Grape ex­pec­ta­tions crushed

Finweek English Edition - - Companies & markets - MARC HASENFUSS

DO SMALL UN­LISTED ven­ture cap­i­tal com­pa­nies “bull­sheet” the pub­lic with over-in­flated profit pre­dic­tions to fa­cil­i­tate fund-rais­ing ex­er­cises?

Do we of­fer the ben­e­fit of the doubt to ex­ec­u­tives of th­ese com­pa­nies, know­ing that start-up ven­tures are so of­ten be­set by un­ex­pected hitches that de-rail the best-laid plans?

Grape pack­ag­ing tech­nol­ogy group Vin­guard, which came out of listed John Daniel Hold­ings, is a case in point.

Back in 2004, Fin­week ex­pressed some se­ri­ous reser­va­tions about Vin­guard, ad­vis­ing read­ers to think long and hard be­fore com­mit­ting hard-earned funds to the ven­ture.

In its prospec­tus of 2004, Vin­guard pre­dicted rev­enue of R17m and earn­ings of R1,7m for the year to end-June 2005. Th­ese fig­ures would grow to R53m and R9,5m re­spec­tively by 2006 and to R124m and R23m by 2007.

Based on th­ese man­age­ment fore­casts, gullible in­vestors would have hap­pily as­sumed that by June 2007 the in­vest­ment in Vin­guard would have largely been paid back in earn­ings.

Not likely. Vin­guard’s latest an­nual re­port for the 16 months to end-June 2006 shows turnover at a mere R4,6m and an ugly pre-tax loss of nearly R3m.

That is a mil­lion miles short of what Vin­guard orig­i­nally fore­cast ahead of fund rais­ing, and – con­sid­er­ing the longer re­port­ing pe­riod – se­ri­ously ques­tions whether man­age­ment re­ally grasped the chal­lenges of the busi­ness. Up­front as­tute in­vestors would have recog­nised that it’s an ar­du­ous task to break new grape pack­ag­ing tech­nol­ogy into a largely con­ser­va­tive cus­tomer base.

It would ap­pear Vin­guard is gen­er­at­ing rev­enue of less than R300 000/month, which means that at this point we can safely throw out the orig­i­nal year to endJune rev­enue fore­cast of R124m. More se­ri­ously, will the busi­ness even make its 2005 rev­enue fore­cast of R17m this fi­nan­cial year?

Vin­guard’s predica­ment is high­lighted in a rather des­per­ate look­ing cash-flow state­ment, which saw a R2,7m cash bal­ance turned into a deficit of R1,1m.

We note that fur­ther shares (roughly 480 000 at 50c/each) were is­sued to raise around R240 000 in new cap­i­tal and that an in­ter-group loan of R1,4m was also raised.

The bal­ance sheet, how­ever, re­mains puny – though cur­rent as­sets of R5,2m (in­clud­ing in­ven­to­ries of R1,6m) do cover cur­rent li­a­bil­i­ties of R3,8m.

Direc­tors ad­mit there was “some ini­tial dif­fi­culty in ac­quir­ing lo­cal mar­ket share” dur­ing the last grape sea­son. Un­der­stand­ably, lo­cal pro­duc­ers felt they would pre­fer to first con­duct lim­ited ex­ports be­fore con­sid­er­ing Vin­guard as their first pack­ag­ing sheet of choice.

Per­for­mance was also af­fected by Vin­guard’s de­ci­sion to pen­e­trate as many in­ter­na­tional mar­kets as pos­si­ble, sell­ing pack­ag­ing sheets at lower mar­gins.

When ex­citable in­vestors pitched for Vin­guard shares in mid-2004 they were ef­fec­tively buy­ing on a for­ward price:earn­ings mul­ti­ple of 38 times. With no prof­its to show to date, share­hold­ers must be seething over a se­ri­ously ex­pen­sive in­vest­ment ex­er­cise.

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