Twenty years ago the idea of customers, let alone investors, picking an English wine over a French or Italian bottle would raise an eyebrow or two at the bar. But much has changed for the English wine industry in the intervening decades.
Producers in the UK have benefited from longer, warmer growing seasons. Drinkers now have a keener thirst for domestic wines, a number of which have won international awards. For those who fancy a sparkling wine from Kent, some will wonder about the best way of investing in English wine.
One problem is that English producers are small compared with many of their European and New World cousins. Only about 4 per cent of all sparkling wine consumed in the UK comes from domestic sources.
Production volumes in England have remained relatively small in recent years at around 9mn bottles, most of which is sparkling. Lex estimates volumes rose to over 12mn last year. By contrast, France’s Bordeaux region alone produced almost 550mn bottles in 2022, according to data from winemaker Gavin Quinney.
Two English vineyards are listed. Shares in Kent-based Gusbourne are quoted on London’s small company exchange Aim. Its rival from the same county, Chapel Down, is listed on pan-European rival Aquis, though it has plans to move to Aim.
Good weather and the unshackling of tourists from lockdown restrictions last year led to some good wine sales for both vineyards. Full-year results from Gusbourne this week showed net revenues after excise taxes increased 49 per cent to £6.2mn. Though it earns a gross profit, the bubbly maker has yet to make an operating profit after overheads such as marketing and other administrative costs.
Nevertheless, Gusbourne’s sales have tripled since 2020, expanding far faster than its expenses. It has introduced pricier, premium ranges of its sparkling wines which have sold well. Further growth will come via more visitors to its 500-acre wine estate in Ashford in Kent, as well as rising average prices.
Gusbourne has also recently purchased another 55 hectares of land. It will have 151 grape-producing hectares by 2025. At the current rate, the group should have positive earnings before interest costs, depreciation and amortisation (ebitda) this year, but statutory profit will take longer.
Chapel Down, England’s largest wine producer, does earn a profit — more than £1mn after tax last year. As with Gusbourne, it wants to increase revenues to £28mn by 2026, up from £15mn. On a comparative valuation measure, Chapel Down, at just over three times its trailing sales, is cheaper than Gusbourne’s seven times.
Small companies such as these must work hard to finance growth. Both have relied increasingly on debt in recent years, after previously depending on wealthy shareholders to plug any financing gaps with equity. Since early 2020, US bank PNC has lent to both Gusbourne and Chapel Down, and other privately held vineyards. UK banks have preferred not to do this.
Sparkling wine producers tend to age their produce for at least four years. Those potential sales drain cash flow during ageing. In France, listed champagne houses such as Vranken-Pommery Monopole and Lanson-BCC could always borrow — sometimes heavily — against these reserves.
There is some attraction in the English vineyards for a lender. Gusbourne’s reserves probably amount to 2.5mn bottles. Valued at £25 each, those alone are worth in excess of £62mn, 50 per cent above Gusbourne’s market value, estimates Panmure Gordon.
Small companies with debt are higher risk investments. Both these companies offer limited trading liquidity with little immediate prospect for dividends given their capital requirements.
Investors keen on investing in the international wine business will find larger, more liquid, opportunities not only in France, but also in Australia via Treasury Wine Estates. This owns fine winemaker Penfolds. Another alternative is Chile’s Viña Concha y Toro.
These two fast-growing English sparkling winemakers offer some long-term potential, though. With promises of an improving climate for grape production and rising demand, both should cheer the patient investor.
Commodities/El Niño: current thinking triggers palm alarm
Away from the verdant vines of England, rising average temperatures present a bigger long-term threat to the world. Fluctuations in temperatures have a greater impact in the short term. The most significant of these are triggered by shifting Pacific currents.
That requires shifts in asset allocation too. The current La Niña period is fading. The advent of an El Niño — “the boy” in Spanish — pattern heralds higher southern temperatures, droughts and gyrations in agricultural commodity prices. This weather system means warmer, wetter winters on the US west coast and gentler hurricane seasons.
That is good news for drought-ridden California. Elsewhere, El Niño is usually big trouble and worst in tropical regions, causing economic damage that can last for years.
A recent study looked at the economic impact of El Niño events in 1982-83 and 1997-98. Dartmouth College professors found that several trillions of dollars of lost output globally resulted from each and growth was lower for up to the following five years.
The strong El Niño forecast by some weather prophets would be bad for emerging markets on the equator. Prices for agricultural commodities are a particular flashpoint. Orange juice prices are already near record highs in part due to cold weather and hurricanes. Sugar prices are soaring due to elevated rainfall levels in India.
Vegetable oil prices are most affected by El Niños, a 2016 study from Sydney university found. Data from Refinitiv shows commodity prices peaking a year after El Niño. Palm oil prices are most highly correlated. Blame drought conditions in Indonesia and Malaysia.
Shares in palm oil producers such as Golden Agri have tracked prices for the commodity lower. A six times forward earnings valuation — a multi-decade low — is one way for equity investors to ride trends from El Niño higher.
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