KWV deal fortifies sentiment

Cape Town - Unlisted KWV Limited, which trades over the counter, rallied more than 12% to 390c in Thursday morning trade after news of a proposed unbundling.

The unbundling - set for finalisation at the end of June - will see KWV Limited's core wine and brandy manufacturing operations unbundled into a new corporate vehicle.

Whether the unnamed vehicle will be listed on the JSE is not clear at this stage.

It appears the company's effective 18% stake in listed liquor manufacturer Distell - which is worth some R2bn - will remain in the existing KWV Limited vehicle. The Distell stake is held indirectly through KWV Limited's controlling stake in listed holding company KWV Investments.

The news of KWV's unbundling is not entirely surprising, with Finweek and Fin24.com having speculated about the event for over two years.

What is surprising is that the unbundling proposal coincides with a disappointing profit performance from KWV Limited's own operations for the half-year to end-December 2008.

Initially it was thought that any proposals to separate KWV Limited's operations from its investment in Distell would be done only when the company's core operations were performing soundly.

While interim turnover of KWV Limited was down 1.2% to R441m, the company's trading margins were seriously diluted as the group fought to maintain market share in an environment not conducive to marketing premium priced wine and (particularly) brandy products.

Operating profits dropped 34% to R27m, but net profits from operations were reduced to less than R5m after taking into account the effect of a larger R22m interest bill.

Questions remain

Pre-tax profits, however, were up 6% thanks to income of R195m earned mainly from KWV Limited's interest in Distell.

No doubt news of the unbundling of KWV Limited's "own" operations will please Distell, which - if proposals are enforced by mid-year - will no longer be in the invidious position of subsidising the operations of one of its closest rivals.

In a note to clients, BoE Private Clients analyst Peter Wille said the unbundling would not only unlock good value for shareholders, but also provide management with the opportunity to focus on KWV Limited's own operations "where some work needs to be done".

Wille said it was unlikely that KWV Limited shareholders would receive KWV Investments shares in the unbundling.

He calculated that - using KWV Investment's current share price of R65 - the value KWV Limited shareholders would receive in the form of KWV Investments shares is 350c/share.

Wille conceded that KWV Limited's own operations have not performed well in the interim period. But he argued that the company had a lot of turnaround potential and was "very asset-rich".

He believed KWV Limited's own operations to be worth 100c/share, based on a premise that the business should be able to earn R50m in the near term (equating to 11c/share).

While most shareholders canvassed by Fin24.com welcomed the proposed unbundling, there were some questions around whether KWV Limited's debt would be left in KWV Limited or whether it would be transferred to the unbundled vehicle.

- Fin24.com