Money: Grape expectations

Romance and investments are two things you would not normally put together - unless you were thinking about putting money into wine.

But it seems that is what investors have been doing over the past couple of years. There have been a string of potential partners to strike up a courtship with.

Besides the main listed stocks - Montana, DB (which owns Corbans) and, until recently, Nobilo - there have been many second board listings, including Villa Maria's Terra Vitae, Delegat's Oyster Bay vineyard, Farmers Mutual's Brackenfield and Medway partnerships and now its latest offering, The Crossings.

When it comes to wine, love is in the air.

The wine sector has become a successful glamour export industry. New Zealand wines are winning awards overseas and are in demand in Britain and the United States.

The business case for investing in wine is compelling.

New Zealand produces sought-after "New World" wines, and the demand for them is growing faster than supply.

Although output is tiny on a global scale, New Zealand is increasing its share of the world market. Our wines attract what have been called "super-premium" prices.

At $US3.29 ($7.73), New Zealand has the highest average price per litre of wine exported of all the New World countries, says International Wine Associates, a California wine distributor.

Another report says New Zealand wines generate 38 per cent more revenue per litre than Australian exports.

All the elements - price, demand and supply - augur well for the industry.

But, how do you invest in wine?

The options can be split into four groups.

The first is buying into the listed wine stocks. These are the bigger and more integrated companies that are traded on the main board of the stock exchange.

Many advisers suggest that if you consider investing in a listed wine company, the range of potential shares should be expanded to include Australian companies such as BRL Hardy and Southcorp.

The next group are those companies that have some integration in their business, such as Lintz, The Crossings, Grove Mill, Palliser Estate and Te Kairanga. Many are quoted on the secondary market and have had reasonable share price rises.

The other group involves growers such as Oyster Bay, Terra Vitae and Seddon.

The fourth option is to invest directly in a wine enterprise.

An investor needs a relatively small amount of money to invest in either of the first three options but a much more substantial sum for a direct investment.

When making the investment decision one of the big questions is, what part of the industry do you want to own? The options are putting your money into a vineyard, or having a stake in the winemaking.

The clear difference is that when you put your money into the grape-growing side, you are a commodity producer. The business has to ensure that it grows great grapes, and has a good supply contract.

However, to get the best returns it makes sense to invest in a business at the manufacturing end.

A look at the trading history of some of the stocks on the secondary markets bears this out.

"Companies that are integrated, in that they are involved not only in growing but also produce wine, have performed better and have been more popular with investors," says Craig and Co research manager Cameron Watson.

Te Kairanga has performed strongly, while Oyster Bay, which is just a grape-growing business, has a net asset value of 240c, yet its shares are trading at a 30 per cent discount.

Mr Watson says that to realise these discounts, the vineyard operators have to develop a wine-making arm.

This is the approach Farmers Mutual has taken with its Medway and Brackenfield vineyards.

The partners agreed to sell the vineyards to a new company, The Crossings, which will plant more land - bringing the total to 120ha - and establish a winery.

Who invests in wine?

The perception is that the type of people who put their money into wine are either wine snobs or very rich. The reality is different.

Farmers Mutual chief executive Michael Millar says people investing in wine do have a high level of income but are in the workforce (rather than retired), and have other investments.

The idea and romance of owning a vineyard is a strong factor but investors also want their money to perform as a good investment.

And while the business case for wine is quite attractive, there are some risks.

A sharebroker's report has questioned whether New Zealand can maintain, over the long term, its super premium prices in the international market.

It says it is likely that the demand for New Zealand wine short to medium term will continue to be strong.

But it says even a small drop in the average price achieved overseas will have a significant impact on the industry's overall earnings before tax and interest.

"If average prices fall by 50c [a litre] the earnings before interest and tax impact is over $25 million," the report says. Mr Millar acknowledges the risks but says that as long as the industry continues to keep up its quality, integrity and brand, it should maintain its super-premium position.

People considering such an investment should be realistic about the financial returns and remember that some vintages never reach their full potential, while others can exceed expectations.

*Philip Macalister is editor of online money management magazine Good Returns. www.goodreturns.co.nzIt provides news on managed funds, mortgages, superannuation, insurance and financial planning.