Company Reports

Treasury Wine Estates is increasingly focusing on building high-end brands in its portfolio, particularly in luxury and premium wine. With this focus, the company's revenue from higher-end wines has risen above 80% in fiscal 2023 from less than half in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales.

We maintain our AUD 11.50 fair value estimate for Treasury Wine Estates. As anticipated, first-half fiscal 2024 earnings were soft with underlying EBIT declining 6% on the previous corresponding period to AUD 290 million. The Americas portfolio struggled, shipments to Asia declined, and some Penfolds product was strategically held back. The company expects a stronger second half and “mid to high-single-digit” underlying EBIT growth in fiscal 2024—before earnings from the recent acquisition of luxury winemaker DAOU. We lift our fiscal 2024 underlying EBIT forecast by 1% to AUD 662 million, including contributions from DAOU. This is about 7% underlying EBIT growth before DAOU.

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury and premium wine. With this focus, the company's revenue from higher-end wines has risen above 80% in fiscal 2023 from less than half in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales.

We maintain our AUD 11.50 fair value estimate for shares in no-moat Treasury Wine Estates following the acquisition of U.S. luxury winemaker Daou Vineyards. The transaction is in line with Treasury's strategy to focus on higher-margin, higher-price, premium, and luxury wines in the Americas. Including transaction costs, the AUD 1.5 billion price tag will be funded by AUD 157 million placement of new shares to the existing owners of Daou, an AUD 825 million entitlement offer, and AUD 490 million in debt. The deal, expected to complete by end of calendar 2023, is broadly neutral to our fair value estimate after accounting for the dilutive impact of the equity raise.

We maintain our AUD 11.50 fair value estimate for shares in Treasury Wine Estates. We make no changes to our forecasts, which broadly track qualitative guidance. We expect fiscal 2024 revenue growth of about 8% and an underlying EBIT margin of about 24%—a 57-basis-point increase from fiscal 2023. We expect the firm's strategic focus on high-end wines and its increased geographical diversification to benefit both long-term revenue growth and profitability. But despite some strong brands, Treasury lacks an economic moat. The wine industry is highly competitive, and volatility in consumer preferences limits Treasury's ability to maintain excess returns over the long term.

Following the release of fiscal 2023 results, shares in Treasury Wine Estates are broadly fairly valued compared with our unchanged AUD 11.50 fair value estimate. Underlying EBIT of AUD 584 million, up 11% on fiscal 2022, was in line with our forecast and management guidance. This was despite a 13% decline in volume as Treasury continues to reposition its portfolio toward more expensive, higher-margin wines.

We maintain our AUD 11.50 fair value estimate for shares in Treasury Wine Estates following the release of interim fiscal 2023 results. Underlying EBIT lifted 17% on the prior corresponding period, or pcp, to AUD 308 million as increased premiumisation, price rises, and operational cost savings more than offset a 10% decline in volume. First-half earnings were weaker than expected. While we lower our fiscal 2023 EBIT forecast by 4% to AUD 598 million, the impact is immaterial to our fair value estimate. At current prices, shares in Treasury screen expensive.

The Chinese Ministry of Commerce tariffs effectively shut the door to the lucrative Chinese market in mid-fiscal 2021 with tariffs of 176% imposed on Australian country-of-origin wine. We had previously noted China appeared unlikely to back down, with spokesperson Wang Wenbin declaring the sanctions "legitimate, lawful and beyond reproach." But Senator Wong's visit to Beijing, the first Australian minister to travel to Beijing since 2018, brings renewed hope of restrictions easing. However, we think Treasury is effectively repositioning its business beyond the restrictions. Indeed, Treasury's strategy assumes the Chinese tariffs on Australian wine are permanent, instead aiming to supply the Chinese market with French and American-made wine (which do not attract Australian tariffs), and South African and Chilean country of origin wine for Rawsons Retreat, as well as launching the first Penfolds wine made in China in September 2022.

China appears unlikely to back down from 176% tariffs imposed on Australian country-of-origin wine. In a Chinese Foreign Ministry press conference on June 22, 2022, spokesperson Wang Wenbin declared the sanctions as "legitimate, lawful and beyond reproach". While this means Treasury Wine Estates' door to the lucrative Chinese market remains effectively shut, it's business as usual for Treasury, and we retain our AUD 11.50 fair value estimate. Treasury's strategy already assumes the tariffs on Australian wine are permanent, and instead aims to supply the market with French and American made wine (which do not attract the tariffs), and eventually Chinese-made Penfolds. At current prices, Treasury screens roughly fairly valued.

We maintain our AUD 11.50 fair value estimate for shares in Treasury Wine Estates following the release of interim fiscal 2022 earnings that were broadly as expected. Underlying EBIT fell 7% to AUD 262 million as 176% tariffs on Australian wine imposed by the Chinese Ministry of Commerce effectively shut Treasury's door to the lucrative Chinese market during the prior corresponding period, or pcp. We maintain our fiscal 2022 underlying EBIT forecast of AUD 565 million--an increase of 11% on fiscal 2021. Treasury declared a fully franked interim dividend of AUD 15 cents per share, in line with the pcp, and we continue to forecast total fiscal 2022 dividends of AUD 32 cents per share, representing a payout ratio of around 65% of underlying EPS.

We raise our fair value estimate for shares in Treasury Wines to AUD 11.50, from AUD 11.00 previously, following a transition in covering analyst. The increase to our fair value estimate is due in equal parts to an increase in our near-term earnings forecast, and time value of money. We raise our fiscal 2021 underlying EBIT forecast to AUD 505 million, from AUD 493 million previously, in line with the firm's guidance range of AUD 495 million to AUD 515 million provided at the 2021 investor day as the company flagged it is performing better than expected. While there was little detail on the recent performance uplift, we expect some second-half recovery in the Americas division, particularly, as vaccines in the U.S. lead to venues gradually reopening. Our Standard capital allocation and high fair value uncertainty ratings remain intact.

No-moat Treasury Wine Estates began to feel the effects of lofty tariffs closing the door to the lucrative Chinese export market in the first half of fiscal 2021, but also enjoyed rising margins versus the beleaguered second half of fiscal 2020 given relaxing COVID restrictions in Australia and the shedding of commercial brands in the U.S. In all, the company’s revenue fell 8.2% to AUD 1.4 billion versus the pcp, tracking our projected mid-single-digit full-year decline, while adjusted EBIT rose more than 70% from 2020’s second half to AUD 284.1 million, a margin improvement to 20% from 15%.

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to about 71% in fiscal 2020 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales.

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above $20) and “masstige” (bottles priced from $10 to $20) wine. With this focus, the company’s revenue from higher-end wines has risen to about 71% in fiscal 2020 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales.

No-moat Treasury Wine’s geographic diversity will be put to the test following the installation of a demand-destroying 169.3% tariff by China’s Ministry of Commerce against the company’s imported Australian wine, along with similar lofty excises on all other Australian wine producers. The tariff effectively shuts the door to Treasury’s arguably most important market. While Euromonitor estimates the total volume at only about 5% to 7% of the firm’s consolidated total, Treasury sells primarily high-end wines such as Penfolds in the country, which is both high price and margin. As such, the company notes China alone represented 30% of fiscal 2020 earnings. Management plans to reallocate some of this wine to other markets in the region, but the associated sales and marketing efforts will take time, leaving a sizable earnings hole in fiscal 2021. We’ve cut our fiscal 2021 EPS forecast by about 16%--given the loss of more than half-year’s contribution from China--and fiscal 2022 by 22%, to AUD 53 cents. Our fair value estimate is now AUD 11.00 per share, down 11%.

No-moat Treasury Wine Estates is beginning to see improving results following a challenging end to fiscal 2020. As flagged in its first-quarter trading update, this sequential step-up tracks our expectations, and we forecast continued recovery throughout fiscal 2021. But the winemaker is not out of the woods yet, and faces near-term volatility given an ongoing inquiry by the Chinese Ministry of Commerce (and potential tariffs and blocked imports) related to Australian wine. Nonetheless, we think the market is already pricing in this risk. In our note published on Aug. 18, 2020 (“Out of the Frying Pan and Into the Fire: Treasury FVE Still AUD 12.30 but China’s Inquiry Adds Risks”), we peg the downside valuation impact at about 20%, owing to China contributing nearly 25% of the company’s profits in fiscal 2020 by our estimate. As such, the 35% discount offered by shares versus our unchanged AUD 12.30 fair value estimate screens as attractive.

As flagged in its July 9 results preview, no-moat Treasury Wine Estates reported a tough fiscal 2020. Competitive pressure in the U.S. and the coronavirus pandemic led to second-half revenue falling 16% and adjusted operating earnings (referred to as EBITS by the firm) declining a massive 50%. This resulted in a full-year revenue drop of 7.1% and EBITS falling 21.7% to a 20.1% margin. We expect continued near-term challenges given international border closures, ongoing restrictions, and a difficult economic situation.

Treasury Wine Estates will accelerate the restructure of its commercial wine offering in the United States and look to potentially spin out its crown jewel Penfolds-branded wines by the end of calendar 2021. We’ve adjusted our near-term forecasts to account for lower U.S. commercial wine volumes and greater negative COVID-19 impacts, but these are offset over the long term by a post-coronavirus rebound in fiscal 2021 and improved American profitability. We maintain our AUD 12.80 per share fair value estimate.

The ongoing coronavirus outbreak is having a negative impact on no-moat Treasury Wine Estates’ sales in China, and management no longer believes its planned 5% to 10% adjusted operating earnings growth in fiscal 2020 is achievable. Treasury did not offer a new performance target, but noted consumption patterns since Chinese New Year have “significantly adversely impacted” the business. We reduce our near-term outlook for the company’s Asia segment, which made up 26% of revenue and 41% of operating income in fiscal 2019, leading to consolidated operating earnings growth of just 0.6% compared with our previous 9.4% forecast. Nonetheless, our long-term estimates and AUD 12.80 per share fair value estimate are unchanged.

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.