Treasury Wine Estate: There is a lot more to come

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
27 September 2019, 6:12 PM
Sectors Covered:
Agriculture, Food & Beverage, Travel

  • TWE's Investor Day showcased the quality of its management team, its world class viticultural assets and brand portfolio and its sustainable growth strategy
  • Vintages 2016-2019 should underpin strong earnings growth out to FY22. FY24 will benefit from the expansion of its Luxury winemaking infrastructure in South Australia. The ability to deliver its medium-term Americas EBITS margin target of 25% also provides upside to our forecasts. 
  • We maintain an Add rating on this quality, well managed growth company with a new price target (Morgans clients can login to view detail reports and price targets).

Investor Day builds confidence in team, assets and strategy

TWE's strategy - 'Together we boldly lead change in the world of wine' - is the right one in our view.

Supported by an impressive management team, TWE has delivered on its strategy of moving from an agri to a brand led company. Its premiumisation strategy has been integral to its success.

This will be enhanced in the future by its multi-regional sourcing which should derisk the business and grow its market share in priority regions, particularly the French category in China. The ROCE delivered by its masstige and luxury portfolios is between 2-4x that of its commercial portfolio.

A demerger of commercial wine is off the agenda for now, but could be revisited in the future with a sizable acquisition of a luxury/masstige wine portfolio.

TWE's competitively advantaged route to market (RTM) strategy saves margin which allows it to reinvest in its brands and support its partners. Globally, TWE is the most self-distributed wine company.

Brands, premiumisation and RTM will deliver solid future growth

TWE continues to invest in its business while still delivering solid double digit earnings growth and outperforming peers on most metrics.

MD, Michael Clarke, said that moving forward, TWE will remain in an aggressive growth mode. CFO, Matt Young, said 'looking forward, we see the potential for our business as being just as great, as it was when we started this journey five years ago'.

TWE's investment approach has established a cellar of highly demanded luxury and masstige wines which will be released over coming years.

In addition, the new investments it is making in France and its increased luxury wine making infrastructure in Australia will further support growth. FY20 guidance for 15-20% EBITS growth was reiterated. Earnings will be slightly weighted towards the 2H20 due to restructuring costs associated with the US and Global Business Services (GBS) transition.

A key theme amongst the management team was a sense of excitement about FY21 when TWE's earnings growth profile is likely to accelerate given it will benefit from V18 which was the best vintage the company has had in the last decade in terms of both volume and quality. V19 (FY22) was also described as very good.

A 25% EBITS margin target was provided for the Americas (FY19A was 19.3%). The ability to achieve this over a 3-5 year period would present upside to our forecasts.

Investment view – Add rating

Relative to peers, we think TWE's FY20/21 PEG ratio of 1.1x/1.0x remains attractive for a company with pricing power and a long dated growth profile.

Given our confidence in TWE's FY21 outlook due to the benefit of its strong V18 and further progress in its US route to market change, we have rolled forward our blended valuation to FY21 from FY20.

This has seen our valuation increase (Morgans clients can login to view detail reports and price targets). The next trading update from TWE will be at its AGM on 16 October.

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