Treasure Chest: Treasury Wine Bubbling Over

This story features TREASURY WINE ESTATES LIMITED, and other companies. For more info SHARE ANALYSIS: TWE

By Greg Peel

Treasury Wine Estates ((TWE)) had previously guided to FY16 earnings guidance of $290m not including the Diageo acquisition, and has now updated to $330-340m inclusive of Diageo earnings. The company notes this forecast is in line with market estimates.

Treasury Wine will also divest of its non-core US portfolio at book value. This will have little impact on earnings, analysts suggest, given supply chain cost savings.

The question is as to whether both the company and the market are getting a little carried away. Morgan Stanley suggests both the guidance upgrade and divestment were already priced in, and given the strong share price run the broker sticks to an Equal-weight rating.

Ord Minnett’s earnings forecast of $326.6m falls short of new guidance but the broker is prepared to believe Diageo is continuing to perform strongly in Asia and has benefitted in the US from the lower Aussie. Ords nevertheless retains a Lighten rating, which sits below Hold. If you’ve been holding the stock now is time to cream off some profit, the rating implies.

While Credit Suisse’s forecast of $335m is in line with new guidance, the share price run has taken the stock’s FY17 PE to 30x – higher than Treasury’s luxury goods peers and higher than even that of Blackmores ((BKL)), another company benefitting from growth in Chinese demand.

Having crunched the numbers, Credit Suisse suggests that despite this fresh guidance, the market is expecting an upgrade. Working backwards implies an expectation of at least 45% organic growth in Asia augmented by organic growth in other regions. The broker is forecasting 20%.

Moreover, while the management has suggested there will be no negative impact from Brexit, Credit Suisse assumes there will be some drag from the lower pound. And the forex gain Treasury enjoyed in FY16 from the lower Aussie is unlikely to be repeated in FY17.

Credit Suisse is maintaining an Underperform rating on Treasury Wine.

Other FNArena database brokers are yet to update on new guidance. At present, the stock attracts no Buy or equivalent ratings, rather four Holds and three Sells (including Lighten from Ords). The consensus price target is $9.03, suggesting 5% downside.

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