fact that wine is in many ways a lifestyle investment - there is more to life that maximum profit."

Risks

While the business case for wine is quite attractive, there are some risks.

A recent sharebroker's report questioned whether New Zealand could maintain, over the long term, its super premium prices in the international market.

It says it is likely that the demand for New Zealand wine short to medium term will continue to be strong.

However, it points out that even a small drop in the average price achieved overseas will have a significant impact on the industry's overall earnings before tax an interest.

"If average prices fall by 50c (a litre) the earnings before interest and tax impact is over $25 mill," it says.

"Increasing global volume of quality product and greater competition could put pressure on New Zealand's super premium position currently being enjoyed."

One of the other big risks has to do with integrity and protecting New Zealand's reputation at the super premium end of the market. This issue causes much anxiety with people in the industry at present as there have recently been two instances were questionable practices have been publicly exposed.

They have been a warning of what could happen, fortunately though little long term damage appears to have been done.

Millar acknowledges the risks but says that at as long as the industry continues to keep up its quality, integrity and brand then it should be able to maintain its position at the super premium end of the market.

Besides the quality issue the industry has to be vigilant in maintaining its integrity and protecting "Brand New Zealand".

"We are such a small part of the total market that we are not in danger of saturating it with our difference," he says.

Owning a vineyard or a winery has a romantic appeal, but like many romances there can be bad times. People considering such an investment should be realistic about the financial returns and remember some vintages never reach their full potential, while others can exceed expectations.
Investing in a wine should, like a good romance, last for a long-time.

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