The Australian Wine Industry Essay Example for Free

The Australian booze Industry EssayThe Mcguigan come to in the Australian wine-coloured Industry goes back four gene dimensionns. Owner Patrick McGuigan the first of four generations to compute the wine patience was a dairy farmer by trade. Percy McGuigans c areer was spent at Penfolds. precedent to retirement in 1968 Percy purchased Dalwood estate and renamed it Wyndham Estate. Two long time later he sold it to his son Brian McGuigan. Brian McGuigan has been involve in the wine application for over thirty five years.He developed Wyndham Estate Wine Comp any in the Hunter Valley and built sales in excess of 1,250,000 cases to become the jumper lead exportinger of Australian wine. In 1992 Wyndham Estate was acquired by French Company ? Pernod-Ricard group, Orlando Wines. Later that year, after the learning Brian McGuigan open a new company McGuigan Wines as a publicly listed company. In 2001 McGuigan wines merged with Simeon Wines to create Australias quaternary larg est wine company and in October 2003 McGuigan Simeon Wines Limited (MSWL) purchased Miranda wines.MSWL distributes to over 25 countries including United States, Ireland, New Zealand, Germany and other mainland countries in Europe. They export over 20 million litres (30% of MSWL wine production) annually.(www. mcguiganwines. com. au) MSWL reported a 2004/05 dismiss boodle of $35. 9 million, down 10. 8% on the previous year. Brian McGuigan believes this is mainly due to the oversupply of grapes and does not foresee any positive movement in grape prices for the next two years. (AAP Newswire 13/9/2005) ?MGSW is targeting focus on a number of things but in particular costs, costs, costs. He said he had been ? embarrassed by the 2004/05 result as a stronger local currency and an over supply of grapes in Australia and overseas weighed on profit growth. (AAP Newswire 13/9/2005) fiscal Analysis The fol griming key fiscal ratios for MSWL are for the occlusion 2003 to 2005.(MSWL yearly monetary give out 30 June 2005 30 June 2003) Working Capital 2005 ($000)2004 ($000)2003 ($000) 377418 ? 124905 = 252,513 332319 135304 = 197,015 255854 ? 105775 = 150,079 Profit readiness Profit mete Ratio 2005 ($000)2004 ($000)2003 ($000) 45112 368050 = 12. 2% 40248 305708 = 13. 1% 32204 283450 = 11. 3% Gross Profit Ratio 2005 ($000)2004 ($000)2003 ($000) 91111 368050 = 24. 7% 88931 305708 = 29% 74096 283450 = 26%.Return on ordinary shareholders equity ratio 2005 ($000)2004 ($000)2003 ($000) 35895 (361288 + 332641)/2 35895 346964. 5 = 10% 40248 (332641 + 270452)/2 40248 301546. 5 = 13% 32204 (270452 + 226093)/2 32204 248272. 5 = 12. 9% Return on Assets 2005 ($000)2004 ($000)2003 ($000) 35895 (681471 +625006)/2 35895 653238.5 = 5. 4% 40248 (625006+566916)/2 40248 595961 = 6. 7% 32204 (566916+471306)/2 32204 519111 = 6. 2% Asset Turnover 2005 ($000)2004 ($000)2003 ($000) 368050 (681471 +625006)/2 368050 653238. 5 = . 56 305708 (625006+566916)/2 305708 595961 = . 51 283450 (566916 +471306)/2 283450 519111 = . 54 Operating Expenses to Sales Ratio 2005 ($000)2004 ($000)2003 ($000) 30809 368050 = 8. 3% 31953 305708 = 10. 4% 18937 283450 = 6. 6% Liquidity Ratios veritable Ratio 2005 ($000)2004 ($000)2003 ($000) 377418 124905 = 3.021 332319 135304 = 2. 451 255854 105775 = 2. 411 Quick ratio 2005 ($000)2004 ($000)2003 ($000) 12728+361288+ 120698 124905 = 494714 124905 = 3. 961 2654+332641+ 126534 135304 = 461829 135304 = 3. 411 773+270452+ 125028 105775 = 396253 105775 = 3. 741 Current hard currency Debt Coverage Ratio 2005 ($000)2004 ($000)2003 ($000) 2523 124905+135304/2 = 2523 130104. 50 = 0. 019 times 5768 135304+105775/2 = 5768 120539. 50 = 0. 047 times (10040) 105775+119523/2 = (10040) 112649 = (0. 089) times Receivables turnover ratio 2005 ($000).2004 ($000)2003 ($000) 320422+47628 120698+ 126534/2 = 368050 123616 = 2. 97 times 262025+43683 126534+125028/2 = 305708 125781 = 2. 43 times 248381+35069 125028 +87486/2 = 283450 106257 = 2. 66 times add up coll ection plosive speech sound in days 2005 ($000)2004 ($000)2003 ($000) 365 2. 97 = 123 days 365 2. 43 = 150 days 365 2. 66 = 137 days list turnover 2005 ($000)2004 ($000)2003 ($000) (276939) 60018+51176/2 = (276939) 55597 = 4. 98 times (216777) 51176+32271/2 = (216777) 41723. 5 = 5. 19 times (209354) 32271+15817/2 = (209354) 24044 = 8.70 times Average Days in Inventory 2005 ($000)2004 ($000)2003 ($000) 365 4. 98 = 73. 29 days 365 5. 19 = 70. 32 days 365 8. 70 = 41. 95 days Solvency Ratios Debt to total assets ratio 2005 ($000)2004 ($000)2003 ($000) 320183 681471 = 46% 292365 625006 = 46% 296464 566916 = 52% Cash debt coverage 2005 ($000)2004 ($000)2003 ($000) 2523 320183+292365/2 = 2523 306274 = 0. 008 times 5768 292365+296464/2 = 5768 294414. 50 = 0. 019 times (10040) 296464+245213/2 = (10040) 270838. 50 = (0. 037) times measure Interest Earned ratio 2005 ($000)2004 ($000)2003 ($000) 45112+1232+ 176690 1232+176690 = 223034.177922 = 1. 25 times 51311+6004+ 145383 6004+145383 = 202 698 151387 = 1. 33 times 46071+2559+ 175071 2559+175071 = 223701 177630 = 1. 25 times release Cash Flow 2005 ($000)2004 ($000)2003 ($000) 2523-(22211) = (19688) 5768-(25006) = (19238) (10040)-(18913) = (28953) Summary of Financials (Working Capital, Profitability, Liquidity Solvency) Working Capital Management The working capital has incrementally change magnitude from 2003 to 2005. This is due to the rapid expansion of the company during this period and in particular the acquisition of Miranda Wines and a bottling prove at Merbein bordering Mildura.This expansion has required a significant increase in working capital. MSWL has a working capital of $252. 5 million for the financial year ended June 30 2005, which indicates that the company has an ability to pay its liabilities. (MSWL Annual Financial reputation 30 June 2005 30 June 2003) Profitability The decrease in damages on assets from 6. 2 percent in 2003 to 5. 4 percent in 2005 can also be attributed to the rapid expans ion of the business during this period. The return on these assets may take up to three financial years to realise their full earnings po 10tial.The 1 percent decrease in the profit coast ratio indicates that the decrease in return on assets was due to the dec cable system in net profit rather than increase assets. Return on shareholders equity has decreased from 13% in 2003 to 10% in 2005. ROE20052004 McGuigan 10%13% (June 04) South Corp-5% (Dec 04) Evans Tate-12% (Jun 04) When benchmarked against Southcorp and Evans and Tate the results are 5% and 12% respectively. (MSWL Annual Financial Report 30 June 2005 30 June 2003, half(a) year report Southcorp December 2004 Annual Report Evans Tate 2004).The downturn in net profit for 2005 has had a negative effect (decrease) on the following ratios ?Return on Ordinary Shareholders honor ?Return on Assets ?Profit Margin ?Asset Turnover ?Gross Profit (Kimmel et al, 2003 p 520, direct 11. 22) Liquidity Analysis of the current ratio in dicates that it has been consistently high during the last three years ranging from 3. 02 to 2. 4 (2003). This can be explained by the high inventory levels carried by MSWL resulting from the processing and bottling of the over-supply of house servant grapes. (MSWL Annual Financial Report 30 June.2005 30 June 2003). Deloitte (2005) suggest that all wineries have a high current ratio as the wine sector is forced to hold high levels of inventories and generally has high current receivables and low current debt, as compared with other industries. The quick ratio indicates that the levels of liquidity for MSWL have remained relatively stable at 1. 2 times. This suggests the company is able to repay short term debt. However, it needs to be recognised that this phase of 1. 2 does not include the contribution of shareholder equity. Including shareholder equity inflates this figure to 3.96 times. (MSWL Annual Financial Report 30 June 2005 30 June 2003).The companys collection period of 1 23 days is the lowest for the period 2003 to 2005. However, it remains unimaginable high, perhaps reflecting the depressed state of the market. Deloitte, 2005 state that the intensified competition, high levels of production of red wine and increase consolidation within the retail sector are some of the factors that have presented financial challenges for the Australian Wine Industry over the past 12 months as evidenced in the 2004 Annual Financial Benchmarking analyse.MSWL, Australias tierce biggest listed wine maker has clearly suffered during this retail consolidation and continues to experience slow payment for its product via the domestic distributor duopoly (Woolworths and Coles-Myer). (MSWL Annual Report 30 June 2005 June 2003) Inventory turnover has decreased from 8. 7 times in 2003 to 4. 98 times in 2005. The results for 2005 indicate that inventory was sold and replaced approximately 50% less lots than during 2003. This result reflects the oversupply of grapes in the market for the last two years. (MSWL Annual Report 30 June 2005 June 2003).Average days inventory has also been impacted by the oversupply of grapes with results increasing from 41. 9 days in 2003 to 73. 3 days in 2005, a 57% increase. These higher inventory levels also increase repositing and reside costs. (MSWL Annual Report 30 June 2005 June 2003) Solvency Debt to equity ratio has decreased to 46% in 2005, indicating that 46% of assets have been provided by creditors. Debt to Equity Ratio20052004 McGuigan 46%46% South Corp-42% Evans Tate-64% When benchmarked against Southcorp and Evans and Tate the results are 42% and 64% respectively.(MSWL Annual Financial Report 30 June 2005 30 June 2003, Half year report Southcorp December 2004 Annual Report Evans Tate 2004) Times interest earned ratio has declined from 1. 33 in 2004 to 1. 25 in 2005, indicating that the companies interest set down was 1. 25 times the amount needed to cover interest expense. The reduction in the times interest earned ration is a reflection of the reported decline in profit at the thirtieth June 2005. (MSWL Annual Report June 30 2005 June 2003) Free cash flow has been negative for the last three years leaving limited opportunity for expansion.It would be unlikely that MSWL would make any major acquisitions in the near future but rather focus on reducing cost and processing efficiency. (MSWL Annual Report June 30 2005 June 2003) Significant key opportunities and risks for the company and investors in McGuigan Opportunity MSWL primary focus is on change bottling efficiency and cost by relocating their wine devising bottling and storage to the newly acquired facility near Mildura. ?The acquisition consolidates our export production and packaging operations around the inland port of Mildura.Its proximity of our major wineries bequeath bring significant operational efficiency gains and transport savings. (ASX Announcement 25/1/05) MSWL is negotiating with other wine companies wa nting to outsource the production of their less expensive firebrands. ?This is very good for us because were a producer of a lot of that product and we look to continue to expand our business. (Adelaide Advertiser 26/1/2005) MSWL has see significant increases in export sales for the period 2004 to 2005. MSWL states, ?Total export sales, bottled and bulk, change magnitude by 34% in dollar terms with significant increases in the UK/Europe and the United States. Actual sales the great unwashed by 40%. (MSWL Annual Financial Report 30 June 2005). As the export trend is increasing with new markets such as Japan this would be a significant opportunity for MSWL to further trespass on overseas growth. (IBIS World Pty Ltd). Risks Distribution and operating costs are high therefore creating efficiencies to compact expenses is essential. Net cash provided by operating activities has decreased in the period 2004 to 2005. (MSWL Annual Report June 2005).MSWLs proceeds is in direct competi tion from Australian wine packager and premium cork specialist Vinpac International, who service 183 Australian wine makers (www. vinpac. com. au). MSWL would need to remain competitive in cost and quality. Competition is increasing at the retail shelf space level due to the proliferation of global wine production over the past ten years. As production increases from South Africa and South America in the next several years, grape prices are likely to fall and will force Australian wine makers to reduce prices, which is adding to earning uncertainty.(IBIS World Pty Ltd). Other financial and non-financial factors that impact upon McGuigans performance and attractiveness as an investment opportunity. Exchange rate movements are leading to increased import competition affecting the Australian dollar returns that local producers receive from exports. They also impact on the demand for imports by altering their competitiveness. (IBIS World Pty Ltd). ?To a degree, the past decade has been subsidised by the go Australian dollar. Now we have to pull our belt in and be super competitive.(Adelaide Review 2/9/2005). Branding is imperative for success in this industry since consumers typically choose a brand that they are familiar with, and hence, know that they can rely on its quality and taste. (IBIS World Pty Ltd). MSWL domestic and export bottled sales increased reflecting the continued focus on brand awareness. (MSWL Annual Report June 2005). Ownership of industry participants has included a phase of mergers and acquisitions, with larger firms taking an increase control of the market.This indicates consolidation, and an industry that is rapidly coming maturity therefore marketing, distribution and export capabilities are growing in importance. MCWL would need to ensure they move on up with this growing industry pattern. (IBIS World Pty Ltd). Limitations of the analysis implications of these limitations for any investment decision Industry variegation The financial analysis of MSWL has been benchmarked against two other known competitors, Southcorp and Evans and Tate. However, diversification may impede comparison with both competitors and industry.For example, Southcorp has diversified into other industries over the last twenty five years which hinders comparisons with MSWL who remain primarily think on the wine industry. Alternative Accounting Methods Variations in accounting methods may also impact financial analysis when compared with other companies. For example, depreciation on Property Plant and equipment is elaborated using straight line depreciation for MSWL and Southcorp whilst Evans and Tate have used a combination of straight line and reducing balance to calculate depreciation between 2003 and 2004.Cost Cost is traditionally not adjusted for price level changes and ofttimes unadjusted from different financial periods which leads to invalid representation of inflation or deflation (Kimmel et al 2005). MSWL has consolidated root word in the form of bottling and wineries, whilst sourcing grapes from owned vineyards rather than contract growers representing a short to medium term cost. However, MSWLs unsloped integration allows it to control the volume of its wine sold on the market thus regulating revenue enhancement growth.The inflationary increases in cost can be negated with the strategic sales of product at margins higher up these cost price increases. In conclusion the above limitations and their implications need to be taken into consideration when making an investment decision. Certain analyses can mask the true investment potential of a company. Consideration of the industry and its trends, the accounting method employed and the costs involved in doing business all require mensurable deliberation before an investment decision can be made.Appendix A.References www. mcguiganwines. com. au Accessed 12/10/05 AAP Newswire 13/9/05 MSWL Annual Financial Report 30 June 2005 MSWL Annual Financial Report 30 June 2003 Half year report Southcorp December 2004 Annual Report Evans Tate 2004 Kimmel et al, 2003 p520, figure 11. 22 Deloitte Annual Financial benchmarking Survey for Australian Wine Industry ? Vintage 2004 ASX Announcement 25/1/05 Adelaide Advertiser 26/1/05 IBIS World Pty Ltd accessed 1/11/05 www. vinpac. com. au ? accessed 1/11/05 Adelaide Review 2/9/05 Kimmel et al 2005.