Foster's Group Ltd, Australia's largest brewer, posted a 9.4 percent drop in second-half profit on Tuesday, pressured by sliding sales at its Californian wine business and a strong Australian dollar. In June, Foster's cut its profit outlook as it began a review of the underperforming wine business, the world's second largest with brands such as Beringer, Rosemount and Penfolds.
But better-than-expected beer sales helped Foster's beat analysts' reduced expectations and lifted its share 2 percent in a broader market that was 1 percent weaker. "The operating environment for wine remains difficult. Supplies are increasing and their brands don't have strong momentum," said Karara Capital investment manager Luke Sinclair. "But Foster's also realised very strong pricing in beer. The issue there is the sustainability of this kind of price growth."
Foster's said it would give no update on progress of its wine review, which is on track to report by the end of 2008, and cited the uncertainty of the review for giving no 2009 forecast.
The review could lead to the sale of some brands or vineyards or a separate stock market listing, but analysts say the entire business, worth up to A$5 billion, is unlikely to find a single buyer because of an oversupply of wine assets on the market. Larger rival Constellation Brands recently wrote down the value of its Australian wine assets and put some brands up for sale.
Foster's Chairman David Crawford said options from the wine review included acquisitions as well as disposals, but he said Foster's had not considered any of the Constellation brands. Foster's second-half net profit before one-offs including writedowns on the wine business fell to A$319.7 million ($276 million) from A$353 million a year ago, based on Reuters calculations from full-year figures provided by the company. That was slightly above forecasts of A$310.9 million, excluding wine writedowns of about A$730 million, according to a Reuters Estimates survey of nine analysts.
The strong Australian dollar, which rose to $0.96 in June, knocked A$70 million off earnings in the full year. Foster's said its Australian beer business, which accounts for about 70 percent of group earnings, saw net sales rise 5.8 percent despite a decline in volume of 2.1 percent.
That pointed to stronger pricing and a growing shift to higher-margin premium brands such as Pure Blonde as consumers drift away from mainstream brands, a trend that has benefited rival brewer Lion Nathan Ltd which competes in a duopoly with Foster's. "People are looking at the continuing strength of the beer business - higher margins," said Hugh Giddy, managing director of Cannae Capital Partners, explaining the share price rise.
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