Latest Developments Shaping up Australian Wine Sector's Future

  • Jul 13, 2020 AEST
  • Team Kalkine
Latest Developments Shaping up Australian Wine Sector's Future

Summary

  • Australian wine contributes majorly to the Australian economy ~A$40 billion contributions annually. 
  • Australian Vintage expects net profit after tax to be between 25% to 30% with grapes crushed in Vintage 2020 up by 22% on last year
  • The industry is facing major challenges amid COVID-19 pandemic with global economic slowdown leading to trade tensions and impacting export. 
  • The Australian wine sector is set for a transformational phase with strategic plans and government packages to reform the industry.  

Australian wines, renowned globally for their quality, contribute significantly to the Australian economy. With an annual contribution of ~A$40 billion, the sector employs more than 175,000 people and comprises a range of participants of around 2500 winemakers and over 6000 grape growers.

With the COVID-19 pandemic putting a dent in the hospitality sector, the wine industry is undergoing a transformational period. The industry recently received A$50 million Export and Regional Wine Support Package for driving the Australian grape and wine industry by exhibiting the country's wine tourism offering and increasing the demand for wine exports. Wine Australia will be overseeing on how the package will be used for the assigned goals.

The export market for Australian wine industry offers more significant opportunities for winemakers and grape growers. In 2018, 63% of Australian wine was exported to other countries which supported jobs across rural and regional parts of the country. In the domestic market, growth is comparatively slow. According to Wine Australia, Australian wine exports increased by 3% to $2.91 billion annually ending December 2019, with Australian fine wine witnessing exceptional growth in demand. The industry, however, is subjected to a lot of challenges.

  • Escalating global-trade tension: the COVID-19 has changed the general equations between different nations around the world, which is significantly impacting trade relations between different countries, thus affecting the export-import equation negatively. These trade tensions prove detrimental for any export businesses as it is going to affect the demand.
  • Economic slowdown: The world economy has experienced significant slowdown thanks to the Global Virus Crisis (GVC). Lockdown and social distancing led to plummeting business challenging other industries, including the wine sector.
  • Climate change: Global warming and CO2 emission are affecting the climate and changing the way wine grows and ripes, which is ultimately affecting the quality of the wine.

Strategic Plan 2020–25 to boost profitability, resilience and sustainability

 

The Minister for Agriculture, Drought and Emergency Management has approved Wine Australia's five-year strategy. The five plans are as follows:

  • Increase demand: Apply marketing strategies to increase demand and premium paid for the Australian wine.
  • Maintain reputation: Protecting the reputation by keeping the integrity of the Australian brand in the domestic and export market.
  • Enhancing quality: Research outcomes will be used to enhance grape and wine excellence. The findings will aid grape growers and wine producers in improving quality.
  • Sustainable environments: Providing knowledge and tools to wine growers and producers to implement environmentally friendly practices.
  • Business sustainability, excellence and leadership: Adopt best practices and research outcomes. 

On that backdrop, let us cast an eye on a few wine operators. 

Treasury Wine Estates Limited (ASX:TWE) 

Treasury Wine Estates made it a top priority to keep in check the health, safety and wellbeing of its global team and partners during the pandemic. TWE's Chief Executive Officer Tim Ford acknowledged that the efforts of the staff, customers, and suppliers put through the difficult time of COVID-19 pandemic, will return the company to both margin and profit growth. He also said that the company is well-positioned to face the crisis, and the challenges will only make the business robust in the future.

The Treasury Wine expects EBITS down by 21% 

The Covid-19 pandemic has hugely impacted the company's business performance across all geographies through 2H2O. For FY20, TWE is anticipating EBITS between A$530 million and A$540 million, that reflects dip by approximately 21% against the previous year. 

TWE adopted cost management by reducing its business cost and cancelled the payment of any discretionary employee incentives relating to this year's performance outcomes.

TWE is expecting the global COGS per case to grow by 3% in F21 as compared to the previous year.

Vintage Update

Extreme heat has impacted the 2020 Australian vintage (V20) during critical stages of the growing season. It resulted in less volume and higher cost vintage for the company. The total intake was around 30% less than the previous year.

On 10 July 2020, towards the end of the trading session, TWE traded at A$10.520 and was down by 3.927%. It has a market cap of 7.89 billion.

Also read: Treasury Wine Estates seeks to deliver shareholder value

Australian Vintage Limited (ASX:AVG

In its trading and vintage update in mid-April, Australian Vintage reported 101,400 tonnes of grapes crushed in Vintage 2020, which is up by 22% on last year. Grape yields from owned and leased vineyards went up by 29% over the previous year. Improved yield from the vineyards upgraded SGARA (Self Generating and Regenerating Assets) by A$2.7 million (after-tax) against last year. Also, reduced the requirement of buying bulk wine over the next 12 months. It will also help in improving cash flow in FY21. The company has also mentioned that the quality of the Vintage is exceptional this year.

AVG is expecting Net Profit after Tax (NPAT) to grow by 25% to 30% for FY20 ending June.

On 10 July 2020, at the end of the trading session, AVG traded at A$0.420 and was up by 3.704%. It has a market cap of 113.69 million. 

 


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