PAARL-based liquor company KWV has certainly had its share of optimistic backers. And CBN can report that only last month a new investor emerged – an astute entity whose participation could
suggest KWV’s turnaround is finding traction.
But first some history… More than a decade ago, retail tycoon Christo Wiese (of Shoprite and Pepkor fame) saw value in the business, post its transformation from a co-operative into a corporation, and snapped up a significant minority stake. Wiese later opted to swop his KWV shares for a holding in PSG, who bundled the KWV shares in its specialist agri-business Zeder. Zeder went on to accumulate more shares in KWV until it held a position of influence. Zeder was obviously a driving force in convincing KWV to unbundle its valuable minority interest in rival liquor business, Distell.
Distell – with its reliable dividend payments and consistent performance - was often the difference between KWV trading in the red and posting a profit. The truth was that Distell effectively masked inefficiencies in KWV’s own brandy and export wine operations.
Although KWV underwent some strenuous structural changes under former CEO Thys Loubser (who made good progress in simplifying the business) it seems sustainable profitability remained elusive. This might well have prompted Zeder to support a proposal to merge KWV with Pioneer Food Group’s beverage subsidiary, Ceres Beverage Company (CBC.) In terms of cost efficiencies in production, marketing power and distribution synergies, the proposed merger made sense. But some KWV shareholders (including many original farmer shareholders) believed they were being sold short – a notion spurred by the fact that Zeder was also a major shareholder in Pioneer. In any event, the deal was blocked – prompting Zeder to sell its entire holding in KWV to Cape Town-based empowerment group Hosken Consolidated Investments (HCI.) Zeder banked a profit well clear of R100m on the deal, and many pundits believed HCI had been sold a ‘lemon’ in view of KWV’s unconvincing profit performances.
The share price has slunk back from the 1200c.share that HCI paid for Zeder’s stake to roughly R8,25 at present. That has, though, allowed HCI to bolster its shareholding considerably – so much so that now there is no doubt who is large and in charge of KWV. HCI has further refined the cost base at KWV, but more importantly diversified the core wine and brandy offering by introducing high volume Ready-to-Drinks (RTDs) like jimmijagga and KWV & Cola.
In the nine months to end March this year KWV managed returned operating profits of R3,5m – a commendable turnaround from a scary R80m loss in the previous financial year. Writing in the company’s annual report, KWV CEO Andre van der Veen said the work at the company was far from being done. “Given that we operate so close to our break-even, our return to profitability will be temporary if we do not maintain the momentum that we have initiated.” He pointed out that in reality KWV’s results remained below forecasts and expectations … and far below an acceptable return on the company’s substantial assets.
He stressed the turnaround strategy still hinged on growing volume rather than cutting costs in order to balance the revenue/cost equation. “Most CEOs would like to manage larger rather than smaller businesses, and when faced with this equation the default answer is volume growth.” Van der Veen said that in order grow volume, KWV needed new markets, which were growing and had the potential to grow at even faster rates in future. The company also needed products in its portfolio that endured a shorter working capital cycle – like the recently launched RTDs – because traditional wine markets would continue to be highly competitive.
He noted that in some instances wine was already sold below cost. But at least KWV’s South African wine sales improved in the key branded categories, with wines marketed under the KWV brand showing consistent growth. Van der Veen argued: “Undoubtedly consumers trust the KWV brand in a very confusing and over-supplied segment.” He said the next challenge was to ensure KWV’s plans to sell more premium wines gained momentum. “Most South African wines are sold in the value category, and in boxed format. The margins are very tight in this segment, and in order to grow profits we need to become more relevant in the premium wine arena.”
Unfortunately KWV’s other ‘traditional’ leg is looking distinctly shaky. Van der Veen said the brandy category in SA was in decline, with whisky now selling more litres than brandy. But he said KWV continued to increase its market share through investment in a dedicated sales force and more dynamic pricing. “We expect the competition in this category to become even fiercer, and we constantly have to review our production efficiencies, costing and selling prices to ensure that we maximise the contribution from brandy.”
Van der Veen said KWV’s RTD portfolio remained a work in progress. He said the jimmijagga wine spritzer gained acceptance in niche categories, but had yet to achieve mainstream awareness. Van der Veen said the recently launched KWV & Cola had set a new benchmark for the category and received an award for the most innovative product in 2013. “Initial volumes are promising and the perception that the KWV product is a premium product compared to its competitors is gaining acceptance.” Van der Veen said the company was confident its strategy to increase margins through ‘premiumisation’, to build a more substantial RTD portfolio and to develop sales in new higher-growth markets was the most appropriate for KWV. He said plans for 2014 included adding additional products to the KVW portfolio and entering high-growth/high-margin markets like Africa and Asia.
Overall it appears KWV’s longer-term prospects remain balanced on a knife-edge. But this scenario is not fazing one of SA’s most respected value investors, RECM & Calibre, which announced it had acquired a sizeable shareholding in KWV in August. RECM & Calibre – headed by former Investec Asset Management stalwart Piet Viljoen – is clearly looking for significant long-term returns on its capital. Viljoen said KWV was well managed and the price paid for the shareholding was “substantially below” a reasonable intrinsic value for the business.
By Jenni McCann