Delegat’s Group Ltd (DGL) is the world’s #1 NZ wine exporter, exporting to North America (44%), the United Kingdom, Ireland and Europe (34%), and the Australia, New Zealand and Asia Pacific region (22%).
DGL has a market cap of $1,501,783,000 with an NPAT of $60.8m for FY20 which represents a 20% increase on the previous year due to a 9% increase in sales and favourable exchange rates. NPAT growth over the past 3 years has averaged 17%, though removing FY20 from the equation makes growth look flat over the prior 4 years. That said, it seems that increased investment in the business may be contributing to growth, and that continued investment planned for FY21 would suggest that the strategy may pay off. Based on this, I will assume a growth rate of 15% – 17% for coming years (the latter number being the company’s Outlook / guidance).
Despite owning a vineyard (Barossa Valley) in Australia, I am still unsure how the recent Chinese bans on Australian wine will affect DGL. On one hand, they will find less competition for their NZ wine in China, but on the other hand, they may have been previously benefiting from a joint marketing effort from competing Australasian wine producers in China. Obviously Barossa Valley wine will be negatively impacted by the ban. In any case (pardon the pun – DGL reports sales in terms of ‘cases’ of wine), it seems that wine shipped to China represents less than 22% of revenue (my assumption for modelling will be 10%).
Debt is not small (read: medium amount of debt), but seems serviceable to me. PE seems to be about 23-24 after removing cash (minus liabilities) – I talk about a range because it depends what you class as a liability.
I like that DGL own significant assets in land, which makes them a good investment in this booming property market. The value of the assets is almost half the share price, which puts a minimum bottom range on the valuation (excluding the risk of a property market drop) – that said, it’s not a possibility for an investor to get money from that land unless the company isn’t doing well, so I wont base my valuation on that – but, it does offer a moat to the business, which is a good thing.
I also like that growth has been solid and there is a plan to continue growth, which has been tested in the last year.
Given the above, I think there’s definitely value at the current price. I think that if there was more confidence in the growth strategy (such as if the current model was subscription based, and not at the whim of changing markets), they would be commanding a PE of up to 27. However, given the nature of markets and the low dividend return, the current share price seems about right as an upper boundary.
I probably won’t be investing in DGL because the long term dividend outlook (as a result from growth) doesn’t excite me and there are other investments with a safer and similar return / growth, such as Summerset or FPH (though there is post COVID19 risk to earnings drop for FPH… But also risk of further upside if the virus rages on, which is my bet).