Financial Mail - Investors Monthly - - Contents - Petri Redel­inghuys

Be­ing of a rather bear­ish dis­po­si­tion, and re­main­ing so un­til there is solid con­fir­ma­tion that the over­all global mar­ket trend has re­turned to bullish, I have been on the look­out for de­fen­sive stocks in which to in­vest, to pro­tect cap­i­tal in the case of ad­verse mar­ket con­di­tions over the next year or so.

Once such stock is Dis­tell. Per­haps it does not of­fer the deep­est value avail­able on the mar­ket to­day, though it is po­si­tioned in a de­fen­sive sec­tor that should be able to weather the worst of a global bear mar­ket storm. And as far as the com­pany goes, it’s not half bad.

Start­ing with its de­fen­sive na­ture, Dis­tell is a man­u­fac­turer and dis­trib­u­tor of al­co­holic bev­er­ages. It owns a num­ber of pop­u­lar brands in SA — Hunter’s, Sa­vanna, Klip­drift, Riche­lieu, JC le Roux, Dur­banville Hills, Bain’s and Amarula among them. There are more, many more in fact, and a fair few of them have won awards for their qual­ity. The fact is that Dis­tell has some es­tab­lished brands that en­joy good mar­ket share in SA.

In the three cat­e­gories in which it op­er­ates, it has about 8.9% of the mar­ket share of ready-to-drink bev­er­ages, which in­clude Sa­vanna and Hunter’s, which is up from about 8.5% mar­ket share in 2017. In the wine cat­e­gory, it is also en­joy­ing growth, from 41.5% mar­ket share by vol­ume in 2017 to 42.8% in 2018.

In the spir­its cat­e­gory, Dis­tell’s brands have a 30.6% share of the mar­ket. This trans­lates into a to­tal mar­ket share of 13.1%. The weak­ness is in the ready-to-drink cat­e­gory as it com­petes against beer, so in that con­text, it is not do­ing badly at all.

The com­pany also has a fo­cus on sus­tain­abil­ity. There is a push to re­duce harm to the en­vi­ron­ment from its pro­duc­tion ac­tiv­i­ties, though this has ob­vi­ous cost-con­trol ad­van­tages as well.

Year-on-year, wa­ter us­age per litre of pro­duc­tion has de­creased by 14.3% and elec­tric­ity us­age per litre pro­duced has been de­creased by 12.2%. Given the al­most con­stantly ris­ing cost of elec­tric­ity, re­duc­ing elec­tric­ity cost per unit of out­put is a wise move for longterm cost con­tain­ment and margin pro­tec­tion.

Dur­ing the 2018 fi­nan­cial year, Dis­tell earned R25bn in rev­enues, of which 35.6% came from ready-to-drink prod­ucts, 36.2% was earned from spir­its sales and 28.2% was con­trib­uted by wine. The small gains that Dis­tell is mak­ing in the ready-to-drink cat­e­gory can there­fore have a big im­pact on un­der­ly­ing earn­ings.

Also dur­ing the last re­port­ing pe­riod, Dis­tell ex­pe­ri­enced an in­crease of 4.4% in vol­umes sold, which re­sulted in an in­crease of 10.1% in rev­enue earned. Its African foot­print in­creased as well, with sales in Botswana, Kenya, Zam­bia and Zim­babwe re­port­ing an in­crease of 19.5% in rev­enues. On the in­ter­na­tional front else­where, rev­enue growth of 5.8% was driven by sales in Europe, Latin Amer­ica and the Asi­aPa­cific re­gions.

From a val­u­a­tion per­spec­tive Dis­tell does not do too badly. It has a price to earn­ings ra­tio of 17.11, which is a lit­tle high to be con­sid­ered a value stock and higher than the price to earn­ings ra­tio of the Top 40 in­dex at 14.17.

Div­i­dend yield is sit­ting at 3.45%, which is also a lit­tle too low to be con­sid­ered a value stock. That said, it is rel­a­tively cheaper than its only JSE listed peer, AB InBev, which has a p:e of 21 and a DY of 3.9%.

So, com­pared to the other de­fen­sive op­tion in the same busi­ness sec­tor, it is the bet­ter pick and when com­pared to the broader all share in­dex with a p:e of 15.25, it does not fare too badly.

This is cur­rently an unloved stock that has been in a down trend for some time. Since its late 2015 highs, it has been drop­ping steadily and has shed about 35% of its value over that pe­riod.

The think­ing be­hind back­ing this stock now is that if the bear­ish case plays out on global mar­kets and the bull mar­ket has re­ally come to an end, this stock should act as pro­tec­tion from volatile and neg­a­tive mar­kets driven by more eco­nom­i­cally sen­si­tive stocks like tech com­pa­nies and fi­nan­cial stocks.

As with any trade though, risk-man­age­ment pa­ram­e­ters are im­por­tant. I would try to en­ter the trade un­der R120 with a stop-loss be­low R100 and a profit tar­get of R180.

This is an unloved stock that has been in a down trend for some time. Since its late 2015 highs, it has been drop­ping steadily and has shed about 35% of its value

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