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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.

The broker expects demand to remain strong in China, despite weak export data from Australia being signalled for September and October. This is blamed on tough comparable numbers, as Treasury Wine stocked its warehouse in the previous period.

Citi believes the data indicate a more mixed outlook for China, although concedes issues in China are more driven by sentiment than fact, as there is little sign of weakness. Pricing is also up 16% in the three months to November 2018.

US Outlook

Goldman Sachs points to the Constellation Brands result which highlighted weakening trends in US wine sales. The broker does not believe Treasury Wine will be unaffected in this regard and reduces estimates for top-line growth in the Americas to 13.9% from 16.1%, based on weakness witnessed in the Nielsen scan data and Consolation Brands commentary.

Goldman Sachs, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Neutral rating and $13.40 target. Macquarie is less concerned about the implications of the Constellation Brands result, given non-premium wines appear to be struggling the most and depletions appear weaker than for Treasury Wine.

The broker believes the suggestion by Constellation Brands that the focus is on higher retail price points is a positive read for Treasury Wine. A combination of a recent sell-off in the stock and increased conviction of the likelihood of margin improvement in the US, as well as a strong supply of luxury wine, underpin Macquarie's Outperform rating.

Morgan Stanley agrees the premium positioning of Treasury Wine versus Constellation Brands will limit its exposure to the soft commercial trends. The broker expects the company will expand its margins in 2019 as distribution changes are incorporated.

Citi sticks by a Sell rating, noting that, while Constellation Brands is losing market share in the US, demand trends in the industry have also slowed. The broker finds it hard to placate investor concerns, estimating one third of the growth in first half EBITS can be attributed to favourable currency rates and the vast majority of the remainder to a better 2016 vintage. The broker would need to witness consistent volume and pricing growth to become more positive.

The change in route to market in the US and ongoing premiumisation should still underpin Treasury Wine, Ord Minnett asserts. The company is going direct in California, Florida and Washington and these three states are collectively 25% of revenue. Changes are also being made to distributors in other states, which comprise 15% of revenue. Ord Minnett calculates the shift provides access to an incremental 6.25% in EBITS margin.

The new distribution strategy in the US and cost reductions, as well as the lower Australian dollar, underpin the business while acquisitions offer further upside to Morgans' forecasts. Margin should increase over time as third-party distributors are removed from some regions (see above).

Once the company has completed its new route to market strategy Morgans believes it will be in a position to make further acquisitions. There has been speculation that Treasury Wine is interested in acquiring Chateau Ste Michelle Wine Estates in Washington, owned by Altria.

On the other side of the ledger, numerous private equity groups have also expressed interest in Treasury Wine over the years and Morgans notes a strong Chinese interest in the Australian wine industry.

FNArena's database has four Buy ratings, one Hold (Deutsche Bank) and one Sell (Citi). The consensus target is $17.07, signalling 15.7% upside to the last share price. Targets range from $14.50 (Citi) to $20.00 (Ord Minnett).

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