PICK OF THE MONTH
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