Lion Nathan's catch-up plan

Lion Nathan, sadly, has another thing in common with Foster's - a more or less painful fling with China. More of that later.

It's made some good decisions. Its joint venture with Hong Kong group Li&Fung, to sell clothes and other branded products over the internet to pubs and clubs looks interesting, if small, and exiting Pepsi in New Zealand was a good day's work - it's a brutal business which was more trouble than it's worth.

Expansion opportunities

The firm has said it's looking for other expansion opportunities, but with no hint as to what.

Our thoughts on chasing global markets for wine - and the best way to go about it - are outlined in the Foster's review. Whether Lion Nathan can do it with Montana (nice wine, good markets, but hardly a Beringer) is debatable. More concerning from our point of view is the quick turnaround in thinking of the company.

Just last year Lion Nathan told the market in no uncertain terms that the plan was beer-only. That it has obviously changed - and so quickly - does not send signals of a confident, focused management, but a rattled one, although in practical terms the company is going to derive most of its income from beer for some time to come.

The problem with that is that, while the company is doing well at home - although variable state by state - its offshore operations are cause for concern. Since our issue 54 review (Accumulate on Weakness - $3.63), the stock is up 18.2%. Its results for the year to August, showed sales and NPAT both up 6.2% to $1.53bn and $130.2m. Perhaps more important than these figures though, Lion Nathan's national market share crept ahead to 41.9 per cent from 41.5 per cent, compared with Foster's Carlton & United Breweries 55%.

The Lion Nathan brands include Tooheys in NSW, XXXX in Queensland, West End and Southwark in South Australia and Swan and Emu in Western Australia. Of these Tooheys gained 2.3% market share in NSW, but Swan and Emu lost 5.3% and West End and Southwark were down 1.3%.

The company managed to boost its 11.8% Victorian share to 13.7%, but only after spending a huge $100m. Much of this went in chasing younger inner city drinkers, by buying pubs, beer rights to clubs and restaurants and sponsoring horse racing. The question is, can the company persuade Melburnians to drink Toohey's New - doubtful we think.

Despite this, net profit is likely to rise this year to between $140m and $145m.

That wouldn't be bad given the Chinese brewing mess. Assets there may be written down by $100m with a sale not far off. The company lost $24m there in the year to August.

While we like this company and can see its earnings growing, there are some points of concern. Enough in fact to recommend that, if you want one play in the sector, you choose Foster's with its greater global presence and clearer strategy over this more domestically focused one.

The historical stock price charts of Lion Nathan and Foster's have some hints, too. Lion Nathan has outperformed Foster's solidly this year - and for that matter over the past ten years.

Plodding upwards

Lion Nathan's share price has plodded upwards ever since its Australian listing in 1991, until some downward pressure in 1999 and 2000. Foster's, on the other hand, was distinctly unpopular in the first half of the decade and has only just managed to make up lost ground. Does all this mean that Lion Nathan is a more certain creator of value through time and therefore the pick of the brewing pair?

We don't think so. We think that Lion Nathan will be left behind by Foster's because the latter is so much further ahead in developing a global wine business. Since Foster's bought Mildara Blass back in 1996 it has vastly outperformed Lion Nathan. While we can guess at its ambitions for Montana, the strategy is not clear yet. We are also worried about the cost of buying market share in Victoria. China, too, until it is sold, makes the company less attractive than Foster's. Taken on its own, however, we believe earnings will grow and the stock can still be ACCUMULATED ON WEAKNESS.