Treasury Wine Estates: Still growing strongly
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 16 February 2023, 8:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Treasury Wine Estates’ (ASX:TWE) 1H23 result was a slight miss to MorgansF and consensus. Nonetheless, the company still delivered strong EBITS growth of 17.2%, which is a solid outcome given the challenging macro-economic backdrop.
- Guidance implies that 2H23 EBITS will be broadly consistent on an underlying basis with the 1H23, resulting in minor downgrades to consensus. However, we still expect TWE to deliver double digit earnings growth over 2H23/FY24/FY25.
- Trading at a discount to our valuation, we maintain an Add rating with a new price target of (login to view) on this high quality company.
1H23 result slightly weaker than expected; Strong growth still delivered
Sales were A$1.3bn (+1.4% on pcp), EBITS +17.2% to A$307.5m (vs MorgansF of A$318.5m) and underlying NPAT +18.7% to A$193.7m (vs MorgansF of A$200.1m).
Group EBITS margin increased to 23.9%, up from 20.7% the pcp reflecting TWE's strong Luxury and Premium portfolio performance (now represent 85% of NSR). Its medium term EBITS margin target is 25%.
Penfolds/Treasury Americas in line; Treasury Premium Brands misses
Demand for Luxury wine remains strong with strong growth trends continuing across all TWE’s key markets, which supported a strong Penfolds result.
Of concern was TWE experiencing softer than expected demand in the 2Q23 for low margin entry-level Premium wine in the US and UK, and Commercial wine globally, resulting in volume declines for Treasury Americas and Treasury Premium Brands.
CF conversion was weak at 67.7% (vs 115.1% pcp) due to the return to a normalised working capital cycle. TWE expects FY23 CF conversion to be in line with its target of +90%. The balance sheet remains strong with ND/EBITDA of 1.7x vs 1.8x pcp. The Board continues to consider capital management and/or acquisitions.
Expect much of the same in 2H23
As expected, no formal FY23 guidance was provided. However, TWE did say it remains on track to deliver strong growth and margin expansion in FY23, with trading conditions for the remainder of FY23 expected to be broadly consistent with those in the 1H23. TWE expects its FY23 EBITS margin to be ~23%.
Penfolds – FY23 EBITS margin is expected to be between 42-44%, with 2H23 trends for volume and distribution growth expected to remain consistent with the 1H23. TWE expects this to support a balanced EBITS delivery through FY23.
Guidance implies that the EBITS margins will moderate in the 2H23, but there should be decent volumes growth vs 1H23 (volumes usually 1H weighted). The resumption of Chinese travellers provides potential upside.
Treasury Americas – Trading conditions are expected to remain consistent through the 2H23. Increased activation for the Premium portfolio is expected to deliver higher volumes but lower margin due to mix in the 2H23. For FY23, TWE expects this will deliver a balanced earnings profile and an EBITS margin of 23% (Morgans previous forecast was 21.2%).
Treasury Premium Brands – 2H23 trading conditions are expected to remain broadly consistent with the 1H23 across TWE’s key global markets and channels. This division will also benefit from further planned price increases in the 2H23.
We make slight downgrades to our forecasts
We have reduced our FY23/24/25 EBITS forecast by 3.4%/5.4%/6.1%.
In FY23 we forecast 16.2% EBITS growth followed by 12.3%/8.9% in FY24/FY25 from lower COGS, a full COVID recovery, further benefits from its new operating model and Penfolds reallocation strategy, greater supply of luxury and premium wine and the FFV acquisition and associated synergy benefits.
Following forecast changes, our SOTP valuation has fallen to (login to view). With 12.8% upside to our price target, we remain buyers of this well managed company.
The next catalyst is TWE’s Investor Day on 8 March, where we expect it will provide an update on its strategy for its Premium and Commercial wine portfolio and a deeper dive on its US business.
Another key share price catalyst is if China removes the hefty tariffs it has placed on Australian wine imports. As tough as the Chinese tariffs were initially, they have resulted in a much more diversified and resilient business moving forward.
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