The Stake of Wine Stocks Amid Coronavirus

  • Feb 26, 2020 AEDT
  • Team Kalkine
The Stake of Wine Stocks Amid Coronavirus

China is grappling with fears that the novel coronavirus (COVID-19) will continue to spew disaster on the daily lives of its residents and the overall economy. With more than 80k confirmed cases of the pandemic and around 2.7k people (across the world) reportedly dead, this new disease is spreading across nations with time. Recent cases have been reported in countries including Italy, Iran, Kuwait and South Korea.

Coronavirus and its Impact

On 31 December 2019, the World Health Organization (WHO) was intimated about a cluster of cases of pneumonia in Wuhan City, China. Initially unrecognised, Chinese authorities reported shortly that the cause of the reported illness is a coronavirus, later named as COVID-2019. What a sad coincidence, as the disease rang alarming bells during the Chinese New Year period, when the country rejoices and mints money from tourism!

The outbreak has forced China to lockdown its cities, rethink wartime measures, shutdown factories, and halt import and export activities. This has resulted in mayhem among locals and countries which have their citizens in China. Few nations, like the United States and India sent special conveyance to rescue their citizens from the infected Chinese areas.

The coronavirus outbreak is resulting in adverse implications for global businesses and the world economy too. Its impact has been primarily noticed in sectors including travel & tourism, retail, manufacturing and commodities. With China recognised as the largest manufacturing country in the world over the last three decades, the ramifications for international supply chains have been a topic of concern for nations like Australia.

(Source: WHO)

Coronavirus Impact on Australian Wine Industry

Concerns regarding the deadly coronavirus are growing across the Australian wine industry. The Australian wine tourism has already been struggling due to the bushfires, and the recent outbreak of coronavirus has only made the situation worse.

Australia is one of the biggest exporters of wine to China and in the 12 months ended 30 September 2019, Australia exported $ 1.2 billion worth of wine alone to the Asian country. Now, with Chinese restaurants and bars shut/ unusually quiet/ due to people staying home amid the fear of coronavirus, wine sales and consumption are bound to take a sharp downward spiral.

Consequently, there is a potential for a downturn in wine demand, as restaurants and bars suffer from a sharp decline in customers and a disturbed consumer behaviour sentiment. There are anticipations of impact on sales and low volume of exports.

With this backdrop, let us look at two ASX-listed wine stocks, and understand their take on the coronavirus pandemic.

Treasury Wine Estates Ltd (ASX:TWE)- Downgrades Profit Guidance

TWE makes close to half of its profit from Asia, and the biggest chunk comes from China. It is one of the world’s largest wine companies and its vertically integrated business focusses on grape growing and sourcing, winemaking and brand-led marketing.

The Company recently notified that the impact on consumption across discretionary categories in China is expected to be sustained at least through March. Consequently, TWE has downgraded its profit guidance, as it is unlikely to achieve the previously provided guidance for F20 reported EBITS growth of between 5 per cent and 10 per cent.

  • In China, TWE’s staff, wholesalers, retailers and logistics providers have not yet resumed work at their respective workplaces and are continuing to work from home.
  • Post Chinese New Year consumption across discretionary categories has been significantly adversely impacted, though they were strong and in-line with expectations during the Chinese New Year.
  • The COVID-19 outbreak may impact performance in markets outside of China
  • If the impacts of COVID-19 are resolved in FY20, TWE does not expect its FY21 plans to be impacted in Asia, a predominantly luxury wine sales region.

Australian Vintage Limited (ASX:AVG)- Will it Join Coronavirus Wine Woes?

Through 2019, AVG has continued its shift from being a bulk wine company to a well-reputed branded wine player. Even though the UK continues to be the Company’s main overseas market, in the year ended 30 June 2019, TWE increased its sales to Asia by 24 per cent.

In FY19, AVG’s wine exports to China continued to lead growth with sales up by 19 per cent to $ 1.1 billion. This translates into the fact that China remains the Company’s largest market for wine sales and third by volume.

During the year, AVG sold packaged wine to Vintage China, an entity associated with one of its Non-Executive Directors, Jiang Yuan, to the value of $670,942 on normal commercial terms.

In February 2020, the Company’s McGuigan Wines launched a personalised wine label AR (Augmented Reality) App, which features on McGuigan’s new Founder’s Gift wine, rolled out to concur with the Chinese New Year. It was created to leverage from the significant gifting opportunity that arises near to period of the Chinese New Year celebrations.

As deciphered from the above, AVG’s businesses are heavily dependent on the sales and consumer behaviour of China. With the coronavirus posing a direct threat to both these parameters, constant vigilance would be required to maintain these optimistic numbers of FY19 and good news hailing from China.

Another issue that has triggered the Company’s operations has been the bushfires, which impacted the 30-hectare Charleston vineyard in the Adelaide Hills.

The Company is due to release its half year results on 26 February 2020. Market participants and investors are awaiting to witness the impact of these two perils on the Company and also the outlook that could be part of the result release.

Bottomline

In light of the coronavirus outbreak in China, the China-based staff of these wine companies, like other corporations, have not been able to visit office and are either logging in remotely or working from home. Likewise, personnel visits and exports are subject to restrictions and safety guards.

With staff, exhibitor and supplier welfare being the supreme concern of these companies, there is no denying that the pandemic has impacted businesses to a degree which is not yet well-defined.


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