Treasury Wine Outlook Cheers Brokers

Australia | Jan 14 2019

Treasury Wine Estates has flagged strong earnings growth for 2019, although several brokers remain concerned about the softer US wine business signalled by competitor, Constellation Brands.

-Wine demand seen strong in China despite soft Oz export data
-US focus on higher retail price points a positive read for Treasury Wine
-2019 US margins likely to expand as distribution changes are incorporated


By Eva Brocklehurst

Treasury Wine Estates ((TWE)) has raised a glass to the New Year, cheering most brokers with a positive outlook. The company has guided to first half operating earnings (EBITS) of $335-340m. Guidance for around 25% growth in operating earnings in the first half has been reiterated, although Goldman Sachs suspects some extra work will be required in the second half to achieve this rate.

The guidance is not as strong as Goldman Sachs expected, albeit the 14/16 Penfolds release is expected to provide significant earnings growth in the first half. Still, there could be a risk to achieving guidance, given a more conservative view on Chinese growth, although the broker acknowledges this is likely priced into the stock at current levels. Moreover, there are reservations stemming from the subdued result from US competitor, Constellation Brands.

Morgans reinstates coverage with an Add rating and $17.20 target and believes the company is on track to deliver on its growth plans. The broker asserts the stock, post last year's sell-off, is attractively priced for its growth profile.

While there are over 70 brands in the portfolio, the focus is on a small group of priority brands, where the company has pricing power. Treasury Wine has also been reducing the lower-margin commercial volumes in order to focus on luxury and masstige, given its strongest performance is in these categories, and margins are also higher.

Luxury wine now comprises around 76% of the non-current inventory and around 56% of total inventory. The company is also less exposed to the wine cycle as it moves to a brand-led organisation.


Morgans believes there is plenty of growth to be achieved in the Asian business, where the company has achieved a compound growth rate of 44%. Treasury Wine is highly leveraged to the rising demand in China for luxury imported wine. Morgans observes plenty of opportunity to expand representation with existing and new customers in China.

Ord Minnett is also confident in Asian growth, notably China, because of the Penfolds brand and the route to market. Penfolds has boosted sales with support from wholesaler bundling, a common strategy by fast-moving consumer goods companies.

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