Why this fundie tips Australian Vintage (ASX:AVG) shares

Citing a much higher earnings potential and a shift away from bulk wine to branded wine, this fundie likes Australian Vintage.

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When you think of ASX listed wine shares, Treasury Wine Estates Ltd (ASX: TWE) is likely the first one to come to mind. And for good reason.

The iconic Aussie wine company has a market cap of more than $8 billion, with a portfolio of globally recognised names including the likes of Penfolds, Beringer, Lindemans and Wolf Blass.

But as you likely know, Treasury Wine has been struggling to diversify from its dependence on the Chinese market, following import restrictions from the Chinese government.

Which brings us to a lesser-known ASX wine share, Australian Vintage Ltd (ASX: AVG), with a market cap of $202 million. You may be familiar with the company’s McGuigan Wines brand.

Why this fundie likes Australian Vintage shares

Simon Mawhinney is contrarian fund manager Allan Gray Australia’s chief investment officer. According to the Australian Financial Review, Allan Gray owns 19.6% of Australian Vintages shares.

Why?

According to Mawhinney:

It’s always been our view that Australian Vintage’s earnings potential was much higher. It still trades at a hefty discount to its Net Tangible Assets and appears cheap to us, on a (price earnings) multiple of 10 times its most recent earnings guidance. It looks a lot cheaper than similar wine companies in Australia and elsewhere.

The AFR notes that Australian Vintage has run into some snags in past years, with grape-supply contract issues seeing the company enter the lower-profit margin bulk wine market.

But as Mawhinney points out, that’s no longer predominantly the case:

The company has spent a lot of energy exiting those significant, onerous grape contracts. The majority of its wine is now sold in some branded form. That should make its earnings less volatile and improve returns over time.

Australian Vintage share price snapshot

Without a doubt it’s been a good 12 months for Australian Vintage shareholders, with shares up 61% since 10 March last year. For comparison the All Ordinaries Index (ASX: XAO) is up 16% in that same time.

Year-to-date the Australian Vintage share price is up 25%. Based on the current price of 73 cents per share, Australian Vintage pays an annual dividend yield of 3.8%.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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