Resilient Consumer businesses amid COVID-19; MCP & AVG

  • Apr 24, 2020 AEST
  • Team Kalkine
Resilient Consumer businesses amid COVID-19; MCP & AVG

Consumer Staples businesses are considered to be defensive as these businesses are engaged in the provision of necessary goods and services. Most of the consumer staples continue to operate as these businesses fall in essential services.

The S&P/ASX 200 Consumer Staples (Sector) is down 1.38% over the YTD period to 23 April 2020. In a similar period, the S&P/ASX 200 index is down by 21.95%. This indicates consumer staples companies have significantly outperformed the businesses in the top 200 pack.

The two small-cap consumer staples businesses under discussion have delivered stellar returns of late. Over the past one month to 23 April 2020, MCP has delivered a price return of +87.5%, while AVG has recorded a price return of +34.38%.

Let us discuss the latest business updates by these two companies:

McPherson’s Limited (ASX:MCP)

Recently, McPherson’s provided a trading update. It was said that the business has been implementing a number of initiatives to manage risks and business continuity, including work from home, social distancing, crisis protocols.

McPherson’s is supporting employees while working from home with support packages to encourage reigniting hobbies. It has extended corporate influenza immunisation program which now includes employee families.

The company providing contactless deliveries to its 5.3k average daily customers, and none of its employees has been tested positive. It is also making efforts to recruit more people in sales, marketing, research & development, and supply chain. MCP had initiated ‘Think Beyond’ group to encourage employees for internal innovation.

Meanwhile, the business continues to witness strong demand, especially for household essential products due to panic buying in supermarkets. MCP says that Multix & Swisspers brands have been positively impacted by the shift in consumer preference towards baking, cleaning, freezing and personal hygiene.

Its six brands are performing consistent with the pre COVID-19 expectations. McPherson’s key brand Dr LeWinn’s continues depict strong momentum in the export markets, particularly the sales in China where the business had partnered with Access Brand Management.

MCP has not experienced supply chain issues and its supply chain team continue to operate from Sydney and Hong Kong. Its manufacturing partner continues to support sustainable product supply.

Business continues to gain traction in online channels, and it has decided to increase investments in online content with its e-commerce store. Management believes that the present environment provides an opportunity to scale up e-commerce channels.

At the same time, ranging in traditional channels remains strong with increased distribution to existing retailers expected to deliver $1.5 million of additional annual sales. Its products were offered at reduced discounts during March, resulting in better margins.

MCP’s R&D focus has been on immunity and sanitisation industry. In April, the company has launched a hand sanitiser product via a new partnership with Game On and Chemist Warehouse licensed Ozguard brand with confirmed orders worth $9 million.

At this juncture, the Company remains confident to deliver on the FY20 guidance, which seeks to deliver underlying profit before tax growth of 10% over the previous year. This assumption is underpinned by the strong performance in 9 months period and a strong forecast for June 2020. However, the company is mindful of the uncertainty and near- term economic contraction due to COVID-19.

MCP remains vigilant while monitoring the impact of COVID-19. The forecast has been provided on an underlying basis prior to the completion of business’ asset impairment and assessments.

Management believes that its brands are well positioned to capitalise on the changing consumer needs in the current environment. The business has a great portfolio of products with steady demand in domestic and export markets.

At the end of March 2020, the company’s net debt, excluding lease liabilities, was $14.7 million at a gearing ratio of 13%. The company was progressing with the finalisation of a new three- year $47.5 million debt facility with its financiers.

On 24 April 2020, MCP last traded at $2.55, down by 5.556% from the previous close.

Australian Vintage Ltd (ASX:AVG)

This week, Australian Vintage reported a trading update. It was noted that the business crushed 101,400 tonnes of grapes from 2020 vintage against 83,000 tonnes last year.

CEO, Craig Garvin stated that this year’s total crush was pleasing despite raging bushfires in the Adelaide Hills. He said that yields from irrigated vineyards were up 18% against the previous year while considering recently leased Jubilee vineyard, the yields were up 30%. Although, the yields of the premium region were in line with the last year, but 50% lower on expectation.

It was said that the business outperformed in an environment of tough drought conditions, owing to the great work of operations staff. The increased yields have improved self-generating and regenerating assets (SGARA) by $2.7 million (post-tax) against last year, thereby reducing the requirement to procure bulk wine over the next 12 months.

An increase in crush would lower the processing cost for all wines made this year, improving winery efficiency. Australian Vintage noted that overall trading results to end of the March were mixed and satisfactory.

Despite Australian industry wines sales to the UK down by 10%, the Company’s UK performance had been exceptional with sales volumes gains and favourable exchange rate helped to enhance the performance.

By the end of last month, the Australian wine sales were up 5% with sales to North America and Asia down compared to last year. It expects North American markets to pick-up due to positive signs of corrective market-place strategy.

Although Asia markets are expected to remain flat over the next 6-12 months, AVG believes that Asia business has long term growth opportunities. It was said that branded business continues to gain momentum McGuigan brand up 4% and Tempus Two up 18%.

Nepenthe was down 2% against last year, but the Company expects it to gain momentum in remaining months of the financial year.

On the outlook, it was said that forecast growth FY20 is supported by the growth in SGARA and favourable exchange rates. With strong performance in the UK and Australia, it expects to lower costs of 2019 vintage and offset subdued performance of other regions.

Australian Vintage expects a NPAT growth of 25% to 30% over the last year. This forecast assumes no material disruptions to exchange rates, no major change to COVID-19 restrictions and excludes impact of changes in accounting standards.

On COVID-19, it was reported that supply chain operations continue to function with no material disruptions. The Company has been experiencing strong retail demand of its McGuigan brand. However, some parts of the business continue to be impacted by the measures, including Cellar doors.

On 24 April 2020, AVG last traded flat at a price of $0.43.

 


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