DGL - Delegats Wines

[Ferg]

I'm in the industry and there is definitely more pain to come...

Thanks Ricky......in what way do you see this?  Increased loss of export sales, or something else?

Some time ago I posted this:

I have been running the numbers....[snip]....I predict the after tax impact of tariffs is $11m less NPAT for DGL based on the FY24 results.

This was for FY25.

And per the downgrade announced the other day:

They also announced a slight profit downgrade for the current fiscal from the range $55-$60m to $47-$50m given the uncertainty over the US tariffs.
https://www.nzx.com/announcements/450561

FY24 underlying profit was $59.7m.
I said $11m less than FY24 = $48.7m
Latest announcement mid point is $48.5m.

Not bad if I may say so myself. 

Did someone say something about not being able to predict the future? 

[Ricky Bobby]

Ha not bad indeed! And thanks for sharing. Wouldn't be surprised if they are burying a few other market issues in that number as well...It's a massive over supply and it's going to take years to correct. Everyone is competing hard to get a sale and the price has dropped through the floor. UK is the worse. There will be more controls in place regarding yield for vintage 2026, but it's too late should have gone more aggressive this vintage. Profit has gone out the door it's all about cash!

[Ferg]

Thanks Ricky.  Maybe this is a chance to 'clear the decks' but I'm not expecting much in that regard....DGL run a pretty clean set of books insofar as I can tell.

About oversupply....I have been running the numbers on DGL harvests.  The 2025 harvest of 47,461 tonnes is a record high and supports case sales of ~3.6m cases in future. This is similar to peak case sales in FY23 and 24.  No cause for alarm....yet.  Unless, as you say, there is massive discounting to get stock away.  DGL don't strike me as the sort who value their brands lightly...excessive discounting can damage a brand (*more on this below*).  In 8 of the last 10 years (including the covid lockdowns), DGL case sales has exceeded the estimated yield from the prior year harvest - it was only FY17 & 18 where I think it was under by <2%.  DGL have a history of getting their stock away, even during covid.

The interesting metric will be average value per case sold.  It bottomed in FY17 & 18 and has been rising since.  The low prices at a time of low volumes says DGL will engage in discounting to kick start sales in times of trouble (*so they do discount*)....but I should check the average FX rates at the time to see how much was driven by FX movements.  The weak NZD has helped FY25 but will disappear if we see US70c again.  To get to $48-$49m operating NPAT for FY25 means DGL have held their pricing and got costs under control.  That's what I predict. 

DGL typically buy in around 30% of grapes...I presume these are from contract growers.  This means DGL are yielding close to 15 tonnes of grapes per productive hectare for the orchards they own.  I think that's actually pretty good...unless you think otherwise with your experience...?  These harvest volumes may result in a slight over-supply.  Keep in mind the poor FY24 harvest is about 500-600 thousand cases below the forecast case sales for FY25 of 3.2m so whilst there may be a build up of stock from the 2025 harvest, they should (will) be clearing prior year vintages at the current sales rate.  This can be seen in the half year report where stocks fell from $182m to $138m.

That's what I am seeing with the numbers.  A bit of a mixed bag and a lot of moving parts, but no cause for alarm.  DGL continue to plant more hectares in grapes and I suspect they know what they are doing.

You must have some sort of view at the coalface...it would be interesting to hear you expand on this bit:

It's a massive over supply and it's going to take years to correct.

Do you see this as an industry-wide issue?  Or a DGL issue?  And is this in all wine categories?  I am genuinely curious.

Cheers

[Ferg]

A mixed bag of a result announced today but a credible result nonetheless.  Following is a summary of the results and the investor call today.

Source: https://www.nzx.com/announcements/457740

The dividend is unchanged at 20c fully imputed and is more than covered by EPS and cashflow, so I'm not sure why analysts were thinking this was going to drop.  Today's share price has recovered 10% to $4.05.  The imputed dividend of 27.78c gives a gross yield of just under 7% on a SP of $4.05.

FY25 Results
The highlights & lowlights:
 1) Revenues at $349m were down -7.6% on last year's $378m
 2) Case sales at 3,188k were down 426k or -12%
 3) Average revenue per case lifted to $9.14 from $8.66 in the previous year, this was due to a mix of price increases and favourable FX movements.  On the conference call they were very clear about wanting to protect their 'brand equity' and to hold and/or raise prices, and not chase volume.  Hence they do not actively compete in Spain, France & Italy.
 4) Revenues are down due to a number of factors including: global consumption is down (more in the cheaper categories); USA tariffs & other disruptions within trade channels, and aggressive discounting by some competitors who have excess stock.  Delegat Wines still see the USA as the major growth area.  I also wonder if there was a "sugar rush" with the Covid lockdowns as we have seen with other companies (e.g. FPH) and we are reverting to a more normal growth trajectory.
 5) Underlying profit was $51m compared to $59m last year; EPS at 50.5c is down ~15% from last year's 59c.  This is due to lower case sale volumes.
 6) Interest bearing debts reduced by ~$32m from $369m to $337m; no issues with debt covenants.

Outlook
 1) Forecast case sales for FY26 is 3.3m (last year 3.188m)
 2) Price rise put in place for USA.
 3) Forecast NPAT is $50-$55m; midpoint of $52.5m is ~52c EPS
 4) Forecast capex spend will halve in FY26 to $26m as this is being re-phased in light of the current global wine market.  Maintenance capex sits between $5-$15m p.a. depending on whether it is a light or heavy maintenance capex year.  Since 2006 8.5% of all capex was maintenance capex, the rest was growth capex.
 5) Debt facilities were renewed in June 2025 with good support from the bankers.
 6) DGL seem to have good working relationships with their distributors.

My graphs
EPS expressed as sales per share (note there have been no share issues in this time) and underlying NPAT as a % of sales.  The latest headwinds have put DGL back ~6 years in their EPS growth:

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Gross margins are stable at around ~45% whilst the cost of doing business has increased by about 1%.  I expect the GM% will improve in FY26 given fixed costs are spread thinner over the bumper harvest from FY25.  Although pricing will be sensitive to changes in FX rates, and they have some cover in place.

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Debts are falling relative to equity.  The recent bump was due to high capex spend; DGL reduced debts by ~$32m in FY25.

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Following is a reconciliation of the reported NPAT to underlying NPAT where grape revaluations create distortions to the reported NPAT.  The impact of a prior year IFRS adjustment is reversed once the stock is actually sold.....so that big gap we see in 2024 marked with a red "x" will likely reverse in FY26 (or later?) where underlying NPAT will exceed reported NPAT as evidenced by the lumps in 2015 & 2016.

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More graphs to follow.

[Ferg]

Some more graphs....less operational and more from an investment perspective. 

This graphs takes the underlying EPS and then plots 2 lines.....the green line being 8 x EPS and the orange line being 16 x EPS.  The blue line is the monthly closing share price relative to the 2 bands:

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Same idea but this time for net assets where the bands are set at +20% and -20% of equity per share.....to see where a share is trading relative to net assets (note this is not net tangible assets).

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And for those who prefer to see the actual P/E Ratio....based on the monthly closing share price.  This graphs uses historical earnings but each non-reporting quarter is a blend of the previous and next reported results.

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I should probably do one for dividend yield too.....that's a job for another day.

[Ferg]

Warning: This is not investment advice.  Rather it is how I look at shares on the assumption the share price deviates from the underlying value.  Do your own research.

How did we go from a SP of $6.51 at the end of FY17 to $4.25 at the end of FY25?

The SP is a function of earnings (being EPS) and investor confidence (being the P/E Ratio).  SP = EPS x P/E ratio.

EPS can be further broken into its components being (Sales x NPAT%)/Share on issue.

I see sales being driven by consumers (responding to Management actions), the NPAT% being the responsibility of Management (in terms of being efficient), the number of shares on issue is the responsibility of the Directors and the P/E ratio is at the behest of investors.

This explains why I present sales/share on one of the graphs....is increased sales coming from consumers or from Directors acquiring things?

Expressing these 4 factors as an annual CAGR for DGL from 2017-2025 we get:
 1) Sales grew at 4.14% p.a. (from $253m to $350m)
 2) NPAT% shrunk by -0.29% p.a. (from 14.95% to 14.62%)
 2a) consequently EPS grew by 3.84% p.a. (from 37.4c to 50.5c)
 3) shares did not grow; 0% CAGR (stable at 101m)
 4) the P/E ratio shrank -8.7% p.a. (from 17.4 to 8.4)
 5) Putting this all together, the SP has gone backwards -5.2% p.a.

Note that I picked 2017 as a start given I couldn't find reliable SP information prior to then.  The price is the closing price at the year end date.

So what has changed?  Fear and greed....investors are currently wary in light of the various headwinds.  The investment community have turned their back on DGL whilst they pursue other options.  Fair enough. 

So is this a contrarian buy?

Let's run some numbers through a DCF calculator, and assume the following:
 1) Buy for say $4.05
 2) Get 5 x cash dividends at say 18.6c p.a. (being $0.20 / 0.72 x 67% where 5% DWT is deducted); let's assume no growth in dividends despite the fact it has increased since 2017
 3) assume DGL grow EPS by 2.5% p.a. for 5 years getting to $57.8m NPAT and 57.2c EPS (assume no new shares) - history has DGL growing EPS at 3.8% p.a.  Keep in mind DGL delivered $65m NPAT in 2021 so it shouldn't be a stretch.
 4) Assume a P/E ratio of x10 in 5 years time and sell for say $5.72.


The internal rate of return on this investment using these assumptions is 11.5%.  If your required rate of return is less that then this should fit your investment criteria.  If DGL exceed any of the assumptions then the IRR will be higher, assuming investor confidence returns.  If however you require a return of say 12% or more then this isn't for you.

This is not investment advice.  Rather it is how I look at shares.  Please do your own research.

[Mos]

Thanks for sharing your insightful analysis Ferg. The FY26 cases sales target of 3.3 m cases could be a stretch when FY25 came in at 3.188 m cases taking into account...
- US tariffs were in place only for the last 3 months of FY25 at a rate of 10%. In FY26 tariffs will in place all year and be 15% for most of the year. Hard to see growth in the US unless tariff's are absorbed which obviously would be a big negative impact on profitability. Perhaps half absorbed and half passed on? (not a lot of commentary from the company on how they plan to navigate this but the flat profit guidance based on increased sales volumes guidance and lower cost of sales per unit suggests some absorption planned)
- deep discounting by competitors was given as a reason UK sales volumes were down 15% and Australia/NZ sales volumes down 5% in FY25. This was despite a light industry vintage in 2024. On the back of the very large 2025 vintage and the oversupply Ricky Bobby refers to, the level of competitor discounting is almost certain to intensify in FY26. On a recent supermarket shopping trip some leading competitor brands (not Oyster Bay) still had 2023 vintage Sauvignon Blanc on the shelf which would seem to indicate big oversupply issues for those companies. Tricky to drive sales growth and also maintain brand price position in this context.

Quality company navigating a challenging industry oversupply and demand weakness dynamics. Will be interesting to see how Delegat and the industry are tracking at half year.

[Ferg]

Indeed Mos.

It will be interesting to see how they counter the various headwinds.  They mentioned on the conference call a price rise for the US market from 1 July 2025 to offset some of the tariffs.  And whilst USA remains the primary focus for future growth, they had good growth in Asia but this is small versus USA.  In Ireland there was an issue with a key customer which impacted their sales and I understand this has been resolved.  Plus there has been some de-stocking and re-stocking within distributors which can be disruptive.  In other words, there are a lot of moving parts.

What gives me some faith is the decline in H2 sales was less than the decline in H1 sales for FY25.  H2 had the tariffs whereas H1 did not.  It would be good to know the quarterly figures but the more you slice something up, the greater the variability between periods (hence the reason US share prices gyrate with each quarterly release).  I think there was a post-Covid sugar rush for DGL that we have seen with some other companies and we may be seeing a reversion back to the long term trend.

There is a seasonality to DGL sales where H1 exceeds H2 by 16-17% over the 10 year growth period to FY23. So if they sell 1.7m cases in the current half, that will put them on track to reach 3.3m cases for FY26.  The answer will present itself in the New Year, although I will keep an eye on the export stats.

Mind you I'm not looking at this as an investment from a FY26 perspective, I'm looking out to FY30 and beyond.

[Basil]

Really good discussion guys, appreciate you sharing your perspective.  Applying my standard 5 year analysis to this all I really see is declining eps due to significant headwinds and oversupply in the industry.  I stick with that timeframe for all investment considerations as I continue to believe that the most recent history is the best guide to the future.  I see the headwinds continuing and the US tariff problem being a real thorn in their side.  Others will have a longer framework for historical consideration and take a longer view of the future and I wish them all the best.

[KW]

There are big structural issues with this industry at present.  Largely driven by declining alcohol consumption that is now not just a blip but a firm trend. Plus the trend towards pre-mixes with no sugar and a lower alcohol content like spritzes and hard sodas (this is what I buy now rather than a bottle of wine)
https://news.gallup.com/poll/693362/drinking-rate-new-low-alcohol-concerns-surge.aspx

As a result, wineries world wide are ripping out vines due to the wine glut.  I expect NZ wineries will do the same this spring.
https://www.rnz.co.nz/news/world/511279/australian-farmers-rip-out-millions-of-vines-amid-wine-glut
https://www.winebusiness.com/news/article/284711

They are also destroying inventory as unsold stock from previous years piles up.  Cheap wine doesnt cellar.
https://www.businessinsider.com/growers-ripping-up-vineyards-australia-california-too-much-wine-supply-2024-3

US tariffs may be the straw that breaks the camel's back for exporters, as the US wineries try to clear their own surplus volumes at discounted prices within the US. 

[Ferg]

Thanks for the comments Basil & KW.

Basil: if you look at a 4 year graph for FPH that tells a terrible picture....90c EPS down to 64c!    The point being we can paint any picture we like when looking at numbers.  Hence the reason I go out 10 years to look at the longer trends....plus covid lockdowns and the subsequent logistics disruptions have thrown up some anomalies that I believe we should look through.

KW: granted there are some structural issues in the industry.....but there are layers within every industry e.g. CMO vs TRA & 2CC are completely different beasts when talking about the automotive industry.  Likewise SUM, RYM and OCA are also different beasts in an industry that is facing under-funding and over-supply.  Not all participants are equally impacted, and also not all participants are created equal.

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On that note there are growers vs wine makers.  Excess grapes and an over-supply is bad for growers, but not so bad for wine makers.  Pre-existing grower contracts prevent some wine makers from benefitting straight away,  and wine makers such as DGL benefit from lower input costs.  Lock it in Eddie....FY26 should see improved gross margins for DGL assuming no black swan event.

Different categories within the market have different characteristics*....sales in the cheaper/value categories are collapsing as baby boomers a) die and b) change their tastes.  The premium categories are not as badly impacted as the value categories, and some premium+ categories are expected to grow.  DGL was one of the first major vintners to have its 2025 vintage on retail shelves, as other participants are still clearing prior vintages.

*FYI the wine categories are  value -> popular -> premium -> super premium -> ultra premium -> luxury+
Delegat Wines is in the 'super premium' category which resonates with the younger generations.

My base investment case in post #21 had EPS of 57c in 5 years time, which (if you read between the lines) should be easy for DGL.  Craigs put out their research today and they have EPS getting to my target of 57c in 2 years time.  That said, I don't necessarily rate the broking analysts given they thought the dividend would reduce....but there you have it.

[KW]

On another note, it seems that Sauvignon Blanc is no longer the go to white wine, its been replaced by Rose.  And Methode Traditionelle replaced by Prosecco.  I wonder what impact that will have on Marlborough?

[Ferg]

We quite literally have the world at our fingertips to look at this stuff.

My most recent chat with Grok about Rosé vs white wines:
https://grok.com/share/bGVnYWN5LWNvcHk%3D_4105f4c7-5d2b-4f98-af5e-b322268c4edd

I could ask more to dive deeper but it won't add much IMO.  But feel free to add your own questions....if so, I recommend keep the questions neutral to discourage a slanted response and share your link here.

[Ferg]

I went to the AGM yesterday and I was very impressed with the people I talked to.  They are very commercially focussed and astute operators IMO.  The recent price rise in the US has not negatively impacted sales volumes, and there are plans for continued growth in topline sales.  Growth capex will slow down for the moment as they assess ongoing market conditions so we should see another meaningful reduction in debts this fiscal year.  But this doesn't mean the growth story stops given the results of significant capex in prior years are coming to fruition.  It take 3 years for new vines to be at 60% expected yield and 5 years to be there or thereabouts for full production.  Meanwhile, their relatively new facility in Hawkes Bay still has plenty of capacity for future growth.

DGL have reconfirmed their profit guidance (per p19) for the current FY with underlying* NPAT between $50m & $55m.  An average of $52.5m puts DGL on a 1 year forward P/E ratio of 9 on today's SP of $4.73.

One takeaway from a shareholder's question is the replacement cost of the land and buildings for DGL is significantly higher than book value.  DGL is not in the property market and as such does not revalue its land and buildings, and chooses to use historical cost.  This is a legitimate valuation methodology under IFRS.  Whilst the true value of assets is likely much higher than book value, this is largely irrelevant for DGL given they are not what I would call a traditional property developer.

All in all .... very happy.

*Note: DGL report underlying profit which removes the IFRS imposed revaluation of harvested grapes to match the market price of bulk grapes.  Given DGL do not sell bulk grapes, this is an unnecessary financial process imposition on DGL which provides zero value to the business and shareholders.  The reported underlying profit quite correctly cuts through this IFRS nonsense IMO.

[Plata]

I was looking into this one heavily leading up to the full year and then it ran away from me. Good luck to you Ferg, if it creeps back down to the low 4s I may be tempted from my ETF cave for a bite. Anecdotally I would agree that under 30s do not seem to drink cheap wine in general, especially not in bulk at parties etc. Tends to be a bottle of a "nicer" brand at dinners or less animated affairs.