MoneyTalks: Broker still rates Australian Vintage a Buy; mining services Vysarn could be undervalued
Broker MA Moelis has a Buy recommendation on Australian Vintage (ASX:AVG), with a target price of 60c (versus current price of 43c).
Australian Vintage owns a portfolio of brands including McGuigan Wines, Tempus Two, Nepenthe and Barossa Valley Wine Company, with significant vineyard holdings and leases across South-Eastern Australia.
Moelis acknowledged that AVG has faced challenging industry conditions in FY23 due to an oversupply of Australian wine and a weakening consumer demand.
In the last trading update, AVG says its full year FY23 revenue is forecast between $255–260m, compared to FY22 revenue of $260.1m.
The company said it has been unable to grow its volumes and pass on inflationary costs to consumers, which has seen margins materially compress.
As a result, AVG said it will cancel its final dividend, and will not pay any further capital back to shareholders until its net debt/EBITDA ratio fell below 2x.
“This will ensure the balance sheet remains in a strong position during a relatively uncertain operating environment,” said the note from Moelis.
Moelis also said the cost out initiatives announced by the company are positive for shareholders as they will deliver a pre-tax earnings benefit of around $9m by FY25.
Looking out to FY24, Moelis anticipates that the lower yielding 2023 industry vintage will alleviate some of the oversupply of wine.
Aditionally, Moelis sees limited volume growth in FY24, as growth in the Austflavour brand and the release of new innovative products (e.g. Not Guilty) are offset by lower commercial volumes.
“The inflationary costs experienced in FY23 have remained elevated and will continue to weigh on margins in FY24,” the broker said.
“But overall, despite these challenges, management have continued to gain market share and are clearly focused on improving margins.
“We see the current FY24 PE of around 9.5x as undemanding with valuation heavily backed by assets.
“We retain our Buy rating, but lower our target price to 60c from the previous 76c per share.”
Broker Euroz Hartleys has a Buy recommendation on mining services stock, Vysarn (ASX:VYS), with a target price of 20c (versus current price of 14c).
In the last trading update, Vysarn upgraded its earnings guidance for FY23 – from $5.1m NPBT to between $6-$6.5m.
Vysarn says the upgrade is underpinned by the performance of its wholly owned subsidiary Pentium Hydro, and the remobilisation of part of its fleet to tier 1 clients (such as BHP, FMG, and Roy Hill) on long dated better margin contracts.
As a result, Euroz believes the second half EBITDA of $7.5m reported by the company could be base case run rate earnings for FY24.
The broker also believes Vysarn is grouped with a bucket of mining services peers that are trading at generally deflated valuations.
“As a broad idea, mining services stock valuations (in terms of EV/EBITDA multiples) continue to trade at 50% discount to 6x average, and overtime we expect re-rate across the sector,” said the broker’s note.
“We also believe VYS’s long term business model, as it transitions towards water consultant and management business, should warrant a premium to capital intensive businesses it is currently grouped with.”
Euroz also said that Vysarn’s management is quietly pulling together a unique range of services (consultancy, contractor and ownership), which could over time yield significant value to investors when executed as a combined group.
“We have therefore increased our price target to 20c a share, which reflects our view of FY24 free cash flow potential,” said Euroz.