Looking for the Right Vintage
Today, we take a look at a vintner that has been flying under the radar, Foley Family Wines (NZX:FFW) which is part of a passion project by US billionaire Bill Foley. The New Zealand listed company is an integrated wine business which has delivered growth over the years via acquisitions, and has piqued our interest. That said, there are still headwinds in the sector which warrant our wait-and-see view and we Traffic Light the stock.
Members closely following our views on listed Vintners would note our recent exit from the space with the recommendation to take profits on Australian Vintage (FAT-AUS-874) in late May. We believed it to be a timely exit considering the headwinds faced by the company on a couple of fronts, and with some macro tailwinds potentially about to change direction.
Unfavourable weather in Europe as well as wildfires in California have driven wine production to its lowest levels in 56 years, providing a boost to Australasia producers as they were largely unaffected and in fact saw a bumper vintage.
However, the winds of change may indicate problems on the horizon as the bumper vintage caused many producers to flood the fast-growing Chinese market while regulatory changes seemed tilted against Australian Country of Origin wines, leading to market share declines. There have also been indications that European and American vintages are set to recover following a difficult year.
In light of these facts, the question may be asked why we are revisiting the sector? We see Foley Family Wines Ltd (NZX:FFW) as being a potentially interesting micro-cap exposure which has flown under the radar. FFW is an integrated wine company and is involved in growing grapes, winemaking, and bottling, and in the marketing and sales of premium wine brands in New Zealand (NZ).
Source: Foley Family Wines (NZX:FFW) Company Website
The company is currently listed in the NZX’s Alternative Market which is for small to medium-sized and fast-growing companies seeking to raise capital. In fact, the average (arithmetic mean) Market Capitalisation for companies listed here is circa NZ$24.89 million though FFW is the second largest at $77.29 million.
One of FFW’s vineyards (undisclosed location):
Source: Foley Family Wines (NZX:FFW) 09 November 2017 Company Presentation
The company has attracted our attention mainly due to deal making activity over the past year. Last October FFW engaged in talks to acquire Mt Difficulty Wines, an award-winning Central Otago based vintner as well as the Roaring Meg Brand. This was then followed with a confirmation from shareholders in November for a total consideration of NZ$55 million.
Since then, and as of this month, FFW is raising circa NZ$20 million in capital via a Share Purchase Plan (SPP) as well as a private placement to Lion New Zealand, the NZ unit of Japanese brewer Kirin. As of the latest announcements, Lion NZ will fund circa NZ$3.0 million and the remainder will come from the SPP. The shares are to be issued at a price of $1.48 per share.
The entrance of Lion is particularly interesting given it is the largest alcoholic beverage company in New Zealand. The drinks behemoth has clearly spotted something in Foley’s product offering and underling growth potential.
This is also as the acquisitions have provided a clear scale boost to Foley, and with the company’s profile with investors about to be raised. The company is set to graduate to the main listing of the New Zealand share market, with plans to do so in November of this year.
The company also has a lower relative risk, in our view, compared to the other players considering that it has strong US financial backing and distribution capability. In fact circa 40% of its revenues are derived from the US. This makes it less vulnerable to Brexit issues or regulatory shifts in China.
That aside, the company also has good leadership in our view, with the founder, billionaire Mr William “Bill” Foley taking a highly proactive role in the business. We also like that Mr Foley has a track record of steering many of his businesses to profitability and has shown commitment throughout the years that he will weather the storms.
Case in point was in the 90’s when his failing Santa Barbara vineyard was losing money on every bottle sold. He proceeded to rip up and replant all the vines, buying grapes from other vineyards until he managed to turn around the operation over a 7 years period into a very profitable business (if this doesn’t show commitment, we don’t know what will). He also has something of the Midas touch in many arenas, and backed the Vegas Golden Knights ice hockey team, which made the Stanley Cup final in 2018, its inaugural season.
Company Overview
First off, before we delve in deeper, we want to highlight that the company we are looking at specifically is “Foley Family Wines Limited” (FFW) which should not be confused with its other similarly named parent companies: “Foley Family Wines Holdings Inc.” (FFWH) and “Foley Family Wines Holdings, New Zealand Limited” (FFWH-NZ) nor its US cousin, “Foley Family Wines Inc.” which operates specifically in California and operates as a subsidiary of FFWH.
FFWH, is the ultimate parent company with an 80.47% stake in FFWH-NZ which also owns 66.54% of FFW. This ultimately puts FFWH’s control of FFW at 53.54%.
With those confusing titbits out of the way, we now look at the group’s history:
The Foley Family Wines group was established in 1996 by billionaire William “Bill” P Foley II, pictured below, with an initial acquisition of the Lincourt Vineyards in California’s Santa Ynez Vallet which was known for its chardonnay wines. Mr Foley owns 59% of FFWH.
Since then, the company has grown to encompass over 27 brands in the both US and NZ with the vintner group counting amongst the largest wine companies in the US producing circa 2 million cases annually and over 1,200 hectares of vineyards worldwide.
Image Credit: Bizuayehu Tesfaye, Las Vegas Review Journal
However, before we discuss further the background, we want to highlight to prospective investors that buying into FFW would only grant a more limited exposure as FFW only overs NZ operations and does not include the US vineyards.
This is because the current incarnation of FFW was the result of a merger in September 2012 between Mr Foley’s Foley Family Wines NZ Limited and of another vintner and listed company, New Zealand Wine Company Limited (formerly Grove Mill) which then led to its listing in the NZ Alternative Market.
And in that time to present, FFW has since acquired the following brands: Grove Mill, Vavasour, Clifford Bay, Dashwood, Goldwater, Te Kairanga and among others pictured below:
Source: Foley Family Wines (NZX:FFW) Company Website
Compared to the aforementioned 27 brands, the prospective investor will also only have exposure to 2 major vineyards, the Marlborough (Grove Mill & Vavasour) and the Martinborough (Martinborough & Te Kairanga) vineyards.
The Marlborough location has 229 hectares leased/owned with 206 hectares directly in production whereas the Martinborough location has 190 hectares with 146 in production amounting to 352 hectares and produces between, 5,300 to 5,900 tonnes (2016 outlier: 6,954 tonnes) of grapes.
Aside from its impressive growth, and a difficult and highly decentralised market notwithstanding, is the close involvement of its billionaire founder, who is well known for his long tenure in Fidelity National Financial (FNF), originally a small title insurance firm, He helped turn it into the country’s largest provider of commercial and residential mortgage and diversified services, and a Fortune 500 company.
Bill Foley has quite a varied career starting in the US Air Force then practiced Corporate Law prior to building his insurance firm. He also has numerous interests and include golf courses, hotels, ski resorts, steak houses, fast-food restaurants and auto parts manufacturers as well as a professional ice hockey sports team, the Vegas Golden Knights.
Aside from his business acumen and proven track record, we believe Mr Foley is well suited to the difficult wine business. His passion for it is clear – he in fact stepped down in mid-2007 from the CEO role at FNF to pursue his wine interests full time. His track record as a value investor, skilled at turnarounds is also evident.
Case in point, was the turnaround he oversaw at the Hardee’s burger chain in the US. He was Chairman of CKE Restaurants (owner of the Cars’ Jr chain) which bought the chain in 1997 for around $327 million. The group has since thrived and has grown to more than 3,000 branches in 42 US states and 28 countries.
A more salient and recent case is the Firestone Winery which despite its 46-year history saw difficulties up until being acquired by the FFWH group in 2007. Foley’s efforts to scale back production and concentrate on quality has seen the brand rise back up the industry ranks.
On the other hand, there is an element of key man risk with Mr Foley (who turns 74 in December). However, we do want to point out that, professional managers aside, 2 out of his 4 children are actively involved in the business with the same degree of passion, and similar expertise in the wine business.
His daughter, Courtney, oversees the production at Foley Sonoma in Geyserville and his son, Patrick, makes the wines for Foley Johnson Wines in Napa. We believe this to be a primary factor in reducing key person risks in the interim.
Foley Family Wines (NZX:FFW) Recent Financials – Interim FY18 (Note: Figures are unaudited)
Moving on, looking at financials and starting from the top, revenues for the first half (to 31 Dec 2017) were up 21.1% year-on-year to $20.11 million on the back of much higher case volumes in Australia, New Zealand and China which were up 24% year-on-year or by 43,000 cases to 222,000. Breaking down revenues, actual sales revenues from bottled wine were up some 30% year-on-year to $18.26 million.
Source: Foley Family Wines (NZX:FFW) 27 February 2018 Company Filing
Note that in interim results, the company doesn’t provide explicit breakdowns of their case sales on a regional basis, the closest comparable numbers we can find are in the annual reports.
The company’s largest market is North America (Canada & US) which covers between 30% and 38% of sales and in recent years has seen an uptick due to product launches being well received as well as the solid market knowledge of management. This is then followed by the NZ market which occupies circa 25% of the total figure and much for the same reasons.
The third spot is occupied by the Australian market which, in recent years, has now dropped to about 18% from the historical 25% levels due to increased competition with more private labels in the space. The 4th spot would now be coming from the European market (EU + UK) which contributes circa 16-17% of revenues and has seen some headwinds due to the Brexit issue. The remainder would be the Rest of the World which includes a sizable contribution from China at around 5%.
If historical trends are any indicator, and reading on management’s tone, we believe that revenue contributions going forward will be very much the same.
Moving on down, the company reported solid EBITDA growth at the interims, more than doubling last year’s figure to $1.587 million on the back of higher volumes and a better product mix. That aside, the company reports that the current period was impacted by non-recurring legal costs of $227,000 in relation to the proposed Mt Difficulty acquisition.
All in, the company reported NPAT of $298,000 compared to last year’s $323,000 loss. Though we want to point out that last year was impacted by a non-recurring earthquake related expenses of $989,000 in relation to the losses incurred as a result of the significant damage sustained at the Grove Mill Winery in the Culverden earthquake on 14 November 2016.
Summary
We believe that Foley Family Wines (NZX:FFW) is an interesting small cap stock in the wine sector. The company has flown under the radar, but this may be about to change following an investment by kiwi drinks behemoth Lion, and with a potential move to the main board of the New Zealand stock market.
For now we are adopting a wait-and-see approach and Traffic Light Foley Family Wines (NZX:FFW) until such time that we believe an appropriate buying opportunity arises.
