Treasury Wine Estates: Positive investment thesis hasn’t changed

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
18 October 2021, 10:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Unsurprisingly, COVID has continued to impact some of TWE’s key channels, particularly the higher margin ones. However, with key markets starting to reopen, we expect sales to improve from here. We also highlight that TWE is performing well in what it can control and in markets not impacted by COVID.
  • TWE reiterated its medium-term growth targets - sustainable top-line growth, high single-digit earnings growth pa, materially higher margins and ROCE.
  • The new divisional operating model is already seeing tangible signs of improvement across the brands. We continue to believe that this structure will achieve demerger type benefits without the additional costs. It also allows the market to properly value the iconic Penfolds brand.
  • We believe that the strategies TWE has in place will deliver solid earnings growth over coming years. Recent share price weakness represents a great buying opportunity in this high quality company. Add maintained.  

AGM update: 1Q is impacted by COVID but executing on the controllables

At its AGM, TWE provided a brief 1Q22 trading update. Despite the recovery of some channels being slightly behind expectations given COVID restrictions and ongoing global logistics and supply chain issues, TWE said that overall, it is pleased with the business’s 1Q22 underlying performance.

Analysis: 1Q had some COVID impacts; more markets should reopen in 2Q

Due to COVD restrictions, TWE’s higher margin channels such as duty free, cellar doors and on-premise have been either closed or disrupted. Specifically, in the US, re-openings have continued at a gradual pace, but on-premise depletions growth has been slower than expected due to the delta variant.

In Australia, lockdowns in Sydney and Melbourne closed the on-premise channel, delaying the company’s execution plans outside of the large retailers. In Asia, there continues to be significant disruptions to key luxury sales channels across large parts of the region.

Retail and e-commerce channels continue to perform strongly, albeit with moderating growth rates compared to the pcp which had COVID pantry stocking.

Penfolds has continued to see positive momentum including in Asia (ex-China) which has seen depletions of 19% in the three months to August. We view this as a strong outcome given many parts of Asia were severely impacted by COVID.

Treasury Americas growth portfolio has grown at 3% which is well in excess of the category which has declined by 5%. Treasury Premiums Brands has continued to benefit from portfolio premiumisation which has delivered 1Q22 NSR/case growth.

Outlook: well placed as channels reopen and strategic initiatives deliver

No formal FY22 guidance was provided. TWE said that it is positive on the outlook given the continuing momentum behind its premium portfolios. Management remains confident that as vaccination programs pick up and restrictions ease across its key premium and luxury wine sales channels, it is well placed to deliver earnings growth.

A number of its key markets are starting to reopen in the 2Q22 and reduced travel restrictions should support a return of duty free sales.

TWE’s new divisional operating model is now in place and is aimed at maximising the benefits of a 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.

Forecasts: we make only minor revisions; expect strong growth from 2H22

Given COVID impacts on the 1Q22, we have reduced our FY22/23/24 EBITS forecasts by 1.9%/0.7%/0.7%. Our new FY22 EBITS forecast is A$524.6m, up 2.8% 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 25% EBITS growth in FY22.

We forecast solid 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

Following forecast changes, our SOTP valuation has fallen to (login to view). We think that TWE is well placed to deliver strong earnings growth when its key channels fully reopen.

The stock has been oversold and is looking good value trading on an FY23 PE of 22.2x compared to its long-term average of 25x.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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