Treasury Wine Estates: Solid start but there is much more growth to come
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 19 August 2022, 7:30 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- Despite all the external headwinds, Treasury Wine Estates' (ASX:TWE) FY22 result was solid and in line with our forecast and its guidance. Importantly, the 2H demonstrated strong EBITS and NPAT growth (+14.1% and +18.8% on pcp).
- Despite cost pressures, the foundations are now in place for TWE to deliver strong double digit growth from FY23. Pleasingly, the benefits of its new divisional model are clearly evident and the Penfolds reallocation strategy has been a success.
- Trading at a material discount to our valuation and its pre-COVID multiples, we maintain an Add rating with a new price target of (login to view) on this high quality company.
Result was solid and in line with expectations; strong growth resumed in 2H
TWE posted FY22 sales of A$2.5bn (-3.6% on pcp), underlying EBITS of A$523.7m (+2.6% on pcp) and underlying NPAT of A$322.6m (+4.2% on pcp).
Group EBITS margin increased to 21.1%, up from 19.9% the pcp reflecting TWE's strong Luxury and Premium portfolio performance (now represent 83% of NSR). Excluding Australian sales to China in the pcp, underlying EBITS was up 22%.
Treasury Americas and Treasury Premium Brands beat expectations
Penfolds EBITS fell 7.8% (+25.1% ex-China), due to a lack of China earnings. Strong NSR growth of 106% was reported in Asia (ex-China). Penfolds EBITS margin was impressive at 44.5%.
Treasury Americas EBITS increased 20.5%, driven by portfolio premiumisation after the sale of the commercial wine portfolio, the addition of the FFV acquisition (exceeded expectations) and the reopening of cellar doors and on-premise.
Its EBITS margin was 19.3% vs 16.4% in the pcp. Treasury Premium Brands EBIT rose 27.0%, despite having to cycle COVID pantry stocking and incurring higher COGS, benefitting from premiumisation and new innovations. Its EBIT margin increased to 10.0% from 7.5%.
In FY22, TWE generated strong cashflow (104.3% conversion). ND/EBITDA rose to 1.8x from 1.6x after funding the FFV acquisition. TWE’s current luxury and premium inventory increased by 28.5% and 27.7% respectively.
This inventory will underpin strong sales over the next 12 months and lead to margin expansion given the greater skew of luxury and premium volumes. The interim dividend of 16cps ff was higher than our forecast. In FY23, the Board is assessing opportunities to supplement the dividend policy with capital management.
Outlook: expecting strong growth in FY23-25
No formal FY23 guidance was provided however TWE did say that it is positioned for strong growth and margin expansion in FY23 from top-line growth across its Premium and Luxury portfolios, targeted price rises and ongoing cost management.
While COGS will remain elevated in FY23, they are expected to fall in FY24. Importantly, TWE’s global supply chain optimisation program is expected to offset the impact of inflationary pressures (further A$25m in FY23) and higher cost Luxury vintages in FY23.
The strength of a number of TWE’s luxury and premium brands has enabled it to implement targeted price increases in FY22 and in early FY23. Premiumisation trends remain intact. TWE has not seen any slowdown or trading down in any of its markets. It also highlighted the historic resilience of the premium and luxury wine category through past economic downturns.
Forecast changes are minimal
Reflecting higher corporate costs, our FY23/24/25 EBITS forecasts have fallen by 0.9%/0.2%/0.2% respectively. Our new FY23 EBITS forecast is A$630.3m, up 20.3% on FY22A.
We forecast 14.6% and 9.7% EBITS growth in FY24 and FY25 from lower COGS/supply chain savings, a full COVID recovery, further benefits from its new operating model and Penfolds reallocation strategy, greater supply of luxury and premium wine (including new French and China Country of Origin wines), new product innovation and the FFV acquisition and associated synergies.
Investment view
After rolling forward to FY24 given TWE has initiatives in place to deliver strong earnings growth out to FY25, our SOTP valuation has risen to (login to view).
With ~20% upside to our new price target and the stock trading on an FY23/24 PE of 24.0/20.4x (long-term average is 25x) and at a discount to other luxury brand owners, we remain buyers of this well managed company.
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