Fat Prophets > Australasian Equities > Treasury Wine Estates

Treasury Wine Estates

TWE

March 15, 2024 FAT-AUS-1028
AUD12.59
Core
medium

TWE Snapshot

Treasury Wine Estates
Latest Closing Price: AUD12.59
Treasury Wine Estates Limited is engaged in growing of grapes and sourcing, wine production and marketing, selling and distribution. The Company's segments include Australia and New Zealand (ANZ), Americas, Asia, and Europe Middle, East and Africa (EMEA). ANZ segment is engaged in the manufacture, sale and marketing of wine within Australia and New Zealand and distribution of beer and cider under license in New Zealand. America’s segment is engaged in the manufacture, sale and marketing of wine within the Americas region. Asia segment is engaged in the sale and marketing of wine within the Asia (excluding the Middle East and Africa). EMEA segment is engaged in the manufacture, sale and marketing of wine within Europe and Middle, East & Africa. It is also engaged in the sale of branded wines, principally as a finished, bottled product. Its wine portfolio includes Commercial, Masstige and luxury wine brands, such as Penfolds, Beringer, Lindeman's, Wolf Blass, Chateau St Jean and others.
Market Capitalisation: AUD10.2b

A catalyst around the corner?

China’s Ministry of Commerce (MOFCOM) has issued an interim draft proposing the removal of tariffs on Australian wine exports. Although not a final determination, we would be very surprised if the removal of tariffs didn’t go through after reaching this advanced stage. Speaking at The Australian Financial Review Business Summit, the Chinese ambassador indicated this would be the likely outcome.

The AFR quoted Xiao Qian as saying, “Currently, Chinese authorities are reviewing and investigating our tariffs on Australian wine and things are moving on the right track, in the right direction.”

After punitive tariffs were imposed in late 2020, devastating Australian wine exports to China, relations between the two countries have been distinctly cool for much of that time. We have seen signs of thawing over the past year and placed a significant probability that a review kicked off in late 2023 would result in a positive outcome for TWE, although we considered this a ‘bonus’ rather than a necessity for our buy recommendation on the stock. We noted a China ‘reopening’ would be a welcome growth opportunity, though the company has already executed well by filling that hole by increasing sales in Southeast Asia, materially strengthening the business.

We continue to see value at current levels, given the solid outlook for luxury wines, the addition of DAOU Vineyards products, and a possible nadir for the Treasury Americas business in 1H24. We are encouraged by the ongoing shift in sales strategy, focusing more on the high-end premium and luxury segments, with the Penfolds brand being a key differentiator and ‘crown jewel’ asset.

Additionally, we foresee more strategic divestments and refined internal investments, as previously indicated. This includes cutting costs in the Treasury Premium Brands segment and minimising the impact of soft demand for lower-tier wines, enhancing the business quality at the group level. As the company integrates DAOU, it is positioning to create a separate sales and marketing focus between luxury and premium product portfolios within the laggard Treasury Americas segment from the beginning of FY25. We rate Treasury Wine Estates a buy.

Treasury Wines has bounced off the primary uptrend and appears technically to be headed towards a retest of the major resistance level at $14. A breakout above $14 would significantly raise the scope for further upside and another run at the record highs. It is encouraging that TWE has held above the primary trendline since the pandemic lows and the introduction of Chinese tariffs.

An imminent outcome. The final determination from MOFCOM is now expected within the coming weeks, and we are firmly optimistic the outcome will be favourable.

Treasury Wine has kept its options open for this possible outcome. The company opted to keep some luxury premium Penfolds volume in reserve in 1H24, which was a headwind for the financials. The Chinese market accounted for roughly 30% of group earnings before the imposition of sky-high tariffs. TWE expects only a minimal incremental EBITS benefit from renewing Australian country of origin exports to China in FY24 should the tariffs soon be removed. We would expect this contribution to lift in FY25, although certainly aren’t expecting a return to the ‘old days’ anytime soon. Positively, TWE was able to successfully pivot to ASEAN sales, which has strengthened the business. Meanwhile, Penfolds’ buyers should brace for global price rises for the high-end Penfolds range if the Chinese tariffs are removed.

In the 1H24 results, group net sales revenue (NSR) of $1,284.3 million was flat on a reported basis and 2.3% lower in constant currency. Positively, luxury NSR increased by 4.3% as the premiumisation strategy continued. Penfolds was the only segment that posted an increase, with sales rising 9.2% to $448.1 million. The Penfolds segment remains the key earnings driver, with EBITS increasing 2.9% to $186.9 million. Group EBITS for the six months came in at $289.8 million, matching market expectations. This marked a 5.8% decrease, hampered by a 17.5% fall in Treasury Americas’ EBITS to $93.1 million. Treasury Premium Brands EBITS was down a more modest 3.2% at $45.8 million.

In summary, Treasury Wine Estates looks poised to benefit from the removal of China tariffs, which we expect to begin benefiting the financials from FY25. TWE delivered to market expectations overall in 1H24 despite a lacklustre performance from the Treasury Americas segment. A strategic shift away from the lower-tier market is ongoing. For investors with a mid-term perspective, Treasury Wine offers an attractive proposition in our view. The company is committed to a premiumisation strategy, eyeing sustainable growth and margin expansion, with a strategic game plan in place should Chinese tariffs ease. TWE has significant scope to expand the distribution of the DAOU luxury range. We retain a buy rating.


DISCLAIMER
Fat Prophets has made every effort to ensure the reliability of the views and recommendations expressed in the reports published on its websites. Fat Prophets research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication. However, like the markets, we are not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Fat Prophets and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special, or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Fat Prophets hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.

Funds Management – In addition to the listed funds FPC, FPP and FATP, Fat Prophets Pty Ltd manages the separately managed accounts, namely Concentrated Australian Shares, Australian Shares Income, Small Midcap, Global Opportunities, Mining & resources, Asian Share, European Share and North American Share. These SMAs are managed under their own mandates by the fund managers, and this is independent to the research reports.

Staff trading – Fat Prophets Pty Ltd, its directors, employees and associates of Fat Prophets may hold interests in many ASX-listed Australian companies which may or may not be mentioned or recommended in the Fat Prophets newsletter. These positions may change at any time, without notice. To manage the conflict between personal dealing and newsletter recommendations the directors, employees, and associates of Fat Prophets Pty Ltd cannot knowingly trade in a stock 48 hours either side of a buy or sell recommendation being made in the Fat Prophets newsletter. Staff trades are pre-approved by an appointed staff trading compliance officer to ensure compliance with the staff trading policy.

For positions that directors and/or associates of the Fat Prophets group of companies currently hold in, please click here.