TWE – a global company with global brands
Treasury Wine Estates (TWE) is a vertically integrated wine company operating across ANZ, Asia, the Americas and EMEA (Europe, The Middle East and Africa). It is focused on portfolio premiumisation supported by innovation, brand building investment and global sales and marketing.
While TWE has over 70 brands in its portfolio, it focuses on a smaller group of priority (core) brands. It is also focused on expanding its country-of-origin offerings, one portfolio at a time. Its most profitable brand is Penfolds. TWE has been proactively exiting lower margin Commercial volume to focus on Luxury and Masstige give growth is strongest in these categories and margins are higher.
TWE's strategy in recent years has been to move from an order-taking agricultural business to a brand-led organisation. It has put in place Fast Moving Consumer Goods (FMCG) principles, meaning that TWE is less exposed to the wine cycle than it once was.
Well placed to continue delivering strong earnings growth
TWE's EBITS four year CAGR to FY18A has been 25% and this rate of growth is expected to continue in FY19. Importantly management believes there is still work to be done at TWE to improve the business and the company is well positioned for growth based on its five year business plan, and that this growth isn't reliant on acquisitions. We forecast a further 19.9% growth in FY20 and 15.3% growth in FY21.
TWE's inventory balance and mix is a lead indicator of its future sales. The inventory on the company's balance sheet underpins our forecasts. In particular there is a greater availability of its Australian Luxury portfolio led by Penfolds. Other factors driving our forecasts include price rises, the strong demand for TWE's brands in Asia, margin accretion from the 2H19 onwards from TWE's new distribution strategy in the US, a new cost out program and a lower AUD.
Any acquisitions offer further upside to our forecasts.
Our positive view on TWE is based on its strong market position globally; its leading brand portfolio which has pricing power; its premiumisation strategy which will continue to underpin strong earnings growth, margin and ROCE expansion; and plenty of potential growth to be achieved from its Asia business and successful execution of its new route to market strategy in the US.
TWE is led by an impressive management team which has consistently beaten expectations. We believe TWE is attractively priced for its growth profile, trading on a PEG ratio of 1.2x over FY19 and 0.9x over FY20. It is also trading at a decent discount to its medium-term average forward PE multiple.
Key risks include loss of key management personnel; adverse FX; agri risks; dealing with the major retailers; not developing the benefits of the new US route to market strategy; competition; managing inventory; market entry issues; and an economic slowdown impacting wine consumption.
We initiate coverage on Treasury Wine Estates (TWE) with an Add recommendation.
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Disclaimer(s): Analyst owns shares.
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