Thursday 14 January 2021 3 alcohol to lead the recovery

In his article today, Tony Featherstone looks at 3 alcohol stocks that a connoisseur might consider as key players in a global recovery in the next two years and also to benefit from -term structural change as demand for higher- boutique alcohol increases.

And in Buy, Hold, Sell – What the Brokers Say, there have been 5 upgrades and 5 downgrades from the 7 monitored by FNArena so far this week.

Sincerely,

Peter Switzer

Inside this Issue 02 3 alcohol stocks to lead the recovery 3 alcohol stocks to lead the recovery by Tony Featherstone 06 Questions of the Week Questions of the Week by Paul Rickard 08 Buy, Hold, Sell – What the Brokers Say 5 upgrades, 5 downgrades by Rudi Filapek-Vandyck 3 alcohol stocks to lead the recovery by Tony Featherstone 02

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. 3 alcohol stocks to lead the recovery by Tony Featherstone

Two wine bars are about to open in my area, joining a COVID-19 is contained, economic conditions are handful of others nearby that have started in the past projected to improve substantially. The industry is 12 months. So much for COVID dampening expected to recover over the five years through socialising. 2024-25.”

Trendy wine bars are becoming a bigger feature of Long-term structural trends appeal. Continued strong inner-city suburbs, and yet another sign of a growth in premium and craft beers is likely, as fast-changing liquor market, as consumer tastes and traditional beer consumption declines. Alcohol behaviours change. consumption per capita might be falling, but we’re drinking pricier alcohol that has higher profit margins. Today’s twentysomethings are likelier to drink craft beer and cider in trendy pubs or at home. Pleasingly, Next time at the bottle shop, look at how many craft fewer young adults drink alcohol compared to 20 beers and ciders are in the fridges. And how many years ago. boutique whiskies, gins and other spirits are being offered. Cyclical and structural change – and left-field events, such as Chinese wine tariffs – is creating opportunity With that will come even more of a tie-up between in Australian alcohol-related stocks, after heavy large brewers and independent providers, small share-price falls last year. alcohol outlets (such as wine bars and micro-breweries) and less demand for traditional beer COVID is driving cyclical trends. The pandemic and large pubs, some of which will have to reinvent initially boosted online and takeaway alcohol sales, themselves. as people stocked up and alcohol consumption increased. With pubs and hotels closed, both here Choice in alcohol stocks on the ASX is limited. and overseas, more beer and wine has been Treasury Wine Estates (TWE) is by far the largest consumed at home. player and United Malt Group (UMG) is an interesting new opportunity after its demerger from GrainCorp That’s not enough to offset the decline in alcohol (GNC). sales in pubs, clubs and restaurants, particularly overseas where COVID is rampant. European Union Australian Real Estate Investment Trusts that own beer sales dropped by at least 20% last year, pubs are another way to play the trend. ALE Property according to industry reports. Group (LEP) and Hotel Property Investments (HPI) are the main choices. Australian companies exporting alcohol or its ingredients, such as malt, have had a hellish time. Micro-caps include Digital Wine Ventures (DW8), But they have good recovery prospects when Good Drinks Australia (GDA), Broo (BEE), Australian European, UK and US lockdowns are lifted. Vintage (AVG) (owner of McGuigan Wines) and the impressive whiskey-focussed Lark Distilling Co (LRK) Industry forecaster IBISWorld said in a recent report (I’ll cover Lark in a future column). Maggie Beer on the beer-manufacturing industry: “Once Holdings (MBH) is another option due to its cellar

Thursday 14 January 2021 02 products, but is mostly a food company.

Here are ways to play a global recovery in alcohol sales in the next two years, assuming COVID is eventually contained in Europe and the US. And also to benefit from long-term structural change as demand for higher-margin boutique alcohol increases. Source: ASX 1. Treasury Wine Estates (TWE) 2. United Malt Group (UMG) China’s decision in November to introduce massive UMG has had a challenging 12 months after tariffs on Australian wine heaped more pain on TWE, demerging from GrainCorp in 2020 at the peak of the a former market darling. The has almost halved pandemic. The stock is down from a 52-week high of from its 52-week high to $8.98. $5.24 to $3.91. The tariffs basically shut TWE’s most lucrative export UMG is the world’s fourth-largest commercial markets, and a key profitability driver. Although China maltster with 13 processing plants in Canada, the accounts for less than 10% of TWE export volumes, it United States, Australia and the United Kingdom. is a bigger contributor to the company’s profitability, Customers for its malts include global brewers, due to sales of Penfolds and other premium wines. distillers, craft brewers and food companies. TWE is reallocating wine exports to other global Beer production accounts for 90 per cent of global markets. But that strategy will take time to implement, malt demand. Growth in emerging markets should particularly during a pandemic. Other export markets underpin demand for beer (and thus malt) over the are unlikely to replace all the lost income and next five years. China’s hard-line stance on trade with Australia is intensifying. Craft beer is important for malt producers because it requires higher malt inclusion rates and better-quality Lots of bad news is factored into TWE’s share price. malts. UMG is strong in US craft beer, a booming Morningstar expects the company to have limited growth market. income growth over the next two years and for its profitability to trail global wine leaders. UMG has been affected by lower demand for craft beer with governments here and overseas locking Although near-term will persist, Morningstar down on-premise alcohol consumption at different expects an earnings rebound in TWE over the longer times. With pubs shut, people bought more alcohol term and values it at $11 a share. for the home, but that tended to favour cheaper beers (with cheaper malts). TWE is bombed out due to all the negativity around China’s tariffs. That is an opportunity for contrarian, UMG’s revenue fell 2.1% to $1.3 billion in FY20, due long-term to buy into Australia’s wine star mostly to lower malt demand and a change in product at a depressed price. mix. The company expects subdued malt volumes until social-gathering restrictions are lifted and mass Chart 1: Treasury Wine Estates (TWE) gathering returns overseas.

UMG has done a good job during the pandemic. Its malt volumes are around 90% of pre-COVID levels, yet the share price is well off its 52-week high. The company has a strong market , is well run and

Thursday 14 January 2021 03 governed and is expanding nicely in Scotland and WINEDEPOT’s potential is connecting regional other markets. wineries to city-based customers. And using its technology to offer same/next-day wine delivery at UMG could be an unheralded winner when COVID is lower rates. Winery deliveries can be expensive and finally contained, craft-beer demand resumes its take 7-10 days to complete, which is too long for upward trend and global demand for the company’s many customers. malts recovers. WINEDEPOT has a network of strategically located Chart 2: United Malt Group (UMG) depots that hold inventory on consignment. Like other successful online marketplaces, it can potentially solve problems for suppliers and buyers, and take a lucrative cut as it connects them.

It’s early days for DW8 and many execution risks remain. But interest in boutique wineries is rising, just as demand for craft beers keeps growing.

A dominant online marketplace that enables smaller Source: ASX wine producers to tap a larger wholesale and retail market – and improves their supply-chain efficiencies 3. Digital Wine Ventures (DW8) – is yet to emerge in Australia.

I’m reluctant to include speculative, thinly traded That explains recent gains in DW8’s share price to 5 micro-caps in this column. But the more I look at cents. If the company can rapidly add more wine Digital Wine Ventures the more interested I am in its producers and customers, and deliver large gains in strategy and early performance. case volumes, the price has upside.

I emphasise that DW8, capitalised at $72-million, DW8 said it is unaffected by China’s wine tariffs. If suits experienced investors who understand the anything, the tariffs could benefit DW8 if more benefit, features and risks of investing in emerging Australian wine that was headed for China is sold companies. locally, at lower prices.

DW8 has big plans. It wants to invest in early-stage Chart 3: DW8 technology-driven ventures that can disrupt parts of the global beverages industry. Its core WINEDEPOT business uses a cloud-based, software-as-a-service platform to drive direct-to-market wine sales.

DW8 said WINEDEPOT shipped almost 25,000 wine cases in December, up more than 1,000% month on month (off a low base). The company’s orders more Source: ASX than doubled. Tony Featherstone is a former managing editor of It’s an good strategy. Add more Australian and BRW, Shares and Personal magazines. The international wine producers to the platform, attract information in this article should not be considered many more customers, and run faster than personal advice. It has been prepared without competitors. Then, get customers to spend more considering your objectives, financial situation or through digital marketing, loyalty promotions and wine needs. Before acting on information in this article clubs. consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do

Thursday 14 January 2021 04 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 12 January 2020.

Thursday 14 January 2021 05 Questions of the Week by Paul Rickard

Question 1: In terms of a 5-year investment at Answer: You can access the metrics in their investor current prices, does Santos (STO) or Woodside presentation of 10 December (for the purchase of the (WPL) present the better opportunity? I am quite additional properties, and the capital raising). These aware of WPL but less aware of the quality of Santos include: and their projects. Further, with Santos is the balance sheet strong enough to withstand another rout of the Forecast FY21 of 6.0% oil price if it were to happen? Proforma NTA of $2.92 per share 9% pro-forma gearing Answer: In the energy sector, Woodside (WPL) and Portfolio of 37 assets worth $952m, 96% Santos (STO) are my preferred plays. I think occupied, 5.2 year WALE Woodside has better assets, but there is always the question about whether they can execute these From FN Arena, broker consensus target price is enormous projects – the development and partner $3.045 (current price is $2.96). risks are so high. Woodside has been going to do “great things” for decades, but somehow, seems to The share purchase plan is only raising $5m and struggle to pull these off. Santos has cleaned up its closes on 22 January. It is at a fixed price of $2.817. balance sheet and is in a much stronger position than Given the discount to the current market price, small it was 24 months ago. size, yield outlook, and positive reaction to acquisitions, I would be investing. Santos is probably more exposed and leveraged to the oil price, so if you are bullish on oil, I would Question 3: What are your thoughts on Paygroup suggest Santos. If you are neutral on the oil price, I (PYG)? would go with Woodside (which is arguably a more defensive play). Answer: I don’t know a lot about payslip processor Paygroup (ASX: PYG) and can’t find any broker After the recent rally, the broker analysts now see research. My sense is that they are in a pretty downside for both companies. According to FN competitive space any before investing, you would Arena, they have a target price of $6.90 for Santos ideally want to get a handle on the group from their (last price of $7.51) and $24.15 for Woodside (last competitors. price $26.68). These target prices need to be interpreted with caution, as they are hugely sensitive Although they are not burning cash, they don’t have to their medium term forecast on oil prices. My take that much on hand ($5.3m on 30 September). This on this is that they are slightly more bullish on Santos could inhibit growth aspirations. than Woodside. Question 4: When do I receive my franking credits? Question 2: How do I access the metrics on ADI (APN Industria REIT)? What are your analysis and Answer: Franking credits are like a tax-offset so their assessment of its Security Purchase Plan issue price value is only realised when you complete your of $2.817? activities with the Australian Taxation Office. For example, if you have a SMSF in pension mode,

Thursday 14 January 2021 06 franking credits will increase the size of your tax refund after you lodge the Fund’s Annual Return. If you are slow to lodge the Annual Return, then you will be slow to receive the value of the franking credits. If you are an individual taxpayer, they will act as a tax offset and reduce the total amount of tax you will pay, or increase your refund, after you lodge your tax return.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Thursday 14 January 2021 07 Buy, Hold, Sell – What the Brokers Say by Rudi Filapek-Vandyck

In the good books inflows. Meanwhile, risk remains as the resignation of a longstanding portfolio manager could lead to net BORAL (BLD) was upgraded to Hold from Lighten outflows at and staff departures from Platinum’s by Ord Minnett second largest fund, the Asia Fund, highlight the analysts. They add some 70% of all funds under Boral has received an upgrade to Hold from Lighten management at Platinum concerns retail investors as Ord Minnett updates assumptions and forecasts who tend to be more loyal. for Australia’s building materials sector. While the broker believes the share price has “overshot” by RELIANCE WORLDWIDE CORPORATION (RWC) some margin, it remains concerned about the outlook was upgraded to Accumulate from Hold by Ord for the company’s fly ash operations in the US given Minnett structural decline of US coal-fired power. Because optimism seems warranted for Boral’s other Ord Minnett has upgraded Reliance Worldwide to operations, Ord Minnett believes an upgrade to Hold Accumulate from Hold with the stock having is now appropriate. Price target has lifted to $4.90 underperformed the broader market by some -11% from $4.50. since the release of a market update on October 29 last year. The broker believes a stronger Aussie OIL SEARCH (OSH) was upgraded to Buy from dollar and the rising copper price, both key input Hold by Ord Minnett costs for the company, can be held responsible for this. Offsetting the above, the company is expected to Ord Minnett has used a general sector update on release a very strong interim result in February. energy, including forecasts for Brent and electricity Target price moves to $4.50 from $4.20. Ord Minnett prices, to upgrade its rating for Oil Search to Buy from highlights that, on a constant currency basis, EPS Hold. The updated forecasts now work off Brent estimates have increased by 8% on average. priced at US$53/bbl in 2021 (up 17%), and US$50/bbl in 2022 and 2023 (up 11%). Most SUPER RETAIL GROUP (SUL) was upgraded to preferred sector exposures are Santos, then Beach Buy from Neutral by UBS Energy, then Oil Search. For Oil Search, the price target has moved to $4.58 from $4, supported by UBS has upgraded Super Retail Group to Buy from higher forecasts. Neutral on the belief investors are underestimating the duration of the spike in demand for the group’s PLATINUM ASSET MANAGEMENT (PTM) was products, with the broker specifically highlighting upgraded to Neutral from Sell by Citi domestic tourism benefits and car miles driven. There is the risk that (part of) demand has been pulled The worst is now behind Platinum Asset Management forward, the analysts concede, but they also believe predicts Citi; reason to upgrade to Neutral from Sell. this is already in the share price. The shares are seen Earnings estimates have moved higher; the new price trading at a discount while a gradual recovery in target of $3.90 compares with $3 previously. The international travel and favourable FX complement analysts do caution it may still be a while, if not a long a better than expected macro outlook, UBS while, before Platinum might experience material net argues. Higher forecasts have lifted the price target to

Thursday 14 January 2021 08 $12.20 from $11.30. cautious about further prospects for sustained earnings upgrades. In the not-so-good books NOVONIX (NVX) was downgraded to Hold from ACCENT GROUP (AX1) was downgraded Speculative Buy by Morgans to Equal-weight from Overweight by Morgan Stanley Morgans has pulled back its rating for Novonix to Hold from Speculative Buy. The target price has Time to take some profits, in the view of Morgan remained unchanged at $1.33. The downgrade Stanley. The broker has downgraded comes in response to a sharp rally in the share price, to Equal-weight from Overweight with a revised price which the analysts believe is due to optimism towards target of $2.60 (versus $2 in late November). The EVs and new batteries following the election of Joe analysts believe this company has executed well Biden as president of the US. Earnings estimates under unusual circumstances. Operational have been reduced due to delays to the company’s is expected to continue, but conditions contract with Samsung. While the company offers are nevertheless expected to normalise, probably by high growth potential, Morgans points to FY22. On this basis, Morgan Stanley sees the some uncertainty given it’s still in the early stages of risk-reward as balanced with an eye to the stock’s development. multiple. DPS forecasts have noticeably moved higher. REECE (REH) was downgraded to Lighten from Hold by Ord Minnett CREDIT CORP GROUP (CCP) was downgraded to Hold from Accumulate by Ord Minnett Ord Minnett has updated input assumptions and forecasts for Australia’s building materials sector. Ord Minnett has increased forecasts with the broker Reece has been the best performing arguing Credit Corp remains in a very favourable sector exposure but Ord Minnett now sees the share position with respect to the Australian purchased debt price as having overshot fundamental value. This ledger, or PDL, market. The company is seen explains the downgrade to Sell from Hold, while the enjoying clear positive near-term earnings price target improves by $1.50 to $13.50. momentum. The acquisition of a large portion of the purchased debt ledger assets and arrangement book The above was compiled from reports on FNArena. of Collection House (CLH) further fuels the broker’s The FNArena database tabulates the views of seven optimism. However, a strong share price performance major Australian and international stockbrokers: Citi, has led to a downgrade in rating; to Hold from Credit Suisse, Macquarie, Morgan Stanley, Morgans, Accumulate. The price target has jumped to $30 from Ord Minnett and UBS. Important: This content has $20. been prepared without taking account of the objectives, financial situation or needs of any COSTA GROUP HOLDINGS (CCP) particular individual. It does not constitute formal was downgraded to Neutral from Buy by Citi advice. Consider the appropriateness of the information in regard to your circumstances. Citi has downgraded to Neutral from Hold inspired by the share price appreciation in 2020. Today’s update does lift the price target to $4.30 from $3.75. While the analysts believe Costa Group remains well-positioned amidst rising prices and better growing conditions, elevated supply for blueberries continues to provide offset. The broker points out Costa Group has responded by changing the mix in berries it produces. Earnings estimates have risen (see also higher price target). The analysts are now

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