MORAM - Italian Wine Brands $IWB.MI - Investment Thesis

16th July 2023

Hi there,

Today we are sharing the investment thesis for Italian Wine Brands. We believe it is a great opportunity to share with you one of the four pillars of our Moram Premium project, where we publish two pieces every week covering Investment Theses, Macroeconomic Analysis, Advanced Financial Education, and Portfolio Management.

Disclaimer before we begin: This is only for educational purposes and does not constitute any form of financial advice, and although the analysis has been conducted as objectively as possible, beware that both we and the fund managers we work with have a position in this company.

Introduction to Italian Wine Brands

Italian Wine Brands (IWB) is a leading producer in the Italian wine sector covering the entire value chain of wine, excluding the production of grapes. It trades on the Milan Stock Exchange with a market cap of €210MM (9.65MM shares - €21.90) and its Enterprise Value around €320MM

IWB has a capital-light business model, which means that it does not own vineyards. The raw materials (grapes, must and bulk wine) are purchased from around 200 Italian vineyards and wine producers and then processed in the group's cellars (65%) and third parties’ facilities (35%).

The group distributes its products through two different channels: B2C and B2B. B2C involves the production and distribution of wine through non-store retail channels (e-commerce) mainly internationally, but also in Italy. Meanwhile, B2B is focused on sales and distribution and is oriented towards international supermarket chains where the private label or registered brand products are distributed. Recently, due to M&A activity, it has also added HoReCa to its B2B segment.

The IWB has a different philosophy that it is introducing into the European wine markets. It aims to create and manage through its internal marketing team high-quality brands and blends with a strong identity and recognizability in the market. Unlike traditional companies in the sector, IWB believes that brand management is the key factor for success. IWB directly manages a portfolio of 30+ proprietary brands that make up roughly 90% of sales.

Italian Wine Brands was the first wine group to be listed in Italia (AIM Italia) in 2015, through a SPAC vehicle. 

Italian Wine Brands Investment Thesis

IWB investment thesis is based on 5 pillars

Asset light model: Maybe the most relevant characteristic of IWB is its business model. IWB’s business model is extremely flexible and able to quickly respond to short-term changes in demand and it employs a relatively low amount of capital. This business model along with its e-commerce capabilities allowed them to take advantage of the Covid situation to grow, and subsequently, acquire other businesses.

Margins recovery: after a year (2022) affected by supply chain issues, specifically related to glass and raw materials (grapes) due to the 2022 harvest, resulted in partially passing on the cost to customers, impacting margins. However, starting from January 2023, IWB completed the transfer of cost increases to its customers, and supply chain problems have been resolved. In March, IWB already mentioned that margins were showing signs of recovery.

M&A in a fragmented industry: IWB has shown in recent years that are able to acquire good businesses at very attractive valuations. The management team has reiterated that they are going to take advantage of the fragmented industry and the financial situation of companies after Covid. IWB is already the largest domestic player in the arena, excluding cooperatives. In this industry, size matters a lot in terms of economy of scale. It is reasonable to expect that IWB continue making acquisitions in the medium term.

Differential Digital platform: IWB acquired an e-commerce platform in 2018, and has been investing in it since then. It gives IWB a competitive advantage in terms of client data to target and market customers. Covid accelerated people's digitalisation and IWB was already well-positioned as a pioneer in the industry. Moreover, sales through this platform eliminate credit risk as clients pay by card in advance. 

Internal shareholder & Management team: In an industry where domestic consumption is flat/declining, the only remaining option to grow is to go abroad. IWB is doing that through acquisition and >80% of its revenues come from abroad. However, there is a lot of room to grow, especially in the US and Canada where the perception of Italian Wine is at its finest and IWB has not had a significant presence there in the past. The acquisition of Enovation brands which has developed an extensive network in North America and Barbanera Family & Enoitalia will help IWB to grow there. 

Business Model

The IWB business model is asset-light and quite flexible as IWB does not own vineyards. This type of business model employs a relatively low amount of capital.

This business model consists of four steps:

1. Purchase of raw materials: IWB purchases wine, must and grapes from local producers (more than 200 farmers). IWB does not invest in agricultural activities and does not own or manage any vineyards. 

2. Vinification and bottling: IWB produces the wine in its two cellars, one in Puglia and another in Piedmont. The product is bottled both internally through three proprietary lines (65% of the volume) and externally (35% of the volume). 

3. Marketing and sales: As stated before, IWB products are sold through two main channels: 

• Wholesale (B2B): focused on international markets and in particular on mass distribution through its own brands (>90%) and private label products (<10%). IWB’s main clients in this channel are giants of organised distribution such as Tesco, Aldi, Costco, etc… 

• Ho.Re.Ca (B2B): (sales at Hotels, Restaurants and catering) in which the group is active thanks to the acquisition of EnoItalia in 2021

• Distance selling (B2C): IWB deals with the direct sale of products in the portfolio to end consumers in Italy, the UK, Germany, Switzerland, Netherlands, Austria, France and the US. IWB’s competitive advantage in this channel comes from a logistics platform without precedent in the sector and long experience.

4. Logistics & distribution: IWB directly controls the distribution activities of the entire group thanks to its own logistics centre in Piedmont, with a storage capacity of 17,000 pallets.