MoneyTalks: Broker still rates Australian Vintage a Buy; Vysarn ‘could be undervalued’

The sailing hasn’t been as smooth as a quality shiraz for Australian Vintage of late, but broker MA Moelis still has a taste for it.

Eddy Sunarto

3 min read

June 21, 2023 - 1:32PM

Stockhead

Australian Vintage has faced some headwinds, but this broker still reckons it's a corker. Picture: Getty Images

Stockhead

Don't miss out on the headlines from Stockhead. Followed categories will be added to My News.

MoneyTalks is Stockhead’s regular drill down into what stocks investors are pondering right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

The sailing hasn’t been as smooth as a quality shiraz for Australian Vintage (ASX:AVG), but broker MA Moelis still has a taste for it.

Moelis has a Buy recommendation on the stock, with a target price that has shrunk to 60c, but is well ahead of the 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 southeastern Australia.

For the latest ASX news, sign up here for free Stockhead daily newsletters

Moelis has 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 said its full year FY23 revenue was forecast between $255 million to 260 million, compared to FY22 revenue of $260.1 million.

The company said it had been unable to grow its volumes and pass on inflationary costs to consumers, which had seen materially compressed margins.

As a result, AVG said it would cancel its final dividend, and would not pay any further capital back to shareholders until its net debt/EBITDA ratio fell below 2 times.

“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 were positive for shareholders as they would deliver a pre-tax earnings benefit of around $9 million by FY25.

Looking out to FY24, Moelis anticipates that the lower-yielding 2023 industry vintage will alleviate some of the oversupply of wine.

Additionally, 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 9.5 times 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.”

Vysarn is a Buy due to its unique offering

Meanwhile, Broker Euroz Hartleys has a Buy recommendation on mining services stock, Vysarn (ASX:VYS), with a target price of 20c (versus the current price of 14c).

In the last trading update, Vysarn upgraded its earnings guidance for FY23 – from $5.1 million NPBT to between $6 million and $6.5 million.

Vysarn said the upgrade was 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.

Visit Stockhead, where ASX small caps are big deals

As a result, Euroz believes the second half EBITDA of $7.5 million reported by the company could be base case run rate earnings for FY24.

The broker also has Vysarn 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 per cent discount to 6 times average, and over time 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 a 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 was quietly pulling together a unique range of services (consultancy, contractor and ownership), which could, eventually 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.

This content first appeared on stockhead.com.au

Get the latest Stockhead news delivered free to your inbox. Click here

Originally published as MoneyTalks: Broker still rates Australian Vintage a Buy; Vysarn ‘could be undervalued’