Treasury Wine’s Tough 1H20 Shows Lack of Economic Moat; Shares Now in Line with our Unchanged FVE

No-moat Treasury Wine Estates saw substantial competitive challenges in the first-half of fiscal 2020, particularly in the U.S. In response, management reduced its forecast growth for adjusted operating income in fiscal 2020 to 5% to 10% from 15% to 20% previously, and outlined only a slight reacceleration in fiscal 2021 to 10% to 15%. These projections trail our 19.6% and 18.2% respective forecasts for fiscal 2020 and 2021, and we’ve pulled down our estimates by 9% and 10%. But we make no changes to our long-term outlook. We still expect wine premiumization, market share gains in Asia, and business restructuring will lead to Treasury reporting nearly AUD 1.2 billion in operating income by fiscal 2024 versus AUD 722 million in fiscal 2020. While this suggests a sizable growth step-up past the next two challenging years, the resulting five-year CAGR of 12% is considerably lower than the five-year historical 29% rate, owing to more limited mix-shift opportunities. Treasury’s stock now trades in line with our AUD 12.80 per share fair value estimate, unchanged given time value of money which offsets our near-term reductions.