In an Australian reporting season where many higher P/E growth stocks have failed to meet or exceed consensus expectations, it was very good to see our high conviction investment Treasury Wine Estates exceed expectations and consequently get re-rated to fresh all-time share price highs. The trend is your friend in TWE and I continue to believe the medium-term investment case for TWE is very strong, driven by its brand portfolio below and CEO Michael Clarke.
TWE generated a +36% rise in earnings before interest, tax and the SGARA agricultural accounting standard to $455m in FY17. Bottom line profit rose +55% to $269m, while revenue rose +8.1% to $2.53bn. Group margins rose 19% and are on a clear pathway to 25% in the years ahead. The final dividend was lifted to 13c, taking the full year payout to 26c, a rise of +30% on the previous year. A $300m buyback was also announced.
For a larger version of this image, click here [1].
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Considering the carnage in other Australian higher P/E growth stocks, this reporting season I have to admit I was a little nervous coming into the FY17 TWE results. The stock is priced for strong growth and it needed to exceed the market’s consensus forecasts and see upgrades to FY18 consensus forecasts for the stock price to rally. Thankfully that did happen and the faith I have in the TWE brands and execution under CEO Michael Clarke has been vindicated.
TWE rallied +7% to new highs.
FY18 is expected to be a lower growth year as TWE navigates through restricted wine availability and as it invests in its business to deliver strong and sustained growth from FY19 onwards. Analysts and myself believe this is the right strategy, which will lead to EBITS growing by around $1 billion by FY21 as the strong FY16 and FY17 harvests become available for sale at premium prices. It’s also worth noting these harvests had a lower cost base.
In terms of geographic spread, we saw encouraging signs in all of TWE’s major markets. TWE’s margin in Asia increased to 38% in FY17, above the company’s own guidance of 30% to 35%. It would appear there is further upside in this margin with the successful implementation of TWE’s own distribution model taking effect. The Australian business is also heading in the right direction, also driven by strong margin outcomes, while the American business is showing early signs of growth.
For a larger version of this image, click here [3].
For a larger version of this image, click here [4].
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The increase in luxury inventory is a big and positive development for future profits. Analysts believe this build up in luxury inventory was not only driven by favourable conditions, but also positive investments being made by TWE.
For a larger version of the investor analysis, click here [6].
For a larger version of the summary and outlook, click here [7].
The summary slide is spot on. This is a journey from an agricultural company to a premium brand led company that feeds the growing “masstige” needs of the worlds growing consumer population.
To quote directly from the no.1 rated Merrill Lynch analyst, “We are expecting FY19 onward to be a stellar period of growth due to strong vintages coming to market and the fruits of its brand investment in FY18. We expect FY18 to be a year of investment to sustain long-term growth”.
I totally agree and feel TWE is one of very few ASX listed global structural growth stocks with pure play leverage to a truly premium product range.
Luxury stocks all around the world continue to see strong revenue growth and TWE is the only “luxury” stock listed on the ASX.
As Michael Clarke continues to execute on his strategy and extra further economic rent for shareholders, I expect TWE to move to a true global luxury of around 25x current year earnings. On the basis that analysts forecast EPS of 80c in FY20, which is only three years away, and applying a global luxury multiple of 25x, then there’s every chance TWE will be a $20.00 stock in FY20.
I believe TWE is a genuine medium-term high conviction investment. Many of you have hopefully followed my bullish view on TWE over the last few years and done well. My message today is this stock is less than half way through its transformation and significant upside remains in the stock over the next three years.
Let your winners run: my view is TWE will continue to be a winner. When it gets to $20.00 we can all have a glass of Grange.
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