One of our favoured portfolio stocks is Treasury Wine Estates (TWE), the owner of Penfolds and other wine brands. I last wrote about Treasury last November when they were undertaking a capital raising to complete the acquisition of DAOU Vineyards in the USA. Through a rights issue, $825m was raised at $10.80 per share (see https://switzerreport.com.au/is-treasury-wines-capital-raising-appealing/)
Treasury Wine Estates – 6/23 to 6/24
Source: nabtrade.com
The purchase of DAOU was aligned with Treasury’s strategy to shift focus to the “luxury” end of the wine market. Defining ‘luxury’ as wine that is sold at a retail level above US$20 per bottle, ‘premium’ as wine that retails for US$8 to US$20 per bottle and ‘commercial’ below US$8 per bottle, the acquisition will lift Treasury’s sales of luxury wines to almost 50% of global group sales. ‘Premium’ wines will represent 38%, with commercial falling to 13%.
Since 2020, TWE has been pursuing a “premiumisation” strategy, maintaining that premium wines have stronger growth rates. Premiumisation is being driven by the emergence of the ‘drink better’ trend and by younger customers who desire premium tastes and exclusive experiences.
In the last few weeks, Treasury has hosted investors/analysts to its Treasury Americas vineyards and on Thursday, updated the market on its China business with the Penfolds brand. It also provided updated market guidance.
Let’s look at what Treasury had to say and the reaction of the brokers, and what this means for the future of the stock price.
Updated guidance
Treasury confirmed that it continues to expect mid to high single digit EBITS growth in FY24, excluding the EBITS contribution from DAOU in the second half of FY24. (It uses EBITS, which is earnings before interest and tax, material items, and an adjustment that brings the value of harvested grapes back to cost rather than to fair value as required by the accounting standard).
Treasury Americas
With the integration of DAOU, revenue in North America from ‘luxury’ wines will increase to 55% of net sales revenue and ‘premium’ 45%, with EBITS skewed to ‘luxury’ at 69%.
Earnings in FY24 (which finishes this week and adjusted for DAOU in the second half) are expected to be fairly flat on FY23, with some growth in the luxury portfolio. DAOU’s EBITS in the second half are in line with expectations.
Strategically, Treasury sees three core priorities for the combined USA business:
- Scale the Estate led brands and elevate the luxury image;
- Establish a lasting connection with consumers through world-class estate led experiences; and
- Pursuing international expansion opportunities (e.g. Canada).
Cost synergies of over US$20m (from sourcing and winemaking, bottling, procurement etc) have been validated and are on track to commence in FY25. With an integrated distribution team, distribution expansion, and ahead of category sales growth, Treasury continues to project that net sales revenue with deliver “average low double-digit growth over the medium term”.
Treasury maintains that the acquisition of DAOU is EPS (earnings per share) accretive before synergies and mid to high single-digit EPS accretive (pro-forma for synergies) in FY25, the first full year of ownership.
Penfolds
The Penfolds division of Treasury, which contributes about 55% of Treasury’s earnings, provided an update on its China business. It said that shipments of Australian wine to China had re-commenced at the end of March with strong demand from their distribution partners. Multi-city distributor roadshows were taking place in June to align on activation plans and priorities.
Penfolds brand awareness in China had remained strong and was ranked #2 for awareness amongst the top 10 imported wine brands. Penfolds had retained many of its China based sales and marketing team and was targeting a local team size of around 200 people in FY25 to support their growth ambitions.
China remains an attractive luxury wine market and a significant long term growth opportunity. With a clear ambition to be the number one luxury wine brand in China, the Penfolds management team believes they are well placed to capitalise on the opportunity in China.
Financially, Penfolds expects to deliver low double digit EBITs growth in FY25. This is driven by top line growth from price increases and a modest increase in in shipments in the Bin and Icon portfolio, offset by the step up in brand building investment and overheads in China of approximately $20m ahead of increased product availability from FY26. The margin is expected to improve to within the range of 43% to 45%.
Further out, Penfolds will target EBITs growth of approximately 15% (driven by product availability from the record 2024 Australian vintage) and a margin of 45%.
For FY24 (which ends this week), Penfolds EBITs will be in the range of $418m to $421m, up from $365m in FY23. The margin is expected to be around 42%.
What do the brokers say?
The major brokers remain supportive of Treasury. They see the opportunity in China, although noting that this will require investment in marketing and EBITS growth is being slightly pushed out to FY26 and FY27.
Macquarie says: “The broker sees a significant opportunity for the Penfolds brand to regain its favoured position in China”.
Citi says: “Recent management updates suggest a de-risking of earnings and removes the discount to peers previously applied”.
UBS says: “The analysts retain a Buy rating as the company repositions to luxury, and because of ongoing Penfolds sales growth, with China providing a growth accelerant.”
The current broker consensus target price (according to FN Arena) is $13.61, about 8.6% higher than Friday’s ASX price $12.54. As the following table shows, the range of target prices is a low of $12.00 from Ord Minnett (Morningstar) through to a high of $14.60 from Morgan Stanley.
Based on an ASX price of $12.54, the major brokers have TWE trading on a multiple of 23.5x forecast FY24 earnings and 19.8x forecast FY25 earnings. They forecast a full-year dividend of 41.9 cents for FY25, putting TWE on a prospective dividend yield of 3.3% (fully franked).
What’s the bottom line?
At around 20x earnings, I don’t think TWE is overpriced. I don’t see anything in the market updates that suggests that TWE management is losing confidence in its ability to execute, and if anything, I see growing confidence in the China opportunity.
I agree with the sentiment of the brokers that there is perhaps “upside risk” with TWE.
The rally in the share price since the capital raising in November/December has been quite strong, so perhaps a little bit of caution is warranted. However, definitely a “hold” for portfolio owners and a stock to consider in market pullbacks for others.
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