This column’s readers know I have commented many times on the boom in middle-class consumption in Asia and what it means for Australian companies. By 2030, Asia will represent two thirds of the global middle class – a megatrend that has profound implications.
The latest interim profit-reporting season showed the benefit of owning Asia-exposed mid-cap companies: The A2 Milk Company, Bellamy’s Australia, IDP Australia, Treasury Wine Estates and others starred. Investors are taking big bets on companies hinged to China’s growth.
It’s fascinating how this trend will play out when another 2 billion Asians have extra income by 2030. Upgrading diets is an obvious first step: witness soaring demand for dairy-related products and baby formulas in China, for example. Our agriculture is a clear winner.
Education is another priority. The boom in international students in Australia is evidence of this trend. More Asian families joining the middle class means greater demand for western university education. That’s great for education-related stocks, such as IDP.
Tourism is another winner. As people join the middle class, more discretionary income is devoted to travel. Witness the huge growth in inbound Asian tourism to Australia, particularly from China. This trend is just starting and will have more power and duration than the market realises.
Then there are luxury goods. Watch the growth in companies that have tapped into cashed-up Asian consumers in retailing or food and beverages.
I’m not suggesting billions of emerging-class consumers will be rolling in cash and spending it on western products. But even a small lift in incomes will send ripples across the global economy given the sheer size of emerging markets. It will be the mother of all booms.
The viticulture industry is a clear winner from this trend as more emerging-market consumers get interested in wine. Treasury Wine Estates’ soaring share price in the past few years shows the rocket that Chinese consumption can put under earnings and market values.
Australian Vintage, a smaller wine producer, has a lower market profile. Prominent wine maker Brian McGuigan established the company in 1992 and it merged with Simeon Wines in 1994. The business was known as McGuigan Simeon Wines until February 2008.
Australian Vintage exports wines from McGuigan, Tempus Two, Nepenthe, Miranda and Passion Pop (if you can call that wine!). About 40 per cent of revenue is earned in the UK and Europe, making Australian Vintage more of a play on those market than Asia at this stage.
Total sales growth of 12 per cent in Asia for the first half of FY18 was marginally below expectations but Australian Vintage expects to make up the shortfall in the next six months.
With that, sales to China grew 57 per cent in the year to December 2017, off a lower base and in line with wine-industry sales growth. But it shows the potential if Australian Vintage can build the profile of its key wines in the giant Chinese market.
An improving product mix is aiding growth. The Tempus Two label delivered 44 per cent sales growth and McGuigan’s premium Black Label brand is making bigger inroads in the UK.
Australian Vintage is also spending $19 million on infrastructure to improve operational efficiencies and, importantly, funding it out of surplus operating cash flow rather than taking on extra debt or issuing equity capital. That’s invariably a good sign.
The market liked the interim result: Australian Vintage shares have rallied from a 52-week low of 40 cents to 60 cents. A one-year total shareholder return (including dividends) of 42 per cent will please long-suffering investors who have held the stock for over a decade.
Some brokers have picked up the Australian Vintage story. South Australian firm Taylor Collison believes there is good potential for sales growth in the UK and rates the company’s improving sales mix thanks to rising Tempus Two and Nepenthe sales. Both products have higher price points and better profit margins.
Taylor Collison upgraded its price target for Australian Vintage to 68 cents in late February. That might prove a touch conservative if the firm keeps growing sales in the UK and Asia and if currency and growing conditions go its way.
As a micro-cap, Australian Vintage suits experienced investors who are comfortable with higher risk stocks. The Australian dollar/pound relationship is a key driver of earnings given the company’s UK exposure and currencies are notoriously hard to predict. Like other viticulture companies, Australian Vintage is exposed to weather and crop risk and the unpredictability of producing wines.
But the company’s long-term strategy to move from a bulk wine producer to a higher-quality wine maker is working and is needed to crack the expanding Asian middle-class market.
Australian Vintage is no Treasury Wine Estates. But it’s not priced like it either and could be one to watch as Asian and UK demand for Australian wine continues to grow.
Chartists will look for Australian Vintage to break through previous price resistance around 65 cents for confirmation that the next phase of its uptrend is starting.
Chart 1: Australian VintageSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at April 11, 2018.