On 1st February Blavod Wines & Spirits*, the owner and licencee of a number of worldwide spirits brands and a distributor of a number of branded spirits and wines in the UK, disappointingly announced that “third quarter sales (to December 31 2009) were well below expectations, and that as a result full-year profits will be hurt”. Although the company anticipates a better final quarter, it now expects a break-even full-year outturn – we had expected the company to build on last year’s £185,000 profit – having also “suffered exchange losses and one-off costs not originally forecast”.

The company’s analysis has shown that it suffered in the quarter because at a time it was able to achieve higher retail prices on several key products, share was lost to competitors which promoted heavily. However, as these promotions are ending, Blavod is finding itself more strongly positioned. Additionally sales, both in the UK and export, have also continued to be constrained by a conservative credit policy – though this has also helped avoid exposure to failures such as that recently of First Quench.

Blavod did also add that, in terms of the sales performance, “whilst this setback is very disappointing, the Board believes that it is short term”, noting:

“there are major causes for optimism; Blavod will regain UK distribution, and new initiatives are in hand to support the Blavod brand. Moderately increased prices have been agreed on several brands which will improve margins and allow further advertising and promotion support, and a number of new products are planned to be introduced in the Spring. Furthermore now that the Company has deepened its infrastructure to be capable of operating a higher level, it will not increase its overheads.”

The company also noted that pressure on its working capital has lessened as a result of the lower rate of growth and that it should thus have access to sufficient funds for operations for the foreseeable future. As a result of the warning we reduce out current year profit forecast to be in-line with the company’s break-even expectation and now see revenue coming in at £8 million (from £8.6 million). We also elect to be conservative regarding the company’s next year (now only two months away), reducing our profit expectations from £0.4 million to £0.25 million and trimming our sales forecast from £9.25 million to £9 million – though, for the reasons above, see the risks here to be very much on the upside.

The company remains confident for the long-term and we remain of the view that its continuing sales growth is seeing it become increasingly more important in industry circles. On valuation metrics typically used in the industry (based on multiple of cases sold), a £3.29 million market capitalisation significantly undervalues the company – being a 58.9% discount to forecast current year sales and not overly demanding forward multiple of earnings. Therefore, at 3.75p, our stance remains buy