DB and Lion Nathan find mature beer market highly competitive

Peter V O'Brien, Finance writer

Friday 7th December 2001

Brewers' share price statistics

Company	30.11.01 (c)	31.12.00 (c)	% change 2001	2001 high c	2001 low c

DB Group	555	470	+18.1	600	470
Lion Nathan	554	509	+8.4	605	454
NZSE 40 cap index	2072	1902	+8.9	2120	1790

The two listed brewing companies had a good year in financial terms and lesser performance in relation to share price movements.

Companies are not responsible for the market's assessment of their prospects but the brewers' share price gains, shown in the table, were a little surprising, given the groups' status as defensive stocks in these times of political and economic uncertainty.

That matter was discussed in The National Business Review on October 5. Brewers, utilities, basic food manufacturers and suppliers, confectionery and soft drinks were identified as classic defensive stocks, as were tobacco companies in the days before the anti-smoking lobbies attacked the industry.

As an aside, it was ironic to see specialist tobacco companies worldwide move into other defensive industries, such as food, soft drinks and confectionery.

Defensive stocks were discussed on October 5 in relation to international sharemarket confusion and uncertainty after the September 11 terrorist attacks in the US.

That was before the brewers issued preliminary reports for the year ended September 30.

DB Group and Lion Nathan reported in early November.

Restructuring, including gains from asset sales and sundry write-offs, complicated comparison of basic dollar results, as did DB reporting in New Zealand dollars and Lion Nathan in Australian.

The DB report gave "key results" of continued operations. They generated a net profit of $20.2 million, compared with $18.1 million in the previous year, an increase in 11.6%.

While it is unusual to compare returns on average shareholders equity over a year, the substantial change in DB's financial structure over the year made it sensible to take a figure on year-end equity.

DB's return on year-end equity was 14.5% and earnings per share on an historic basis were 40c, using a profit of $20.2 million.

Overall earnings per share of 115.6c. That gave an historic price/earnings multiple of 13.8 at 40c a share and were only 4.8 at 115.6c a share.

The latter figure was no guide to the current situation, because DB is unlikely to repeat last year's special gains in the current term.

Brewers still refer to how they stood in the "mainstream" market, statements I queried on June 8.

The query drew a comment from Lion Breweries corporate affairs director Graham Seatter in a letter (NBR, June 22).

His company's definition of "market leadership" was the product that led the market in sales volume and "quite simply, Lion Red is far and away the bestselling beer in New Zealand."

Mr Setter unfortunately, did not address the use of "mainstream" preferring to write about the "bestselling market leadership" and "most popular."

He doubtless will have another go, assuming he reads this, but must be quick if he wants Lion Nathan's semantic interpretation in NBR this year, given next week's issue is the last for 2001.

The brewers' arguments about who has what always smacked of the "world famous" wherever amusing, advertising seen on TV.

Lion Nathan said its brewing business "delivered a 14% increase in net profit" compared with the previous year, excluding "individually significant items and the impact of sale of shares in Montana Group."

Both companies referred to highly competitive beer markets in their operational spheres.

That could be the key to the market's assessment of the companies.

Beer is a mature, even static or declining industry as drinkers move to wine and/or exotic tipples.

The offset of beer's maturity against brewers' defensive stock status could explain why the two companies were well down the share performance list this year.

The top and bottom price performers are included in the NBR Personal Investor's review of 2001 on page 41.

Another apparent paradox was the companies' wine activities over the past year.

DB quit wine-producing interests, while Lion Nathan pursued vintners, with two deals in Australia to offset the battle over the Montana Group.

International markets settled down after reactions to September 11, resulting in less interest in defensive stocks.

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