Treasury Wine Chases Luxury

Australia | Jun 25 2024


Treasury Wine Estates is seeking to become more of a luxury wine brand in the US, and in China, now that tariffs have been lifted. Analysts are encouraged by the company’s new three-year plan.

-Treasury Wine Estates ups the ante in China
-US acquisition to add to luxury shift
-New guidance for medium term earnings and margins
-Analysts are becoming more confident

By Greg Peel

In mid-2021, Beijing imposed a 176% tariff on Australian wine imports, along with tariffs on many other imports from Australia, in response to the Australian government refusing to bow to China’s demands. The government remained unmoved, and Beijing has been gradually lifting those tariffs in recent times.

In March this year, the tariff on wine was lifted, an event the Australian wine industry had been holding on for all that time, including Treasury Wine Estates ((TWE)). In the interim, Australian winemakers had looked to expand into other markets, such as Singapore, Hong Kong, Malaysia and Thailand, but nothing compares to the size of the Chinese market.

Treasury Wine did manage to some extent to skirt China’s tariffs, supplying Penfolds wines made in China and other wines from France and the US. But now the door has been re-opened altogether.

In light of the lifting of tariffs, and last year’s acquisition of the California-based Daou luxury wine business, last week Treasury Wine announced its new strategy for the near to medium term. (Daou is not an acronym, the company was originally founded by the Daou brothers).

The Plan

Treasury Wine first reiterated its FY24 guidance. This is slightly below consensus forecasts, but analysts were braced for a downgrade based on recent peer results and industry data. Management also provided a three-year guidance outline for the Penfolds brand. China is a prominent factor, given despite the tariff period, Penfolds remains number two in the top ten of imported wine brand awareness in China.

Management expects to deliver a 14% three-year compound annual earnings growth rate for Penfolds, but in FY25, growth will only be in the single digits. This is because Treasury Wine will invest -$20m in building a Penfolds marketing team in China to restore the brand and subsequent sales. This cost will be offset by a 6% price rise previously announced for Penfolds wines in FY25.

In FY26-27, Treasury Wine expects its investment will pay off, projecting 15% earnings growth. While earnings margins will be somewhat constrained in FY25, management is targeting 45% in FY26-27 and beyond. The company is currently seeing solid demand for its higher-end brands, particularly in the US, making it difficult to provide sufficient supply, but FY24 has proven to be a strong vintage, allowing for the volumes required to meet restored Chinese demand.

Management has insisted it will build earnings on volumes, not on price, and there will be no further price rises in FY26-27 after the FY25 hike. Analysts are not convinced this promise will be kept, given Treasury Wine has a track record of frequent price increases. But taking the pledge on board, analysts simply suggest there could be “earnings upside”.

The US

Treasury Wine’s business case for for Daou remains unchanged, with low double-digit net sales revenue growth per annum targeted over the medium term. Distribution growth outside California is expected to be a key driver of growth. The plan is also to establish Daou as a renowned international brand, particularly through Asia.

Daou’s scale supports a future standalone TA Luxury division for Treasury Wine, which would include Penfolds, Frank Family Vineyards and other brands, making the business the largest luxury wine player in the US. In FY25, the wine availability for the TA Luxury portfolio will increase by double digits.

The Response

Citi considers the short term outlook for Treasury Wine to be “materially de-risked”, given the company did not deliver an FY24 guidance downgrade as was feared, and has provided increased comfort regarding the near term outlook for Daou. The issuance of Penfolds guidance for the next three years also reduces the risk of analysts making incorrect assumptions about the pace of the China recovery, and upside is on offer should further price rises occur.

Citi is incrementally more positive on the company, and to turn even more positive is looking for signs the premium segment of the Americas division, representing some 31% of divisional earnings, has stabilised.

Citi lifts its target to $12.95 from $12.40 but retains Neutral.

Ord Minnett is similarly maintaining a Hold rating for now. While the company likely enjoys a solid brand reputation at the very high end of its wine range, particularly in Penfolds, this broker expects pricing pressure to remain at critical mid-range price points, and profitability to continue to trail global wine leaders.

Ord Minnett expects a rebound over the longer term, but near term believes volatility will likely persist. The broker has increased its fair value estimate by 4% to $12.00.

While Treasury Wine won’t be completely immune to cost of living pressures and reduced alcohol consumption, Morgans thinks the company has a number of drivers to underpin solid earnings growth over coming years, including greater luxury wine supply, the Daou acquisition and associated synergy benefits and rebuilding its China business.

The stock is seen as trading on attractive valuation metrics for a luxury brand owner, hence Morgans maintains an Add rating with a target of $15.03, up from $14.03.

Morgan Stanley also sees valuation as attractive, trading at a forward PE of 19.5x. This broker has made minor adjustments to earnings forecast which lead to a target increase to $14.60 from $14.50. An Overweight rating is retained.

Macquarie retains Outperform, but has actually reduced its target by -1% to $13.60 due to an increase in the risk-free rate.

This broker sees significant growth opportunities in both the US and China over the short to medium term. Penfolds’ margin structure, the group’s global distribution, the more-focused US portfolio and a strong balance sheet provide confidence in the Outperform rating.

UBS has also lowered its target, to $14.50 from $15.00, due to a reduction in near term earnings forecasts based on investment spend. Those forecasts nonetheless sit above Treasury Wine’s guidance, and UBS retains Buy.

That leaves four Buy or equivalent ratings and two Hold among brokers monitored daily by FNArena. The consensus target is $13.78, on a range from $12.00 (Ord Minnett) to $15.03 (Morgans).

Not monitored daily, Goldman Sachs has hiked its target to $15.20 from $13.40. Goldman also finds Treasury Wine’s value attractive compared to the rest of its global growth Consumer coverage, and maintains a Buy rating.

Jarden highlights a multi-year relative PE low, and a growing luxury skew, along with greater conviction in terms of Penfolds upside risk and Daou synergy upside. Jarden retains a $14.50 target and upgrades to Buy from Overweight.

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