Caution Over Treasury Wines’ Restructure

This story features TREASURY WINE ESTATES LIMITED. For more info SHARE ANALYSIS: TWE

A divestment process in the Americas has started as Treasury Wine aims for a leaner, more profitable business, but where will growth come from?

-Cautious reaction given lack of detail on further restructuring
-Significant uncertainty around volumes previously destined for China
-Takeover speculation continues
 

By Eva Brocklehurst

Treasury Wine Estates ((TWE)) has commenced the restructure of its Americas business, flagged at the first half update, with the of exit of several low-priced brands. Additional restructuring, where both Penfolds and the Americas units are separated internally, should be undertaken over the next six months.

The latest announcement pertains to a significant share of volumes in Americas that is likely to be rationalised, and Goldman Sachs, while believing this is a positive start, is cautious.

The broker's reticence stems from a lack of detail on terms and clarity around the timeline to completion of the remaining restructuring program.

Credit Suisse downgrades to Neutral from Outperform, noting the share price has largely closed the valuation gap to peers. The broker also notes FY22 earnings forecasts are relatively depressed because of the import tariffs imposed by China on Australian wine. Moreover, a large part of business in Asia outside of China relies on global travel retailing to return to normal.

The broker envisages intensive price competition in Australia and Europe as grape supply previously destined for China competes in these low-end wine markets.

Ord Minnett, too, downgrades, to Hold from Accumulate, following the outperformance in the share price since the first half result, believing the risk/award equation is now less attractive. Nevertheless, the broker acknowledges Treasury Wine is delivering on its plans to realise at least $300m in proceeds from brand and asset sales in 2021.

Jarden believes the deal is good and should provide increased confidence in management's ability to execute on its other plans. The deal should also be accretive to margins over time given the shift in mix towards quality.

UBS considers the overall impact of the deal modest, but is increasingly confident in the ability of the company to move to a lower volume/higher margin business. The broker reduces earnings (EBITS) estimates for the Americas by -2-6% to reflect a faster divestment process.

While there is a strong portfolio of brands and tangible asset backing, the broker's assessment of the stock price suggests it is already factoring in a recovery year despite the market risks.

Morgan Stanley finds management commentary increasingly positive regarding the US turnaround but also highlights the significant uncertainty surrounding the re-allocation of wines previously destined for China and the impact on the Australian market from supply/demand imbalance.

Licensing Agreement

A licensing agreement with The Wine Group, bringing in $100m plus ongoing licence fees, is the first step in the promised $300m wine divestiture plan for 2021.

The brands, such as Beringer Main & Vine and Founders Estate, Coastal Estates and Meridian, will be offloaded and while this will reduce volumes in the Americas by -35% it should only lower group earnings by -3%, Citi points out.

The broker would like further product innovation and more marketing investment in order to apply a higher multiple to its Americas valuation, and suspects the residual business in the Americas will have an EBITS margin of nearer 25%.

The issue will then become one of clarity regarding future growth, which is currently concentrated on 19 Crimes and Matua. The broker expects volumes in the Americas will settle at around 7m cases, down from 12m in 2020. A further scaling back of Lindemans and others should result in a further -1m reduction.

Citi expects the additional divisional restructure, including the fate of Penfolds, should be more of an influence on the share price, and an investor briefing on May 13 could provide more detail.

Bid Speculation

Jarden notes recent speculation of M&A activity, with a purported $15.67/share offer by Pernod Ricard, or a US firm. Ord Minnett also suspects recent speculation regarding takeover interest has supported the share price but considers a bid would be opportunistic, noting commentary that Pernod Ricard was selling much of its wine portfolio in 2019.

Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, has an Underweight rating and $9.70 target. In order to become more positive the broker requires an understanding of the new earnings base and changing corporate structure, as well as detail on the reallocation of volumes from China where the uncertainties create risk.

Goldman Sachs, also not one of the seven, has a Neutral rating with a $9.30 target. The database has six Hold ratings and one Sell (Citi). The consensus target is $10.61, signalling -7.2% downside to the last share price. Targets range from $9.30 (Citi) to $11.50 (Ord Minnett).

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