Delegats Half Year Results to 31 Dec '09 Disappoint

15 March 2010

Delegats Group have published their results (copy of the PDF is available here or here) for the six months ending 31 December 2009. They were no longer able to avoid the impact from the global economic downturn. In their statement they list the strong New Zealand Dollar (NZD) as one of the factors that had a negative impact on their business. Another major factor was that a large customer in the UK went into receivership and provisions had to be built for that.

Although it is not surprising that the economic environment finally also has an impact on Delegats business, the half-year announcement is still disappointing.

In the announcement for the full year results the company states the "Group expects to achieve ... a profit result at least in line with the past year's record performance." In the announcement for the six months ending 31 December 2009, the company then reported that a large UK customer has been placed in administration resulting in a negative impact on the profit.

Admittedly, when a big customers goes into receivership this can come at a surprise (to some degree). The announcements didn't contain the number for the full provision. However, upon request Delegats responded that "the majority of the increase" in the administrative expenses includes the "provision for doubtful debts".

Since the increase of administrative expenses is about NZD 2.7 million the provision for doubtful dept is in this range. In the half year results announcements the management now expects a "2010 profit that is between 30 to 40% lower than the result in 2009". With a net profit of NZD 30 million in 2009 this would mean that 2010 would be about NZD 12 to 16 million below 2009.

Taking out the provision for the large UK customer in receivership this would still be an estimated NZD 9 to 13 million lower than 2009. This begs the question: Where does this significant change in net profit come from? The annual shareholder meeting was in December, when the profit guidance was confirmed. What change in little more than 3 months caused the net profit guidance to decrease by another NZD 9 to 13 million?

If it was exchange rate changes then although the expenses for marketing and sales campaigns were increased this still doesn't necessarily answer the question why on the sales side the exchange rates were listed as a negative factor. By the same token the expenses should benefit from an exchange rate change. This is an inconsistency for which we couldn't obtain sufficient details from Delegats.

Generally we continue to be optimistic about the New Zealand wine industry and Delegats Group in particular. Investors, however, should be cautious about adding to their existing share holding in the next 12 months unless additional data indicates that Delegats business is improving again.

Disclosure: Agile Utilities NZ Ltd who operates this web site is a share holder of Delegats Group Ltd.