Treasury Wine Estates: A result worth toasting

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
20 August 2021, 9:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Given the number of external headwinds TWE faced in FY21, we think its result was commendable, with many areas across the business beating expectations.
  • Despite some issues still to overcome, the outlook is positive for TWE. Over the long-term, the company is targeting sustainable top-line growth, high single-digit earnings growth pa, materially higher margins and ROCE. Following the result we have greater confidence in TWE’s Penfolds reallocation strategy and the outlook for Americas. Reduced COGS will become a tailwind from FY23.
  • The new divisions allow the market to properly value the Penfolds brand and in our view, proves that the SOTP is worth more than the whole. We maintain an Add rating with a new price target of (login to view).

FY21 was at the higher end of guidance; NPAT/CF/Bal Sheet/Dividend all beat

Treasury Wine Estate (ASX:TWE) posted FY21 sales of A$2.6bn (-3% on FY20), underlying EBITS of A$510.3m (-0.4% on FY20 but up 2.8% in constant currency) and underlying NPAT of A$309.6m (up 3% on FY20). EBITS was in-line for us, while NPAT was a beat.

Analysis: Other Asia (EBITS +51%) was the highlight; CF was impressive

In our view, TWE reported a solid FY21 result in light of the number of challenges it faced including: COVID impacting a number of its higher margin channels, the tariffs limited its China sales, the Californian wildfires impacted its business, it incurred higher COGS and adverse FX (reduced EBITS by A$16.0m).

Trading improved in all markets except China and EMEA. Pleasingly, Asia EBITS of A$205m was well ahead of our forecast with China -48% but Other Asia +51%. Americas EBITS rose 23% after TWE’s focus brands (19 Crimes, Penfolds, Beringer Brothers, Matua and St Huberts The Stag) grew 23% by value.

TWE experienced strong growth outside of China for Penfolds Bins & Icons in FY21, with NSR ex-China up 38%, satisfying previously unmet demand and ANZ grew NSR by 15%, setting a solid platform for future growth. Across all regions, Penfolds pricing is holding up well.

The balance sheet was stronger than expected with ND/EBITDA of 1.6x after TWE generated stronger than expected cashflow (100.8% conversion) and sold noncore assets. The final dividend of 13cps ff was also higher than our forecast.

Outlook: targeting solid earnings growth over the medium term

As expected, no formal FY22 guidance was provided. Although COVID creates some uncertainty, TWE said that it is positive on the outlook across its key markets except for China. COGS per case are expected to remain elevated in FY22 but no worse than FY21. They are forecast to fall materially from FY23.

TWE reiterated that over the long-term, it is targeting sustainable top-line growth and high single-digit earnings growth pa, an EBITS margin of 25% and it intends to restore its ROCE to pre-COVID levels (FY19 was 14.9%) and beyond.

TWE’s new divisional operating model is now in place and is aimed at maximising the benefits of separate focus across its brand portfolios, rather than regions. We think its new structure is essentially trying to create the benefits of a demerger without actually demerging. TWE is now better positioned to take advantage of previously untapped growth opportunities across the globe, including M&A.

Forecast implications

Reflecting higher COGS, we have reduced our FY22 EBITS by 2.9%. However our NPAT forecast in FY22 is unchanged given lower net interest costs. Our EBITS forecasts in FY23 and FY24 are largely unchanged. Our new FY22 EBITS forecast is A$535.0m, up 4.8% on FY21A.

However, if we adjust FY21 for the 1H China result and proforma the Americas for the sale of the commercial portfolio, we forecast TWE to generate 28% EBITS growth in FY22.

We forecast double digit EBITS growth in FY23 and FY24 from materially lower COGS, a full COVID recovery, benefits from its new operating model and Penfolds reallocation strategy.

Investment view: Add rating

Our FY23 SOTP valuation is (login to view). We maintain an Add rating.

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