Treasury Wine Estates Earnings: Increasing Premiumisation Improves Profitability

Following the release of fiscal 2023 results, shares in Treasury Wine Estates TWE 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 expect the firm’s strategic focus on high-end wines and its increased geographic diversification to benefit both long-term revenue growth and profitability. While the wine consumption in aggregate is sluggish, consumers have been trading up to higher-priced wines. 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.

Treasury declared a fully franked final dividend of AUD 17 cents per share, bringing total fiscal 2023 dividends of AUD 35 cents per share—a payout ratio of about two thirds of underlying EPS. We expect Treasury will continue to pay out a similar proportion of EPS from fiscal 2024. While Treasury is an Australian taxpayer, most earnings are derived outside Australia. We estimate available franking credits to be exhausted more quickly than replenished over the coming years.

Penfolds—still most of group earnings—remains the jewel in Treasury’s crown, with 7% increases in both volume and price. Treasury has effectively reallocated the product to other Asian markets, like Singapore, Hong Kong, Malaysia, and Thailand. We think alternative markets had been starved of high-end Penfolds product under the company’s strategy to limit global supply, hence preventing a need for substantial discounting. Indeed, underlying EBIT margins were maintained at about 44%.