Treasury Wine Estates’ H1 Earnings Weaker Than Expected

We maintain our AUD 11.50 fair value estimate for shares in Treasury Wine Estates TWE 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.

Treasury declared a fully franked interim dividend of AUD 18 cents per share, 17% higher than the pcp, and we continue to forecast total fiscal 2023 dividends of AUD 33 cents per share, representing a payout ratio of about two thirds of underlying EPS. While Treasury is an Australian taxpayer, most earnings are derived outside Australia, and we estimate available franking credits to be exhausted more quickly than they are replenished over the coming years.

Weaker volumes in the largest two segments (Penfolds and Treasuries America) were principally behind the lower-than-expected earnings for the period, and we don’t expect the second half to recoup the shortfall. Treasury’s first half year is generally stronger because it includes greater sales volume over the festive season and American Thanksgiving. Nonetheless, all segments improved on premiumization, with revenue per case, EBIT, and EBIT margins lifting above the pcp across all segments. Premium and luxury wines comprised 85% of group revenue during the half, from 83% in the pcp. 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. However, the wine industry is highly competitive, and volatile annual supply limits Treasury’s ability to generate sustainable economic profits, leading to our no-moat rating.