Johannesburg — THE strengthening of the rand negatively affected wine and brandy producer KWV's performance in the six months to December, and the group is likely to face the same challenge in the second half of the financial year.

Absa asset management analyst Chris Gilmour said the rand was still getting stronger. "It is going to be a problem for them." The continuing stronger rand will dampen the group's sales in Europe - to which it exports 90% of its wines.

Gilmour said he expected the rand to weaken in the third quarter, which should coincide with a possible strengthening of the dollar when the US increases interest rates.

KWV's revenue rose 10,3%, to R395,3m from R358,5m.

"The challenges are not getting easier," said KWV CEO Thys Loubser. "The recession might be over but we are certainly not feeling that in the market."

Group sales volumes increased by 12,3%. Revenue in the South African market grew by 14,1%, while business in the UK and the rest of Europe increased 8,4%.

Loubser said the group sold less spirits than other products during the six months as consumers were buying down.

This is the group's first set of results after unbundling Distell last year and Loubser said he was pleased with the performance.

Gilmour agreed that it was a good result given the circumstances and the strong rand.

KWV's gross profit margin declined to 37,8% from 43 % for the six months.

The group also strengthened its financial position by raising R150m via a rights offer during October. It said this was to bolster its ability to take advantage of investment opportunities.

Finance costs improved from an expense of R20,7m to a net income of R4,1m as a result of the capitalisation of the group and proceeds from the sale of the grape juice concentrate business.

The group said it expected the next six months to remain challenging in all markets. It said the rate of economic recovery and its effect on high unemployment and consumer debt remained uncertain and the health of the group's foreign markets, particularly in western and northern Europe, remained a concern.