Bodegas Riojanas Octubre 2012

8/12/2019 Bodegas Riojanas Octubre 2012

1/23

OCTOBER 2012 - THE COMPANY REPORT OF BODEGAS RIOJANAS 1

Analyst

Frederick E. Artesani, EAFI

THE COMPANY REPORT OF

Bodegas Riojanas is a Spanish winery that makes and commercializes winesfrom the Rioja region, which is protected under its own Designation of Origin(Denominacin de Origen, D.O.). This D.O. has the largest market share inSpanish premium wines, which favours domestic market penetration forBodegas Riojanas since it principally makes premium wines. Furthermore, theonly channel showing signs of continued growth is Consumer and Retail, with agrowing demand for premium D.O. wines, which is where Bodegas Riojanasconcentrates the bulk of its production. Moreover, the company enjoys a highGross Margin/Sales owing to the fact that aged premium wines have a higheradded value. Finally, the companys positioning in quality wines segment

makes it well placed to take advantage of an eventual pick up in the cycle.

The companys winery infrastructure (presses, tanks, barrels, racks, bottlingfacilities) has benefited from successive investments, upgrades and increasesin capacity. At present this allows Bodegas Riojanas to unfold its strategy ofconcentrating in the production of quality aged wines without the need for

further investments.

Its international projection is still low. This is partly explained by the highpenetration in Spain of its added value wines. Even so, Bodegas Riojanas is notoblivious of the opportunities that foreign represent and is reinforcing itscommercial arm outside Spain.

The cost of debt weighs down on results: Even if debt levels do not represent abalance sheet problem, nevertheless financial costs do represent more thanhalf of EBIT. Therefore, we consider the companys objective of a 25% debt

reduction between 2011 and 2014 to be a very favourable course of action.Bodegas Riojanas has already started to meet its targets for 2011 and theprojections in this report support the planned debt reduction and this withouthaving to either cut their dividend or reduce the current pace of theirinvestments.

Year 2012 is a turning point (in fact half yearly results confirm this) and net

profits are expected to increase at a faster pace: this will be due to theimplementation of the current debt reduction plan and the associated lowerfinancial costs, together with improving Gross Margin to Sales, owing to thecoming into the market of stocks of aged wine produced with harvests wheregrape costs had been very low (2009 and 2010). This is important to note, since

Bodegas Riojanas trades basically at Book Value, to a great degree because itsreturn on resources (assets, equity, invested capital) is low when confronted tocomparable companies. As sales will translate to a greater degree into profits,with less financial costs and less raw material costs, this return on resourcesshould pick up, and so should the companys stock-price (as well as its P/BVwhich is well below sector average).

Earnings up, stock-price down: Since the end of 2009 (when the sectorexperienced a severe adjustment) until now, Bodegas Riojanas has increasedannually its Sales, Gross Margin/Sales and Net Profit and according to theprojections of this report, will continue to do so. In spite of this improvedperformance the stock-price has fallen by 43% since the end of 2009.

This report uses two different valuation methods (Discounted Cash Flows

and Comparable Multiples) which give an intrinsic value per share forBodegas Riojanas of 5,67 and 5,97 . When compared to the current

stock-price of 4,75 , this gives an upside between 19% and 26%.

BODEGAS RIOJANAS

COMPANY DATATICKER RIO

PRICE (15 OCTOBER 2012) 4,75

SECTOR Alimentac in y B ebidas

N OF SHARES (in 000) 5.440

CAPITALIZATION (in 000 ) 25.840

FREE FLOAT 26,7%

DAILY VOLUME TRADED LAST12 MONTHS (in 000 )

10,60

MAXIMUM PRICE(LAST 12 MONTHS)

5,90

MINIMUM PRICE(LAST 12 MONTHS)

4,25

SHARE PRICE VARIATIONLAST MONTH

-2,3%

SHARE PRICE VARIATIONLAST 3 MONTHS

-0,8%

SHARE PRICE VARIATIONLAST 12 MONTHS

-19,2%

KE Y F I NANCI AL DAT A ( i n 0 0 0 )

2010 2011 2012(e) 2013(e)

SALES 15.063 15.132 15.182 15.386EBITDA 2.856 3.144 3.267 3.336

NET RESULT 699 730 771 923

ROE 2,83% 2,96% 3,09% 3,65%

NET DEBT 22.934 21.922 20.142 18.151

P E R S HARE DAT A ( )2010 2011 2012(e) 2013(e)

DPS 0,10 0,10 0,10 0,10

EPS 0,128 0,134 0,142 0,170

BVPS 4,53 4,54 4,58 4,65

R A TI O S D E V AL O RA C I N2010 2011 2012(e) 2013(e)

P/E 55,3 x 36,8 x 33,5 x 28,00 x

Dividend Yield 1,4% 2,0% 2,1% 2,1%

P/BV 1,57 x 1,09 x 1,04 x 1,02 x


2/23



AnalystFrederick E. Artesani, EAFI

DESCRIPTION OF BODEGAS RIOJANASBodegas Riojanas produces and commercializes wine from the Classified RiojaWine Region, and in a lesser quantity wine from the Toro Wine Region, bothfor the domestic market and for the international market. They also maintainagreements with other wine producers of other Classified Regions tocommercialize their wine. A great share of the firms sales corresponds tored wines from the Rioja Designation of Origin (Denominacin de Origen -D.O.-) with ageing (such as Crianza, Reserva and Gran Reserva).Their main brandsare Via Albina,Monte Real and Puerta Vieja.

HISTORY OF BODEGAS RIOJANAS

Bodegas Riojanas started their activity in 1890 promoted by families of winetradition from Cenicero and even today their managers are descendants of theoriginal families that founded the firm. Right from the beginning of theiractivity they have been wine growers, producers and exporters .Repeatedlyduring their business history they have invested in modernization, technology,R&D, quality, capacity in storage and in ageing facilities. They are considereda classical wine producer of the Rioja, but their activity is not limited to theClassified Rioja Region, since in 1999 they started a diversification byproducing their own wines in the Classified Wine Region of Toro, and at a laterstage by expanding their commercial offer to encompass different classifiedwine regions, such as Ribera del Duero, Rueda, Rias Baixas, just to mention afew, thanks to various collaboration agreements with other winemakers.

MILESTONES OF BODEGAS RIOJANAS

1890:Bodegas Riojanas are founded.

1925: The Classified Rioja Wine Region is created as well as its RegulatingCouncil.

1930:The Firm is registered as a Limited Company. They have 528 vats.

1940-1950:Bodegas Riojanas becomes a Public Company. During this periodthe Bodega undertakes the first enlargement of its installations.

1950-1960:The second enlargement is undertaken, increasing the capacity ofthe wine storage to 3.000 vats.

1960-1970: Another enlargement is performed and in particular a strategicchange in the firm. The sale of bulk wine and of young wines is stopped, andsales are concentrated on aged and vintage wines. To accomplish this, newpremises and deposits are built, the capacity of aged wine is increased to2.600 vats, reaching a total of 15.000 vats and special bottle storage racks forthe ageing of an additional 700.000 bottles are built, reaching a storagecapacity of 3.000.000 bottles for wine ageing.

1970-1980:In 1973 Banco de Santander acquires a capital share. The winery isenlarged again, investing in more warehouses, in more storage space and inthe bottling machinery which now reaches a bottling capacity of 3.000bottles/hour.

Chart 2:

Chart 3:

Chart 1:

Rioja;

86,7%Toro;

6,9%

Other;

6,4%

Bodegas Riojanas - Sales

breakdown by Denomination

of Origin

Red

Gran

Reserva;

7,1%

Red

Reserva;

54,9%

Red

Crianza;

30,1%Red

young;

3,9%

White;

4,0%


breakdown by product for Rioja

wines

Red

Reserva;

4,5%Red

Crianza;

14,9%

Red

young;

52,3%

White;

16,3%

Ros;

12,0%


breakdown by product for Toro

wines


3/23


4/23


5/23




to add the impact from a reduction of meals outside their homes by the consumers.

In relation to the changes in the consumption patterns of the channel, at least we can notice a strong substitution away fromnormal table wines into wines with Denomination of Origin. This change in the choice of wines is due to the fact that theconsumer considers the wines of Classified Origin of a better quality and at a reasonable extra cos. As a result patrons atrestaurants have shifted to consuming Classified Origin wines, considering them a sure choice at a competitive price.

This change plays in favour of the wine zones with a well-established Denomination of Origin, such as La Rioja. In fact, 7 out of10 aged wines sold in the hotel /restaurant business are from the Rioja region (this is based on a study of wine consumption inSpain as published in April 2012 by Nielsen Consultants).

Besides the move away from young wines from unclassified regions, the demand in this channel is concentrating in theintermediary aged wines (Crianza), also moving away from wines with lots of ageing (Gran Reserva and even Reserva): in fact,the Hotel/Restaurant business cannot finance stocks and as they try to have the minimum stock possible, they also ensure stock

their inventory is not too high on expensive wines. This change in the general demand has given origin to a larger concentrationof aged wines and to a lesser extent of vintage wines and to a much lesser extent of great vintage wines.

This change validates a strategy focused on producing wines with age, as carried out by Bodegas Riojanas. Nevertheless, theHORECA channel is not exempt of difficulties since even for wines with Denomination of Origin there is a reduction in thevolume consumed (in liters) and a shift in the product mix which translates into lower prices per liter purchased.

After the consumption changes of the past seven years, at present, for the Rioja Denomination of Origin the volumes ondemand correspond on an equal basis to the HORECA channel with 50% and to the retail channel with the other 50% (as per thereport presented by the Nielsen Consultants in April 2012). So, in spite of its gradual loss of weight since 2003, the HORECAchannel still remains an important buyer and must therefore be adequately serviced by the producers.

Chart 6:

The HORECA channel has also requested a special updating in the presentation of the wineries, demanding a special labelingdifferent from the one presented to the retail sector with the sole purpose of avoiding the use of the same labels for the samewines and thus not revealing to the consumer their sales margin. This request has been accepted by Bodegas Riojanas, whichhas amended its portfolio of labels creating exclusive bottles for the hotel/restaurant sector. Adapting to HORECA needs isimportant, since this channel still represents a very powerful way of promoting wineries and their brands.

Due to the low loyalty of the HORECA channel to the wineries and to its sensitivity to special pricing and promotions, it is ofutmost importance for a producer to have a strong and well developed commercial and marketing department.

Finally, although there is no statistic at hand to prove this, it is a general opinion that the hardening of the traffic laws in

relation to alcohol limits and drunken driving together with the smoking prohibition in indoor premises have also contributed toexacerbate the reduction of consumption in the HORECA channel.

47,240,4 36,1 36,3 33,1 26,6 26,5 29,5 31,5 29,1 31,1

34,4 36,2 37,5 38,842,4 47,7

50,0

52,859,6 63,9 63,7 66,9 73,4 73,5 70,5 68,5 70,9 68,9

65,6 63,8 62,5 61,257,6 52,3

50,0

0%

20%

40%

60%

80%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Annual sales volume split (%) of RIOJA wine through different channels(Source: Nielsen)

Retail HORECA


6/23




Offer-The official subsidies to uproot vineyards and to reduce the planted areas have been offset by the technological

improvements in yield and productivity.

The vineyard surface in Spain is on the decrease: with the financial aid from the Common Organization of the Wine Market(OCM) for the 2010/2011 campaign, the uprooting of 25.120 hectares of vineyard. When added to the vineyards uprooted withEuropean aids in the two previous campaigns this gives us a total of 93.567 hectares completely eliminated in the last threeyears. To which we should add the vineyards uprooted without official aid or simply abandoned for their low yield andprofitability.

In fact, from 2002 to 2010 the total vineyard planted area in Spain has gone down by 14%.... but the production has gone up by22%.

In fact, as wineries have invested in their structure to improve quality and production they have unwillingly contributed toworsen the situation of excess supply that threatens the sector, since the improvements in quality and production haveincreased productivity to a point where wine production has increased even after a considerable reduction of planted areas.

Additionally, the sector has to face other problems:

An excessive atomization and fragmentation of the producers.

With 70 Official Denominations of Origin and more than 4.600 wineries, the Spanish wine sector has a high level of atomization.This is a problem for the stability of the sector and for the faithfulness of the clients (this last point is of vital importance forthe small wineries of recent creation) since there are brands and types of wine in excess.

It is also certain that this atomization implies the existence of many small producers who can afford with difficulty theinvestment programmes which are needed to carry out a strategy of quality aged wine. This situation favours in the endwineries with economies of scale in their marketing department and with the capacity to invest in modernization andenlargement of the installations both for increased production and for increased ageing installations. We understand that,without being one of the largest wineries, Bodegas Riojanas has this competitive advantage since during its history they have

built the necessary installations to develop their strategy of specializing in aged wines of quality.

If we take into consideration the latest data published by the Classified Rioja Region, at Bodegas Riojanas the segments withhigher added value, such as vintage (Reserva) and great vintage (Gran Reserva) wines, have registered a better record as can beseen by the sales breakdown per category which follows:

Vintage and great vintage wines: 62% (against 14% for the Rioja Region).

Aged wines: 30% (against 40% for the Rioja Region).

Young wines: 4% (against 46% for the Rioja Region-Includes white and red).

White wine: 4%.

Imports of cheaper wines:

Another factor which has meant an additional threat has been the penetration of more affordable wines produced in new

zones (such as Australia or New Zealand) into both the Spanish market and the mature international markets traditionallyserviced by Spanish wines.

However, since the end of 2009 the growth which was registered in the so called New Countries has been slowing until

currently reaching a standstill or even a reduction in production which has also meant a reduction in their exports, thus easingtheir competitive pressure on Spanish wines.

The economic crisis since 2008:

Both the available income in private houses and the economic situation in firms have an influence on sales. These have beennegatively hit by the economic crisis which started at the beginning of 2008, and so far signs of a recovery are very distant. Thisdecrease in the purchasing power of private houses and of firms has clearly dampened consumption from the HORECA channel,even though part of this adverse phenomenon has been compensated by the substitution which is done by retail consumerswhen celebrating dinners at home rather than in restaurants.


7/23


8/23


9/23




A renewed effort to continue boosting up sales in the international markets:

Aware of the importance of the export activity, and aiming at strengthening the distribution in the U.S.A., Bodegas Riojanasconstituted in 2010 the firm Bodegas Riojanas USA Corporation, with Head Office in New Jersey. Presently, sales in the USA

represent for Bodegas Riojanas 15% of their total exports.

Still today the more mature markets (mainly Europe, particularly Germany and Northern Europe, which are showing strongincreases) represent the greatest share of exports, with 33% sold to the United Kingdom: The UK however shows the problemthat 80% of the volume corresponds to aged wines which are sold through hard discount, and even if there is still a market forVintage and Great Vintage wines, the average price continues to drop.

The actual level of exports is 9% of total sales, which is low compared to the Classified Rioja Region, where exports exceed30% of production, but this difference is mainly explained by the high rate of penetration of the brands Bodegas Riojanas foraged, vintage and great vintage wines in the domestic market.

We think that due to the specialization of Bodegas Riojanas in quality wines, their export activity should gradually benefitfrom the clear world growth in the demand of such wines, particularly in the segments of Premium and Super Premium

wines.

Confirming this move towards wines of added value, during the first quarter of 2012, although the exports of the Rioja winesfell by 2,5% in volume , they grew in value (Euros) by 4,9% (according to the Spanish Wine Market Observatory- OeMv)

Finally, it is important to mention that Bodegas Riojanas maintain their decided objective to develop the international market,by opening at the beginning of 2012 commercial offices in China and Germany to be added to their commercial offices in theUnited Kingdom and Mexico.

Diversification to keep a continued presence in the young wines market:

In 1999 the group started a new winery in Toro. This was part of their will to maintain a competitive presence in the segmentof young wines with little or no ageing. The diversification took place when the price of the grape shot up significantly (400Pesetas per kilo = 2,50 Euros approx.) for the prestigious Classified Regions (Rioja and Ribera del Duero) which prevented themto compete in the young and aged wines (Crianza) market. Their new venture in Toro meant being able to continue to competeand be present in these segments.

Since then, excesses in the prices of Rioja grapes have been corrected and the problem experienced in 1999 has disappeared,thus allowing them to compete again in the young Rioja wines. Their production in Toro concentrates 87% of sales in youngwines, a very similar proportion to the Toro wine producers aggregate, which is 86%.

FINANCIAL ANALYSIS

Profit & Loss account.

The yearly data for Sales, Gross Margin, EBITDA etc. point to a turnaround in 2009 from which all P&&L magnitudes haveinitiated a recovery.

Table 2

Relevant Data from the P&L Account


10/23




Bodegas Riojanas is facing a complicated environment where revenue isthreatened both by lesser unit sales by final price reductions in Spain. Andyet it is experiencing a growth in Sales and higher Operating Margins: this isthe result of a change in consumption patterns in the retail channel whereconsumers are moving towards wines with a Denomination of Origin, and withsome ageing in vats. It is also a consequence of having reactivated at the endof 2009 their commercial activity, with the creation of new Marketing andPublic Relations departments.

Balance Sheet:

Debt:

The strategy focused on wines of higher added value has needed variousefforts in investment in technology, in quality and in increases in capacityboth in the ageing process in vats and in the bottle storage in racks. All thishas given rise to a debt level which is high although it does not represent aproblem of liquidity nor does it stretches the Balance Sheet: however, thefinancing of this debt is a heavy burden in the companys results. (See table3, 4, 5 & 6 where Bodegas Riojanas is compared to similar wineries).

This causes a problem since the high level of the debt implies a highfinancial cost which reduces profits (After Financial Costs of 1.015.000 the

profit before taxes is 925.000). It limits the potential dividend and it also

penalizes the valuation of the firm measured by multiples, since as a resultof a lower EPS Bodegas Riojanas is relatively expensive in terms of PE ratio orEV/EBITDA.

In spite of this situation, the firm has no liquidity or cash problems, being inline with the sector as far as its liquidity ratio is concerned. (See table 7)

Additionally, Bodegas Riojanas has never had any difficulties to finance itself,be it internally through working capital or externally through credit lines andbanking loans.

Bodegas Riojanas always manages to finance with ease the increases in coststied to the seasonality of their business with increases in its Short Term Debt(normally this item increases systematically every year about 3 million Euros

in the 4th quarter, then to be reduced during the first quarter). Moreoverthey have 4.170 million Euros in unused Credit Facilities. Furthermore, theyhave recently negotiated with their bankers the restructuring of their debt,transforming part of their short term debt into long term debt, closing in theyear 2011 eight new loans with maturities of 2016 or longer for a totalamount of 3,07 million Euros.

This last point deserves an additional consideration. Bearing in mind that theannual rotation of stocks is equal to 20%, i.e. five years are needed to rotatethe total stock, we deem it wiser and more cautious to obtain financing on along term basis, matching more closely assets with liabilities. For this reasonwe value this change favourably. Presently, the average cost of debt forBodegas Riojanas is around 5,8%.


11/23




At present Bodegas Riojanas has started a debt reduction programme started in 2011 in order to reduce the total debt by 5million Euros in 4 years, their target being to have total debt under 15 million Euros by 2015. In the fiscal year 2011 the debtconsideration was reduced by 1,12 million Euros, in line with their initiative.

Our Free Cash Flow forecasts for the next years avail the debt reduction strategy of the winery.

Free Cash Flow:

Table 8 CASH FLOW FORECAST

(in 000 ) 2011 2012e 2013e 2014e

EBIT 1.940 2.067 2.156 2.252

EBIT after taxes 1.531 1.612 1.682 1.757

(+) Amortization 1.204 1.200 1.180 1.160

(-) Variation in Working Capital -521 -980 -985 -667

(-) Capex 678 693 720 790

Free Cash Flow 2.578 3.099 3.127 2.794

Dividends -544 -544 -544 -544

Available for Debt reduction 2.034 2.555 2.583 2.250

Based on our Cash Flow forecast, Bodegas Riojanas can, without any problem, maintain both its dividends policy and itsinvestment plans while at the same time proceeding with the debt reduction projected.

Capex:

Bodegas Riojanas spent 700.000 Euros in investments (the replacement of the vast represents 50% of this investment) and theyexpect to maintain this rate of investments for the years 2012 & 2013.

Dividends:

During the year 2009 the dividend per share (DPA) was reduced from 0,17 to 0,10 . Since then it has remained unaltered.Currently, the payout is in 74,5% (at the closing of year 2011).

Although it is a fact that the firm would like to reach a payout level of 50%, we do not think that they intend to reduce thepresent DPA. We are of the opinion that as earnings grow, this payout will be possible with a DPA similar to the actual one of0,10 ( or even slightly higher) as from the year 2015, when the total debt will have been reduced (and its associated financialcosts also) in accordance with the financial plan of the firm.

The dividend yield at actual prices is 2,1%. Which is reasonable since this is a sector which does not show a very high dividendyield.

Table 9 Dividend Yield (%)

(Dividend of last 12 months and prices as of 15 October 2012)

Bloomberg Wine & Cheese Index 1,98%

Bloomberg Wine & Beverages Index 1,89%

Bodegas Riojanas 2,10%

Source: Bloomberg


12/23




RESULTS AT THE END OF THE FIRST SEMESTER 2012

Due note must be taken of the seasonal trends of the wine business.

In fact, the conventional closing of the balance sheet of a winery (as at 31st December) shows more adverse financial data: thisis due to the fact that in the last quarter the winery disburses the second and bigger payment for the supply of the acquiredgrapes, as well as the expenses of elements needed for the sale, such as bottles, labels, carton boxes etc. and at the sametime experiences the bulk of marketing and commercialization costs for the new campaign. On the other hand, it is onlytowards the end of the next first quarter when most of the sales proceeds are collected (including the promotional Christmascampaign which represents between 30% and 40% of the total annual turnover), generating an important cash inflow.Consequently, the annual balance sheet at year end shows an irregular snapshot: with a concentration of expenses associatedto the harvest, and with greater needs of short term financing, which always result in a seasonal increase in both short termdebt and working capital.

Since Bodegas Riojanas has recently published the results of the first semester of 2012, we analyze the accumulated data ofthe last twelve months, from 1st July to 30 June of the following year. We think these figures offer a better picture of theevolution of a winegrowers business, since they contain in the same period of analysis the expenses of a campaign, started inthe 4th quarter of the previous year, as well as the cash income of the first quarter directly derived from this campaign .

TABLE 10Profit & Loss account

(in 000 EUROS)

12m to

1H2011

12m to

1H012

Net Sales 14.721 16.367

Other Income -234 -973

TOTAL INCOME 14.487 15.394

Raw material costs -5.519 -5.697

GROSS MARGIN 8.968 9.697

Labour costs -3.050 -3.065

Other -2.999 -3.322

EBITDA 2.919 3.310

Amortizations -1.233 -1.210

Provisions 0 0

EBIT 1.686 2.100

Participated companies 0 0

Net financial results -835 -1.096

Other 0 0

PBT 851 1.004

Taxes -196 -202

NET PROFIT BEFORE MINORITIES 655 802

Minorities 0 0

NET PROFIT 655 802

P&L ANNUAL VARIATION (%) 2011/2010 2012/2011

TOTAL INCOME -5,9% 3,2%

EBITDA 0,4% 13,4%

EBIT 3,9% 24,6%

Net Financial Result 30,7% 31,3%

PBT -13,4% 18,0%

NET PROFIT -15,4% 22,4%


13/23




OPERATING PROFITABILITY12m to1S2011

12m to1S2012

Gross Margin / Total Income 61,9% 63,0%

EBITDA / Total Income 20,1% 21,5%

EBIT / Total Income 11,6% 13,6%

Net Profit / Total Income 4,5% 5,2%

The last 12 months of operation show very favourable data with a good evolution in sales and a marked improvement in

operating margins.

The impact of the sale of stock corresponding to the 2009 harvest, which registered a significant drop in the supply costs (low

grape prices) is starting to show in higher Gross Margin/Sales.

Even if Total Debt is reducedthanks to the generation of higher cash flows, financial costs for the period go up due mainly tothe one-off reorganization of debt, after changing Short Term Debt into Long Term Debt, with carries a higher financial costbut, as noted before, this allows for a more balanced financing structure, correcting what in our view was excessive reliance onshort term financing. The new debt structure makes more sense due to the nature of the business and the necessary financingof the assets (such as the stocks of aged wines) on a long term basis.

Even with the increase of financial costs, the net result for the period shows a spectacular growth of 22,4%.

TABLE 11 - BALANCE SHEET

(in 000 EUROS)

12m to

1S2011

12m to

1S2012

Total non-current assets 13.413 13.031

Fixed assets 12.162 11.765Other non-current assets 1.251 1.266

Total current assets 34.607 34.035

Inventories 30.475 29.498

Receivables 2.535 2.973

Other current assets 1.554 1.470

Cash and cash equivalents 43 94

TOTAL ASSETS 48.020 47.066

Equity 24.199 24.031

Non-current liabilities 8.972 10.784

Interest bearing liabilities 7.870 9.701

Other non-current liabilities 1.102 1.083

Current Liabilities 14.849 12.251

Interest bearing liabilities 12.538 9.161

Trade and other payables 1.954 3.033

Other current liabilities 357 57

TOTAL LIABILITIES 48.020 47.066

Net Debt 20.365 18.768

Working Capital 32.296 30.945


14/23




BALANCE SHEET RATIOS12m to1S2011

12m to1S2012

Net Debt / EBITDA 698% 567%

Net Debt / Equity 84% 78%

Net Debt /(Net Debt + Equity) 46% 44%

Net Financial Results / EBIT -50% -52%

Liquidity ratio 233% 278%

Quick ratio (without inventory) 28% 37%

Inventory turnover 18% 19%

BALANCE SHEET PROFITABILITY RATIOS12m to

1S2011

12m to

1S2012

ROA 1,36% 1,70%

ROE 2,71% 3,34%

ROIC 2,04% 2,38%

We notice a reduction in the financing needsboth in working capital and in total financial debt.

The return on resources increases(on Assets, on Invested Capital, on Equity).

Meanwhile, during the same period, the price of the stock has fallen by 29% from 6,46 to 4,58 per share, which is hardly

justifiable bearing in mind the positive evolution of the results of Bodegas Riojanas.

FORECASTS

Working hypothesis.

Sales:

TABLE 12 - WORKING HYPOTHESIS FOR SALES FORECASTS IN PERIODS 2012 Y 2013

(in 000 )

Sales channels Sales 2011 % sales var price var units rice 12 vs. 11 units 12 vs. 11 sales 12 vs. 11 Sales 2012e var 12/13

HORECA 3.371 20,93% 0,00% -5,00% 100,00% 95,00% 95,00% 3.202 -5,0%

Retail 6.155 38,22% 1,00% 7,00% 101,00% 107,00% 108,07% 6.652 8,1%

Alternative / Xmas campaign 5.129 31,85% 0,00% -5,00% 100,00% 95,00% 95,00% 4.873 -5,0%

International (growth countries) 580 3,60% 5,00% 10,00% 105,00% 110,00% 115,50% 670 15,5%

International (mature countries) 870 5,40% -5,00% -5,00% 95,00% 95,00% 90,25% 785 -9,8%

Total 16.105 100,00% 16.182 0,5%

(in 000 )

Canales de venta Sales 2012e % sales var price var units rice 13 vs. 12 units 13 vs. 12 sales 13 vs. 12 Sales 2013e var 13/12

HORECA 3.202 19,79% 0,00% -5,00% 100,00% 95,00% 95,00% 3.042 -5,0%

Retail 6.652 41,11% 1,00% 7,00% 101,00% 107,00% 108,07% 7.189 8,1%

Alternative / Xmas campaign 4.873 30,11% 0,00% -5,00% 100,00% 95,00% 95,00% 4.629 -5,0%

International (growth countries) 670 4,14% 5,00% 12,00% 105,00% 112,00% 117,60% 788 17,6%

International (mature countries) 785 4,85% -3,00% -3,00% 97,00% 97,00% 94,09% 738 -5,9%

Total 16.182 100,00% 16.386 1,3%

2012 Forecast: Working hypothesis

2013 Forecast: Working hypothesis

Margins:

We take into account, on the basis of information provided by the firm, that as from the end of 2011 Bodegas Riojanas isbeginning to sell stocks with less built-in costs, corresponding to the 2009 harvest, where the price of the grape had fallen by


15/23




42% (since then prices have remained fairly similar). For this reason we forecast an improvement in the Gross Margin.

Other Assumptions:

We maintain the DPS constant in future years at 0,10 and as from 2015 on the increase while keeping a payout target of

50%.

We apply investments (Capex) of 600.000 euros to 700.000 euros per year.

We assume that the free Cash Flow (after investments and dividends) will be entirely used to reduce the debt.

We assume that the reductions of the debt will be first allocated to the Short Term Debt, keeping the Long Term Debtaround 9 million euros , which is the level at which Bodegas Riojanas closed the first semester of 2012.

2012-2016 Forecasts:

PROFIT & LOSS ACCOUNT (in 000 EUROS) 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Net Sales 17.062 14.933 13.517 15.297 16.105 16.182 16.386 16.440 16.596 16.753

Other Income -61 1.533 323 -234 -973 -1.000 -1.000 -900 -900 -900

TOTAL INCOME 17.001 16.466 13.840 15.063 15.132 15.182 15.386 15.540 15.696 15.853

Raw Materials Costs -7.330 -6.993 -5.140 -6.126 -5.673 -5.340 -5.375 -5.425 -5.477 -5.528

GROSS MARGIN 9.671 9.473 8.700 8.937 9.459 9.842 10.012 10.115 10.219 10.324

Labour costs -2.941 -2.882 -2.975 -3.131 -3.040 -3.055 -3.070 -3.086 -3.132 -3.179

Other operating results -2.673 -3.056 -2.783 -2.950 -3.275 -3.520 -3.605 -3.617 -3.684 -3.719

EBITDA 4.057 3.535 2.942 2.856 3.144 3.267 3.336 3.412 3.403 3.426

Amortizations -1.164 -1.278 -1.314 -1.259 -1.204 -1.200 -1.180 -1.160 -1.140 -1.140

Provisions -39 -76 -26 0 0 0 0 0 0 0

EBIT 2.854 2.181 1.602 1.597 1.940 2.067 2.156 2.252 2.263 2.286

Particip. in resultados of associated companies 0 0 0 0 0 0 0 0 0 0

Net financial results -998 -1.137 -771 -690 -1.015 -1.079 -972 -884 -810 -733Other 0 0 0 0 0 0 0 0 0 0

PBT 1.856 1.044 831 907 925 988 1.184 1.368 1.452 1.553

Taxes -520 -235 -172 -208 -195 -217 -260 -301 -320 -342

NET PROFIT BEFORE MINORITIES 1.336 809 659 699 730 771 923 1.067 1.133 1.211

Minorities 0 0 0 0 0 0 0 0 0 0

NET PROFIT 1.336 809 659 699 730 771 923 1.067 1.133 1.211

BALANCE SHEET (in 000 EUROS) 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Total non-current assets 15.804 15.138 14.163 13.903 13.377 12.870 12.410 12.040 11.710 11.000

Fixed assets 14.578 13.847 12.889 12.620 12.131 11.600 11.260 10.900 10.660 10.000

Other non-current assets 1.226 1.291 1.274 1.283 1.246 1.270 1.150 1.140 1.050 1.000

Total current assets 38.448 37.960 38.110 39.774 39.490 38.522 37.894 37.385 36.973 36.623

Inventories 27.727 29.333 29.447 29.289 28.408 28.000 27.500 27.000 27.000 27.000

Receivables 10.497 8.326 8.251 9.709 10.563 10.000 9.865 9.865 9.450 9.100

Other current assets 169 237 359 565 416 420 420 420 420 420 Cash and cash equivalents 55 64 53 211 103 102 109 100 103 103

TOTAL ASSETS 54.252 53.098 52.273 53.677 52.867 51.392 50.304 49.425 48.683 47.623

Equity 24.506 24.394 24.508 24.669 24.691 24.918 25.297 25.820 26.382 26.984

Non-Current Liabilities 3.546 4.431 6.434 8.086 7.772 10.920 11.080 11.180 11.180 11.130

Long term interest bearing financial liabilities 2.817 3.692 5.622 6.984 6.619 9.700 9.700 9.700 9.700 9.700

Other non-current liabilities 729 739 812 1.102 1.153 1.220 1.380 1.480 1.480 1.430

Current Liabilities 26.200 24.273 21.331 20.922 20.404 15.554 13.927 12.425 11.121 9.508

Short term interest bearing financial liabilities 18.635 18.075 16.880 16.161 15.406 10.544 8.560 6.900 5.531 4.083

Trade and other payables 6.700 5.491 3.731 3.917 4.242 4.300 4.627 4.785 4.790 4.725

Other current liabilities 865 707 720 844 756 710 740 740 800 700

TOTAL LIABILITIES 54.252 53.098 52.273 53.677 52.867 51.392 50.304 49.425 48.683 47.623

Net Debt 21.397 21.703 22.449 22.934 21.922 20.142 18.151 16.500 15.128 13.680

Working Capital 30.883 31.762 33.659 35.013 34.492 33.512 32.527 31.860 31.383 31.198

ICMV (Invested capital at market value) 27.323 28.086 30.130 31.653 31.310 34.618 34.997 35.520 36.082 36.684

TABLE 13 PROFIT & LOSS ACCOUNT AND BALANCE SHEET FORECASTS AND RATIOS (2012 AL 2016)


16/23




ANNUAL VARIATION IN P&L ACCOUNT (%) 2008/2007 2009/2008 2010/2009 2011/2010 2012/2011 2013/2012TOTAL INCOME -3,1% -15,9% 8,8% 0,5% 0,33% 1,35% 1,00% 1,00% 1,00%

Gross Margin -2,0% -8,2% 2,7% 5,8% 4,05% 1,73% 1,03% 1,03% 1,03%

EBITDA -12,9% -16,8% -2,9% 10,1% 3,91% 2,11% 2,28% -0,28% 0,69%

EBIT -23,6% -26,5% -0,3% 21,5% 6,55% 4,31% 4,46% 0,46% 1,03%

Net financial results 13,9% -32,2% -10,5% 47,1% 6,31% -9,89% -9,09% -8,31% -9,57%

PBT -43,8% -20,4% 9,1% 2,0% 6,82% 19,81% 15,59% 6,13% 6,95%

NET PROFIT -39,4% -18,5% 6,1% 4,4% 5,57% 19,81% 15,59% 6,13% 6,95%

MARGINS / SALES 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Gross Margin/Total Income 56,9% 57,5% 62,9% 59,3% 62,5% 64,8% 65,1% 65,1% 65,1% 65,1%

EBITDA/Total Income 23,9% 21,5% 21,3% 19,0% 20,8% 21,5% 21,7% 22,0% 21,7% 21,6%

EBIT / Total Income 16,8% 13,2% 11,6% 10,6% 12,8% 13,6% 14,0% 14,5% 14,4% 14,4%

Net Profit / Total Income 7,9% 4,9% 4,8% 4,6% 4,8% 5,1% 6,0% 6,9% 7,2% 7,6%

BALANCE SHEET RATIOS 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Net Debt / EBITDA 527% 614% 763% 803% 697% 617% 544% 484% 445% 399%

Net Debt / Equity 87% 89% 92% 93% 89% 81% 72% 64% 57% 51%

Net Debt /(Nebt Debt + Equity) 47% 47% 48% 48% 47% 45% 42% 39% 36% 34%

Net Financial Results / EBIT -35% -52% -48% -43% -52% -52% -45% -39% -36% -32%

Liquidity ratio 147% 156% 179% 190% 194% 248% 272% 301% 332% 385%

Quick ratio (without inventories) 41% 36% 41% 50% 54% 68% 75% 84% 90% 101%

Inventory Turnover 26% 24% 17% 21% 20% 19% 20% 20% 20% 20%

PROFITABILITY RATIOS 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

ROA 2,46% 1,52% 1,26% 1,30% 1,38% 1,50% 1,84% 2,16% 2,33% 2,54%

ROE 5,45% 3,32% 2,69% 2,83% 2,96% 3,09% 3,65% 4,13% 4,29% 4,49%

ROIC 4,89% 2,88% 2,19% 2,21% 2,33% 2,23% 2,64% 3,00% 3,14% 3,30%

MARKET RATIOS 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Stock-price at year end 9,00 8,60 7,39 7,10 4,94 4,79 4,79 4,79 4,79 4,79

PE 36,65 57,83 61,00 55,26 36,81 33,81 28,22 24,41 23,00 21,51

EV/EBITDA 17,34 19,37 21,30 21,55 15,52 14,14 13,25 12,47 12,10 11,60

P/BV 2,00 1,92 1,64 1,57 1,09 1,05 1,03 1,01 0,99 0,97

P/ICMV 1,79 1,67 1,33 1,22 0,86 0,75 0,74 0,73 0,72 0,71

DIVIDEND 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

DPS (ordinary) 0,17 0,17 0,10 0,10 0,10 0,10 0,10 0,10 0,105 0,112

Dividend Yield 1,9% 2,0% 1,4% 1,4% 2,0% 2,1% 2,1% 2,1% 2,2% 2,3%

Payout 69,2% 114,3% 82,5% 77,8% 74,5% 70,6% 58,9% 51,0% 50,4% 50,3%

VALUATION

The market capitalization of Bodegas Riojanas at present is not very different from its Book Value (see table 14). The BookValue per share is 4,42 (with data of the first half of 2012) andthe last quoted price per share is 4,75 (at 15 October 2012).

Table 14 PRICE / BOOK VALUE

P/BV

BODEGAS RIOJANAS SA 1,03

TREASURY WINE ESTATES LTD 1,04

WILLAMETTE VALLEY VINEYARDS 1,05

ANDREW PELLER LTD 1,16

BARON DE LEY 1,16

VINA CONCHA Y TORO SA 1,73

Bloomberg Wine & Cheese Index 2,36

CONSTELLATION BRANDS INC 2,54Average excluding Bodegas Riojanas 1,58

Source: Bloomberg


17/23




Shares which trade around or below their book value, unless there are factors justifying this (such as expected adverse news or

projected falling results), which is not the case for Bodegas Riojanas, can be considered undervalued and this offers aninvestment opportunity.

Table 15 RETURN ON ASSETS

ROA EBIT/Assets

BODEGAS RIOJANAS SA 1,4% 3,7%

TREASURY WINE ESTATES LTD 2,4% 3,0%

WILLAMETTE VALLEY VINEYARDS 3,5% 6,2%

BARON DE LEY 3,5% 7,5%

ANDREW PELLER LTD 4,6% 8,7%

CONSTELLATION BRANDS INC 6,3% 7,6%

VINA CONCHA Y TORO SA 6,5% 7,8%

AVERAGE excluding Bodegas Riojanas 4,5% 6,8%

Source: Bloomberg

We understand that this market valuation to a large degree is due to the low return on resources currently exhibited by BodegasRiojanas when compared to other similar companies (See table 15).But Bodegas Riojanas is a viable firm, with more than 100 years inexistence, which generates profits and distributes dividends (with a yield of 2,1%). Moreover, since year 2009, when the wine sectorunderwent serious adjustments (note that in spite of this Bodegas Riojanas never ceased generating profits), Bodegas Riojanas hasincreased its Sales, its Gross Margin/Sales and its Net Profit. And now, after three years of recovery since 2009, we are of the opinionthat the year 2012 represents a turning point where the returns on resources will start to improve, as profits and free cash flowsaccelerate their uptrend. We shall now proceed to calculate the theoretical value of the share in order to determine its

undervaluation and its potential upside. For this we shall use two valuation methods: discount cash flows and multiples based oncomparable companies.

Valuation using Discounted Cash Flows (DCF):

We cannot recommend a valuation based on assets, bearing in mind the nature of the exploitation of the business, with abalance sheet with material assets such as machinery for elaboration, ageing, bottling and storage but with few hectares ofvineyard in ownership (Bodegas Riojanas buys 90% of the grape they need in the Rioja region and 60% in the Toro region). As weconsider that the value of the firm is based more on its processing and ageing capacity rather than in the ownership ofagricultural vineyard assets, we are inclined to use the method of discounted cash flows.

As from the year 2012, we incorporate in our forecasts the fact that Bodegas Riojanas have started selling stocks of aged wineswith a lower supply cost (In the second half of 2011 they started selling bottles from the 2009 campaign, when the price of thegrape fell by 42%, and this stock should come out over five years).This will improve gradually the Gross Margin and will

generate a larger operating cash flow .With a stable dividend and with provisions for capital investments also stable nearing700.000 euros , Bodegas Riojanas should obtain, as shown in the forecast table, a larger free cash flow which we foresee willbe applied to a large extent to reduce debt. The objective of the company of reducing debt in 5 million euros in the next 4years is feasible based on our forecast numbers. This feeds a virtuous cycle for the firm since a lesser debt means incurringlesser financial costs, and this leads to a better net result. It is another reason why we think appropriate to use a valuationwhich takes into account the expected free cash flow growth for Bodegas Riojanas.

Due to the difficulty in making forecasts on a long term basis in a sector which is cyclical, seasonal, competitive and largelydependent on uncontrollable factors such as the macro economy and climatic conditions, the use of the cash flow discountmethod could be considered less reliable over a too long a period. And that is why we have used a forecast model which coversfive years of expectations, the present year 2012 and four years more. (Thereafter we have assumed a constant lower growthfor the following years, from which we obtain a residual value).

With this method we obtain a company value of 5,97 per share. This means an upside potential of 26% from the actualstock market price of 4,75.

We now provide the detailed DCF model for Bodegas Riojanas:


18/23


19/23


20/23




Table 18 Price / Free Cash Flow

(Prices at 15 October 2012, CashFlow at close of 1st Half 2012) P/CFL


CONSTELLATION BRANDS 11,60


BARON DE LEY 14,10


VIA CONCHA Y TORO SA 29,10

ANDREW PELLER LTD n.a. (CFL=0)

Average excluding Bodegas Riojanas 17,42BODEGAS RIOJANAS 10,10

Source: Bloomberg

Table 19 Price / Book Value

(Prices at 15 October 2012, Equityat close of 1st Half 2012) P/BV



ANDREW PELLER LTD 1,16

BARON DE LEY 1,16

VINA CONCHA Y TORO SA 1,73


CONSTELLATION BRANDS INC 2,54

Average excluding Bodegas Riojanas 1,58

BODEGAS RIOJANAS 1,03

Source: Bloomberg

We think that after the 2009 crisis of the sector in Spain and with the gradual recovery of Bodegas Riojanas observed sincethen, in particular with forecasts of debt reduction from 2011 to 2014, it would be more appropriate to use for BodegasRiojanas the ratios of a normalized year when establishing comparisons. As a result we have opted for the utilization of

forecast data of year 2016; we now show in Table 20 the Present Value of each magnitude after applying the necessaryadjustment factor.

Table 20 Present Value of 2016 data used for valuation by the method of comparablemultiples

(in 000 )PV of2016edata

Adjustment factor 2016e

Net Profit 888 0,73348 1.211

Net Debt 10.034 0,73348 13.680

EBITDA 2.513 0,73348 3.426

Free Cash Flow 3.284 0,73348 4.477Book Value 19.792 0,73348 26.984


21/23


22/23


23/23

23

AUTHOR OF THE REPORT:

Frederick E. Artesani, EAFI

This Report, together with the data, opinions, estimates, forecasts and recommendations it contains has been researched and written byFrederick E. Artesani, EAFI.

The content of this Report is based on information provided by Bodegas Riojanas and by information deemed public and generallyavailable, obtained from sources considered to be reliable. The information obtained has not been independently verified by Frederick E.

Artesani, EAFI so no guarantee is provided, implicit or explicit, as to the precision, integrity and accuracy of said information.

Frederick E. Artesani, EAFI does not assume any liability or responsibility with relation to any use of the information contained in thisReport from any person or company who might have had access to the Report, in part or as a whole, through any method or system ofdistribution and diffusion.

The research and writing of this Report does not include a revision or an evaluation of the fiscal or legal situation of the companyanalyzed, nor of its accounting, nor of its compliance with labour regulations. Consequently, should any risk arise from such situations, ithas not been taken into account when calculating the company valuation.

All the opinions, estimates, forecasts and recommendations contained in the present Report constitute the personal technical opinion ofthe Analyst at the date of publication, and are subject to subsequent modification, without any obligation from the Analyst to publish orcommunicate such modifications, nor to update the content of the present Report.

This Report, under no circumstance, should be construed as an investment recommendation, nor does it represent from the Analyst anoffer, a solicitation or an obligation to engage in any operation or transaction in the shares or the financial instruments covered in theReport.

Frederick E. Artesani, EAFI does not assume any responsibility, direct or indirect, which might derive from any investment realized takingthis Report into consideration, nor does it assume any responsibility or liability in any loss or damage incurred by any person or entity whomight have materialized operations and transactions on the basis of this Report. In particular, Frederick E. Artesani does not assume anyresponsibility or liability for any financial loss, nor for any decision, incurred directly or indirectly, that was based on the use of theinformation contained in this Report.

Any investor accessing this Report must be fully aware that the shares, financial instruments and the investments referred to in this Reportmight not be adequate for his specific investment objectives, his financial situation or his risk profile since these have not been taken intoaccount for the elaboration of this Report. Consequently, any investor accessing this Report must adopt his investment decisions taking intoaccount such personal circumstances and must necessarily seek prior specific and specialized advice.

Frederick E. Artesani, EAFI is an independent financial advisory company, approved, supervised and regulated by the Spanish ComisinNacional del Mercado de Valores (the CNMV) and is constituted under Spanish legislation, and is not a member of the New York Stock

Exchange (NYSE) nor of the National Association of Securities Dealers (NASD). Any person involved in the elaboration of this Report is not amember of the New York Stock Exchange (NYSE) nor of the National Association of Securities Dealers (NASD) and therefore is not subject tothe normative and legislative conditions which regulate such members.

This report, partially or as a whole, cannot be reproduced, distributed or disseminated in the United States of America nor can it be madeavailable to persons or entities resident in the United States of America.

This Report can only be accessed in the United Kingdom by those who can be recipients of such information under the Financial Services andMarkets Act 2000 (Financial Promotion) Order 2001 and is not for reproduction, distribution or dissemination, direct or indirect, to anyother person or entity. In particular, this report can only be made available to persons or entities which are (i) outside the UnitedKingdom, (ii) with professional experience in matters of investments as per Article 19(5) of the said Order 2001, (iii) High Net Worthentities and (iv) to any other person or entity to whom the content of this Report can be made legally available, as included in Article 49(1)of said Order 2001.

Frederick E. Artesani, EAFI can have an interest or a position, directly or indirectly, in any of the shares and financial instruments referredto in this Report, or in any related financial instruments. Frederick E. Artesani, EAFI can be engaged in providing advisory services, or anyother services, to the issuer of said shares and financial instruments, or to related companies, or to their shareholders, employees orDirectors, prior or after the publication of the present report, always within what is permitted by the laws applying to Frederick E.

Artesani, EAFI.

The Spanish Financial Analysts Institute (Instituto Espaol de Analistas Financieros, hereinafter: "IEAF") provides the IN RESEARCH service incollaboration with Bolsas y Mercados Espaoles Sistemas de Negociacin S.A. (hereinafter, "BME"). Neither BME nor IEAF have participatedin the preparation of this report, which they recognise belongs to the issuer of the security or financial instrument analysed and/or thesubscribing analyst or company. Therefore, BME and IEAF decline any responsibility in relation to any investment decisions made based onthe report and/or any direct or indirect damages or losses incurred by anyone formalising operations based on said report.

This report does not constitute an investment recommendation, nor an invitation offer, request or obligation on the part of BME or IEAF tocarry out any operation or transaction in respect of the security or financial instrument analysed in the report. Neither BME nor IEAF areresponsible for the content, accuracy or veracity of the report or for any financial loss or decision taken based on the informationcontained in the report. Neither BME nor IEAF, their directors, representatives, partners, subsidiary companies, managers, shareholders,employees or advisors assume any responsibility in respect of the information contained in the report, or any use made thereof.

Bodegas Riojanas Octubre 2012

Documents

Transcript of Bodegas Riojanas Octubre 2012