INSIGHTS

WEEKLY COMPANY INSIGHT: DELEGAT GROUP

Roy Davidson, 11 January 2019

dgl110119

Description

Delegat Group (DGL) is New Zealand’s third largest wine maker and is focussed on producing branded, super-premium wines from New Zealand’s leading wine regions, which it primarily markets offshore. Around 60% of the group’s output is Sauvignon Blanc, with the balance being Chardonnay, Merlot and Pinot Noir. DGL’s flagship brand is Oyster Bay.

Business well-positioned

In recent years DGL has invested significantly in the necessary infrastructure to facilitate a step-change in the scale of its business. Access to additional grape supplies has been secured, processing capacity has been increased and modernised, international sales and marketing functions have been established and the key Oyster Bay brand has received substantial support. The group is well placed to leverage the investment made to date, as it drives sales into key international markets, benefitting from the ongoing popularity of distinctive, high-quality, super premium New Zealand wine styles.

Barossa Valley Estate

In 2013, DGL acquired the assets of Australian Winemaker Barossa Valley Estate for A$24.7m. These include a modern 5,000 tonne winery and a 41 hectare vineyard on 80 hectares of land situated in the heart of the Barossa Valley along with assigned grape grower contracts. Having invested in sales and distribution the establishment of Oyster Bay as a leading super premium brand in key markets for New Zealand wine, the acquisition of Barossa Valley Estate is allowing DGL to leverage that investment and access incremental growth. The Barossa Valley brand is now building momentum and is now shifting from a brand rejuvenation phase into development phase, which should help support the company volume growth target of around 8% annually.

North America the key to longer-term growth

DGL has recently invested heavily in its business ahead of the growth opportunities it sees in the coming years. Central to DGL’s growth plans is further penetration of the North American market and the US in particular. The company expects its North American growth plans to be supported by several factors including a lower per capita wine consumption (10 litres in the US vs 20 in New Zealand), and the stronger than market growth of the super premium category, as well as Sauvignon Blanc.

Investment summary

DGL has well established brands and a clear strategy to grow global sales, with the US a key market. The company is also exiting a phase of significant capital expenditure (post infrastructure spend) and recent results have been good. Over the medium term, DGL should show reasonable earnings growth driven by projected growth in volumes and case sales from land that it is currently developing. Given the relatively full valuation DGL traditionally trades on, the key investment questions are how much scale leverage potential exists in DGL’s operations and can it successfully sell all its planned production growth. Overall, DGL remains well positioned for growth over the coming years.

Risks

  1. change in consumer tastes
  2. adverse weather
  3. increased competition
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