Treasury Wine Estates: FFV bolsters the Americas luxury portfolio

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
19 November 2021, 9:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Treasury Wine Estates (ASX:TWE) has announced the acquisition of Napa Valley luxury wine business, Frank Family Vineyards (FFV) for US$315m (A$432m), funded by debt and cash.
  • The acquisition is in line with Treasury Americas strategy and will strengthen a key gap in its chardonnay portfolio. Importantly, FFV has generated solid earnings growth over many years and is a high margin business. It should see TWE achieve its margin target two years earlier than planned. The acquisition is immediately EPS accretive and US$5m of cost synergies are expected by FY24.
  • We have upgraded our forecasts, believing that the strategies TWE has in place will deliver solid earnings growth over coming years. We see recent share price weakness as a great buying opportunity in this high quality company. Add maintained.

Event: Acquisition of Frank Family Vineyards (FFV)

The acquisition will be funded via a combination of debt and cash, including proceeds from recent US asset divestments of its lower margin commercial and other non-core brands (realising ~A$300m of capital). Post funding this transaction we forecast ND/EBITDAS to end FY22 at 1.9x, falling to 1.5x in FY23. 

FFV is a luxury wine business based in the Napa Valley, California. It holds an award-winning luxury portfolio across three collections, with retail price points ranging from US$38-225/bottle. FFV's portfolio is chardonnay led and supported by a range comprising of cabernet sauvignon, pinot noir and sparkling wine.

The acquisition is in line with TWE’s strategy given it grows its Luxury portfolio in the US, fills missing price points and is a high margin business. The US wine market is growing the strongest in the luxury price points.

FFV will improve Treasury Americas share in luxury chardonnay to #3 overall and to #2 in the US$25 per bottle and above category. TWE has now successfully replaced its previously low margin commercial portfolio with a high margin luxury portfolio.

Analysis: Reasonable purchase price offering attractive long-term synergies

The acquisition price implies an FY21A EV/EBITDAS multiple of 13.2x or 10.9x post synergies. This is reasonable and represents a discount to other luxury wine transactions in the US (Constellation Brands paid 15-17x for some of its luxury and premium wine brands). FFV offers an attractive IRR, exceeding TWE’s WACC. 

The acquisition is expected to be EPS accretive immediately. TWE expects to acquire FFV during December 2021. Run rate cost synergies of US$5m are expected to be delivered by FY24, driven primarily by supply chain efficiencies.

In FY21, FFV generated NSR and EBITS of approx. US$54m and US$21m respectively, delivering an impressive EBITS margin of 38% (vs Treasury Americas of 16.4% in FY21). The acquisition will fast track Treasury Americas’ reaching its 25% EBITS margin target two years earlier than previously anticipated.

FFV has a track record of delivering solid earnings growth (FY18-21 volume and NSR CAGR of 7.7% and 9.1% respectively). Given the poor V20, earnings are forecast to flatline in FY22 however strong growth is forecast to resume from FY23 onwards.

A step up in FFV’s volumes is expected in FY24 from leveraging TWE’s sourcing capability (upside to TWE’s synergy target). TWE also intends to fast track FFV’s growth by increasing its distribution in the off-premise channel and into under-penetrated states.

We upgrade our forecasts for FFV

Taking into account the acquisition of FFV, we have increased our FY22/23/24 EBITS forecasts by 2.4%/5.5%/6.4% respectively. Our NPAT forecasts for FY22/23/24 have increased by a lesser amount of 1.8%/2.9%/3.9% given net interest expense has risen post funding this acquisition.

In FY22, FFV will only contribute to TWE’s earnings for slightly over six months and we note its earnings are seasonally skewed to the 1H given the key Christmas/holiday trading period.

In FY23, TWE will benefit from a full year of FFV and some of the targeted synergy benefits, while in FY24, all of the synergies are expected to be realised.

Investment view – Add recommendation

Following forecast changes, our SOTP valuation has increased to (login to view). We think that TWE is well placed to deliver strong earnings growth when its key channels fully reopen.

We think that the stock currently offers compelling value trading on an FY23 PE of 20.3x compared to its long-term average of 25x.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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