Delegat's to push into China next year as part of global wine brand expansion

Delegat's Group [NZX: DGL], the listed winemaker, plans to put a toehold in China next year as part of a long-term goal of boosting overall sales by 52 percent in the next five years.

The Auckland-based company set up an in-market sales team in Japan this year and plans to do the same with three to four staff in Shanghai next year to push both its Oyster Bay and Barossa Valley Estate brands.

Delegat's outlined what progress it had made on its goal of becoming a leading global super premium wine business to a large group of shareholders at today's annual meeting in Auckland, many of whom took advantage of the range of wines available for tasting at the end of formal business. The company set a number of record performances in the 2014 financial year, with case sales of 2.03 million, operating profit of $31.4 million, and harvest up to 35,127 tonnes.

Managing director Graeme Lord, who took over from now executive chairman Jim Delegat in May, said the company has been researching the move into China for the past three years.

"The plan is to start in Shanghai for two years and then refine our business model before going to other regions in China," he said. Around 80 percent of the Chinese wine market is in red wine currently which provided good opportunity for Barossa Valley Estate, but Lord said Oyster Bay, which was a leading sauvignon blanc brand globally, could also be attractive in Shanghai.

He said the winemaker was on track to delivering 9 percent sales growth to 2.2 million cases in the 2015 financial year and operating profit of $34 million, up 8 percent on the previous year.

North America became the company's biggest market for the first time during the year, accounting for 38 percent of revenue compared to 33 percent from New Zealand, Australia and the Asia-Pacific region. Sales to Europe and the UK accounted to 29 percent.

Much of the anticipated sales growth in the next five years is expected to come from the North American market, which is projected to lift 86 percent by 2019, and the development of the Barossa Valley Estate brand which Delegat's bought for $28.6 million last year.

Over the past two years the company's capital expenditure has been $107 million. It has earmarked a further $86 million to be invested over the next year to build a 10,000 tonne capacity winery in Hawke's Bay, expansion of the existing Marlborough winery, and new vineyard development in Marlborough, Hawke's Bay and the Barossa Valley to meet projected increased demand.

That expansion will be funded by a mix of borrowings and retained earnings, though shareholders were concerned that the current board policy of paying out between 30 and 35 percent of operating profit would continue despite the long-term growth plan.

Currently the group has net debt of $153.7 million, up 14 percent on the previous year. Jim Delegat said it had also arranged new debt funding facilities from a syndicate of banks - Westpac Banking Corp, Bank of New Zealand and ASB - to provide up to $250 million in the 2015 financial year, rising to $350 million in 2016.

Not all of that was likely to be drawn down given its significant retained earnings, Lord said, but it gave the company flexibility to get the right balance in its currently conservative equity and debt capital structure.

Initially the company is pushing two super premium brands but Lord said there was potential longer term to consider acquiring another one or two complementary premium brands.

Delegat's share price is currently trading at $4.63, having risen 23 percent in the past year.

(BusinessDesk)