A New Strategy For Treasury Wine Estates

Australia | Jun 09 2021

Chinese tariffs have hit Treasury Wine Estates hard, but management is working even harder on a revised global strategy. Early optimism equally focuses on some kind of normalisation post covid

-Expectations are that Treasury Wine's Asian business will return to pre-covid sales by FY24
-The volume of Australian wine exports to Hong Kong hasbeen raising eyebrows
-Treasury Wine is exploring alternative luxury markets via targeted marketing campaigns

By Miles Wu

Following Chinas escalating hostility since the outbreak of covid-19, the share price of Treasury Wine Estates ((TWE)) has been going south.

Starting from mid-January in 2020, Treasury Wine shares have lost approximately -33.6% versus the 2.2% net gain booked by the ASX200.

While brokers and pundits generally assumed the heavy five-year Chinese tariff is the key detriment to the free-fall of the share price, on the positive side Credit Suisse analysts, among others, have already expressed their view the companys Asian business will return to pre-pandemic levels in FY24.

More importantly, the prospect of Treasury Wine does not seem as bad as it sounds. When taking a closer look at its one-year share price, the stock is currently showing signs of consolidation breakout after pondering on the mid-range of 52-week high and 52-week low.

Strategy

Although China accounted for around 30% of group earnings and a 3.3% in five-year compound annual growth rate to FY20, Treasury management in the meantime implemented various mitigation measures to weather the storm.

Apparently, according to press reports, investors are betting that Australian wine shipments (Penfolds) will turn to the grey market in Hong Kong while onshore Chinese drinkers are being punished by the tariff imposed by the Chinese authorities.

Goldman Sachs analyst Andrew McLennan expects ongoing volatility for years to come as wine companies work out new markets and channels, though there is an obvious rise in sales of Australian wine to Hong Kong and exports to frontier markets in the last quarter of 2020 have raised eyebrows.

Looking at Treasury Wines most recent interim result and investor presentation, the company is restructuring its China wine business as part of its plans to change the global operating model. The company is moving quickly in diversifying its sales to other global markets.

The new focus is on luxury growth markets in the US, Australia and other parts of Asia via driving consumption through targeted marketing campaigns.

The company also signed an agreement with the Republic National Distributing Company to distribute its Penfolds California Collection in multiple US states. The cost saving measures are expected to save -$10m from FY22 onwards.

While this stop-loss measure helps Treasury Wine to buy time during a difficult period, the company is heading to divest a significant portion of the commercial brand portfolio in the US, which enables management to further focus on higher margin luxury wine that supports the regional margin target of 25% in operational earnings.

Optimisation plan

Macquarie has already increased its own operational profits forecast to $515m from $495m due to the delivery of the companys global supply chain optimisation program.

The brokers recent research update suggests negative news with material effect to the share price is by now mostly priced in.


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