Treasury Wine Estates: Now on a runway for growth

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
17 February 2022, 7:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Treasury Wine Estates (ASX:TWE) reported an impressive 1H22 result given it had to cycle China earnings and the divested US commercial wine portfolio. COVID also continued to impact some of its higher margin channels. The result materially beat our forecast but was in line with consensus expectations.
  • Guidance implies that the 2H22 EBITS will be slightly lower than the 1H22 however it will be up strongly on the pcp. The foundations are now in place for TWE to deliver strong double digit growth from FY23. Pleasingly, the benefits of its new divisional model are clearly evident.
  • Trading at a material discount to our valuation and its pre-COVID multiples, we maintain an Add rating on this high quality company.

1H22 result materially beats our forecast

TWE posted 1H22 sales of A$1.3bn (-10.1% on the pcp), underlying EBITS of A$262.4m (-6.7% on the pcp or -3.6% in constant currency) and underlying NPAT of A$163.2m (up -5.3% on the pcp). The result was in line with consensus and materially beat our forecasts. If we exclude Australian sales to China in the pcp (EBITS of A$78.2m), underlying EBITS was up 28%.

Penfolds and Treasury Premium Brands better than expected

This was TWE’s first half yearly result under its new divisional model. The impressive result clearly highlights the benefits of a separate focus and accountability, helping TWE to deliver strong underlying growth across all its divisions and key markets (excluding China).

Penfolds EBITS fell 19.0% (+18.8% ex-China), due to a lack of China earnings and effectively no duty free sales. The result was better than expected, driven largely by strong growth in Asia (NSR +119%), reduced costs and a temporary rephasing of overhead and promotional investment.

Treasury Americas EBITS increased 18.8%, driven by portfolio premiumisation after the sale of the commercial wine portfolio and the progressive reopening of cellar doors and on-premise. Treasury Premium Brands EBIT rose 19.3%, despite having to cycle COVID pantry stocking and incurring higher COGS, benefitting from premiumisation and new innovations. Its EBIT margin increased to 9.3% from 7.4%.

The balance sheet was stronger than expected (ND/EBITDA of 1.8x) after TWE generated strong cashflow (115% conversion), despite funding the FFV acquisition. The interim dividend of 15cps ff was also higher than our forecast.

Slightly weaker 2H22 vs 1H22; Strong double digit EBIT growth from FY23

No formal FY22 guidance was provided however, TWE did say that it expects trading conditions for the remainder of FY22 will be broadly consistent with those in 1H22 across all key global markets and channels. It stressed that the company has shifted its focus from a mindset of ‘recovery and restructuring’ to one of ‘growth and innovation.

Trading in the 2H22 across Treasury Premium Brands is expected to be consistent with the 1H22, while Treasury Americas 2H22 EBITS should be stronger given the FFV acquisition. Penfolds earnings are seasonally skewed to the 1H. Costs of packaging materials, shipping and labour are expected to remain elevated. Importantly price rises are being implemented across select brands.

In FY23, TWE’s earnings will benefit from the recovery of its higher margin channels, its new divisional operating model, Penfolds reallocation strategy, a full year of the FFV acquisition and the associated synergies and lower COGS, with management expecting to deliver cost savings of at least A$75m pa.

We revise our forecasts slightly

Given TWE’s FY22 guidance, we have reduced our forecasts slightly. Our FY22/23/24 EBITS forecasts have fallen by 2.6%/2.6%/0.7% respectively. Our new FY22 EBITS forecast is A$523.2m, up 2.5% on FY21A (implies 2H22 EBITS growth of 13.8% on pcp). We forecast 21.6% and 13.8% EBITS growth in FY23 and FY24 based on key initiatives in place.

Investment view - Add rating

Following forecast changes, our SOTP valuation has fallen to (login to view). With over 18% upside to our new price target and the stock trading on an FY23 PE of only 21x (long-term average is 25x) and a material discount to other luxury brand owners, we remain buyers of this well managed company.

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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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