Challenger Wine Trust, Challenging Times Calls for Some Fine Wine! A$0.30

Fear...What do you fear most in life? Death? I fear that, but that is something that will not happen for a long time for me...and for all of us. But there is a constant fear that I have in my heart which I must share. That is when I look at my bank balance. I have a close friend who knows this, she says I always shake my head when I look at my receipt right after I withdraw money from the ATM. This cannot be more true. As I once again face my cashflow problem head on for another month, I asked myself, how did I get myself into this hole? Here I am, with no car, no kids, no mistresses, how am I without cash? Addiction....That is the answer. Addiction to smoking, drinking, womanizing or gambling? I admit, besides smoking, I am only human to be susceptible to the rest of the vices, however, trust me when I say, none of these vices are the source of my addiction.

My name is ______ and I am an investment ADDICT.

This is me, overinvesting again, running down my cash holdings to buy the next stock I find. Why do I deprive myself of the pleasures in life and invest for the future? Some of my closest buddies ask me this question and I just smile and act cool. In fact, I do not know why I cannot bring myself to buy a nice car, or even buy the most expensive bottle of wine or whisky. It is just a second nature of mine to look for opportunities to grow my money for the long term. My mum was still reasoning with me on my insomnia problems, stating the main reason for my inability to sleep as "thinking of ways to make money". Now that is food for thought isn't it?

Lets move on to the stock pick for the week. Something interesting, something I believe you have never thought about investing in. This stock was discovered by chance, during my brainstorming session in the hopes of designing a product that will provide extraodinary returns for investors.

What is the stock you may ask? It is in fact a trust listed in the Australian stock exchange. Challenger Wine Trust. This is the only wine trust listed in Asia and perhaps the World. I cannot be sure but I tried to find others, all I could get were wineries rather than a wine trust. What is a wine trust? It is basically like a Reit, investing in vineyards rather than properties. Challenger Wine Trust currently holds 22 vineyards in Australia, 95% has been leased out with an average lease renewal at 4.6 years.

Why do I like it? Because it is selling at distressed levels. This is what we call deep value investing. The trust has been able to generate strong cashflows since its inception and the distribution per unit for 2010 is guided at A$0.07. Yes, your eyes are not lying to you, it has a yield of 23% for this year while last year it was 18%. Distributions are paid out semi annually. While the yield is looking really attractive, of course there is a catch....The debt to equity is 54% and it is sitting on A$149 million debt at 8% interest rate. During the good times, the market will not discount the stock on this leverage, afterall it is secured with the vineyards. However debt and leverage is frowned upon at this day and age due to worries about the difficulties in refinancing. The trust has been paring down on its debt for the past 2 quarters through sales of vineyards.

With vineyard valuations coming down, I doubt they will be able to get good prices going forward, therefore they will probably be raising money through equity issuance. Current book value of the trust is A$0.61, which is expected to come down more as more units are issued for cash. This will be dilutive for the trust earnings in the short run, but I believe in the long run, there will be value as good vineyards will only become scarcer in the long run with soil erosion and urbanization. Also the water rights in the trust are booked in their financial statements based on historical purchase price and not the actual value. Water rights are strategic and hard to come by in Australia and this is worth a ton.

I do expect this trust to continue falling in the short run but I do not expect it to go much lower unless they do a 1 for 1 equity issue. As the Australian economy continues to grow steadily, the trust will start to get stronger rental income and the vineyard valuations will rise again. The trust's vineyards are leased by strong wineries like Australian Vintage Ltd and Pernod Ricard, both of which rents almost 50% of the leasable land. Thus they act like anchor tenants to the trust.

I would like to write more but really, I am getting tired due to the lack of sleep over the past few days. Expecting more days like this, especially as pay day continues to be ever elusive and the bank balance continues to run low...

Ha!

Best,

SVI