Treasury Wine: How To Run A Vineyard

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

Brokers are impressed by Treasury Wine Estates investment in its Barossa Valley vineyards.

-Investment in new facility to pay off for Treasury Wine Estates
-Replanting/rejuvenation underway
-Automation to provide cost efficiencies
-Improvement in margins

By Greg Peel

Being an equity analyst can often be a difficult and tiresome assignment. Yesterday Treasury Wine Estates ((TWE)) analysts were forced to drag themselves off to the Barossa Valley for a guided tour of the company’s vineyard facilities.

But they did come home impressed.

Investment in the Barossa Valley wine production facility was announced at the company’s 2019 investor day and serves to replace the previous Nuriootpa winery. The total investment of $165m, completed in May 2022, was in line with initial guidance of $150-180m.

Optimisation

Morgan Stanley saw the key benefits of the new facility to include yield optimisation, with an uplift in conversion and automated berry sorting, reduced grade slippages through tank availability for smaller batches, cost efficiencies through automation, and scale (one-third increase in premium wine-making capacity).

Treasury Wine has also replanted or is rejuvenating 800-900 hectares of vineyards, a process that began in FY21 and represents some 10-12% of planted acreage. Approximately 25% of these vineyards are producing, with the remaining 75% to return to production over the next two years. This will support the company’s ambition to increase intake in FY24 and beyond, Morgan Stanley notes.

While Citi points out replanting/rejuvenating is somewhat business-as-usual for a winemaker, this has been opportunistically accelerated at a time of oversupply and China wine tariffs.

The recently built dam (one of five) provides a competitive advantage as it increases water security, and future plans to put a lid on the dam shown to analysts from April 2024 could save 20% to 30% of water from evaporation.

Automation

The company is also testing robot sprayers which facilitate significant labour efficiencies, Citi notes, as one employee can run five sprayers versus one employee to operate each non-robot sprayer. Each sprayer costs US$230-250k plus a subscription charge, versus labour which can be up to A$100k per person.

And the company is trialing vineyard canopies, which cost $1m for 16 hectares, installed four months ago, to take greater control of climates, which is helpful for managing yield/quality particularly for cabernet growing in hot/dry years, Citi learned. The canopies help manage wind disruption, temperature extremes and soil moisture/irrigation.

The key drivers for return on capital employed (ROCE), in reference to the $165m investment, were for UBS firstly a one third increase in luxury wine production capacity via more crushers, concentrators and fermenters, while the number of oak barrels has also increased from 75k to 137k.

Secondly, the winemaking process (including a more versatile approach to grape intake and greater use of technology) is now better able to ensure grapes become the highest luxury grade possible, which helps to increase net sales revenue per case and expand gross margins, and thirdly, greater use of technology (eg automation) and changing processes drive efficiency gains and reduce overall labour costs.

All up, the investments should lift FY24 intake to increase as Penfolds' inventory position is rebalanced and Treasury Wine prepares for potential removal of China tariffs, Morgan Stanely notes.

As a result of utilisation of the new wine-making facility, the broker expects to see an improvement in the company's luxury inventory positioning, supportive of gross profit margins. The uplift in conversion and reduced grade slippage will underpin this mix-shift to higher quality inventory.

Despite all the excitement, none of the three brokers reporting deigned to change their ratings or targets for the stock.

Morgan Stanley retains Overweight with a $14.35 target (last $10.51), UBS has a Buy and $13.75 target, while Citi is on Neutral and a low-end $11.80 target.

Bottoms up.

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