Treasury’s Transition Turbulence

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

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Market conditions remain challenging for Treasury Wine Estates. The immediate outlook offers more questions than answers, but is the share price too low?

-Treasury Wine Estates continues to battle challenging conditions
-FY26 guidance for Penfolds lowered
-Ord Minnett questions value of Daou acquisition
-Luxury segment is management’s main focus

By Mark Woodruff 

International wine business Treasury Wine Estates ((TWE)) is undergoing a period of transition, marked by strategic restructuring and a challenging trading environment in key international markets.

Recent hiccups stem from headwinds in the US Premium wine segment, alongside some distribution disruption plus a weaker-than-expected performance from the company’s Daou Vineyards acquisition.

Earlier this month, management lowered FY25 earnings guidance, attributed to weaker US Premium wine sales, particularly 19 Crimes below US$15 per bottle, though Luxury portfolios such as Penfolds appeared to be tracking to plan.

Adding to the risk at the time was a forced distributor change in the key Californian market, whose citizens account for the highest wine consumption of any US state.

Now, as part of an investor update, FY26 guidance for Penfolds earnings growth has been revised down, driven by additional investment aimed at re-establishing the brand in the key Chinese market.

Following a recent trip to China, Citi is cautious on Penfold’s growth prospects in the country having garnered feedback on relative weakness in both Grange and 707, which may be reflective of changing consumption patterns.

Treasury Wine Estates has a portfolio of luxury, premium and commercial wines, largely focusing on the luxury wine category, with Penfolds being its most iconic brand.

The company’s primary reporting divisions are Penfolds, Treasury Premium Brands, and Treasury Americas.

Premium Brands includes well-known but more accessibly priced wines like 19 Crimes, Matua, Sterling, Squealing Pig, and Pepperjack.

Lower-priced, high-volume brands such as Wolf Blass, Lindeman’s, and Yellowglen are part of the commercial brand portfolio.

While group-wide FY25 earnings guidance of $770m was reaffirmed, Citi describes the investor update as lacking clarity. Citi thus expects uncertainty to linger over the company’s outlook.

The broker questions whether this will be the final downgrade for Penfolds, noting plans to increase sales to Asian markets outside China in FY26 could prove difficult.

Industry checks by Citi suggest demand across most of these markets, excluding Thailand, remains soft, while increased sales to these regions could fuel grey market imports into China, potentially undermining local pricing.

Disappointingly, revenue synergies and cost savings from the Daou acquisition (completed in early-2024) were expected to drive earnings growth in the luxury division, prompting Ord Minnett to question the value of the purchase. Sales growth is now forecast to fall short of the original target of low double-digits over the medium term.

Management attributed softer expectations for Daou to disruption from the distributor change in California and a deterioration in US consumer sentiment linked to the Trump administration’s economic policy uncertainties.

Ord Minnett now believes FY26 earnings from the Americas are likely to fall below FY25 levels, particularly as company guidance was issued before the distributor change.

Reorganisation

The luxury segment is central to management’s global strategy, with continued investment in marketing, innovation, and international expansion for these brands.

Luxury at Treasury refers to the group of brands and products positioned at the higher end of the market, which typically retail above US$20 per bottle.

The luxury portfolio includes: Penfolds (Australia/global), Daou Vineyards (California, acquired in 2023), Stags’ Leap (Napa Valley), Beringer (Napa Valley), Frank Family Vineyards, Beaulieu Vineyard, and Beringer Knights Valley.

These brands are marketed as luxury or ultra-premium. Together they now account for the majority of the company’s profit and a growing share of revenue.

The star of the show remains the Penfolds label, anchored in its iconic Grange range from South Australia, but the company also sells Penfolds wine made in China’s Ningxia province, as well as from Bordeaux, where it is produced with prestigious French wine company Maison Dourthe.

As part of efforts to kickstart weak sales in the under $15 per bottle segment, management also announced at Tuesday’s trading update the formation of a new Treasury Collective division (beginning July 1), which will house brands including 19 Crimes, Matua, Squealing Pig, Wynns, Wolf Blass, and Lindemans.

Effectively, the Americas division will become luxury only, with Americas Premium & Commercial to join with Premium Brands to be part of the new Collective division.

The Daou vineyards in California will be the largest contributor to the new segment at around 50% of net sales revenue (NSR), followed by Frank Family Vineyards at circa 17%.

New FY26 guidance under the new structure

Penfolds earnings growth has been downgraded to low-to-mid double-digit from a prior 15% guidance, while Americas Luxury is expected to expand modestly, and Daou’s NSR is tracking below its medium-term low double-digit target.

The Collective division is anticipated to see a slower rate of revenue decline as it moves toward medium-term stabilisation.

Capital management

Management plans to formally launch an on-market buyback of up to 5% of issued capital alongside its FY25 results in August, reflecting the board’s view the shares are significantly undervalued.

Macquarie estimates completion of the entire buyback would be around 3.5% accretive to EPS on an annualised basis. By contrast, Morgan Stanley doesn’t expect the buyback will be meaningful in size given the constraint of management’s 2 times leverage target.

Picking up on this point, Ord Minnett feels a buyback is not the best use of the balance sheet, given leverage is already running near the top end of the targeted range, along with Treasury’s uncertain earnings profile.

Outlook

Despite yet another EPS downgrade, UBS retains a Buy rating alongside a reduced target, citing an attractive risk/reward following a -34% share price decline since July 1 last year.

The broker continues to see strong long-term potential in Penfolds’ global growth opportunity, including renewed momentum in China and the ongoing repositioning of the Americas toward luxury.

While the stock appears inexpensive on most valuation metrics, Ord Minnett remains cautious given the subdued earnings outlook and the potential for incoming CEO Sam Fischer to reset guidance and expectations when he succeeds Tim Ford in October.

UBS, on the other hand, remains confident in Treasury’s scale advantages, in particular growth from Daou and Frank Family Vineyards.

There are six daily monitored brokers in the FNArena database that research Treasury Wine Estates, equally split between Buy (or equivalent) and Hold ratings.

Including Morgans’ update, which only arrived this morning, the FNArena consensus price target for the shares has retreated to $9.58 from $10 prior to this week’s update. At the start of the calendar year, that target stood at $13.71.

The shares closed more than -22% below the revised consensus target yesterday.

Morgans has kept is Buy rating while lowering its price target to $10.25 from $11.06 in line with management’s reduced guidance and with plenty of FY26 uncertainties looming.

Outside of daily coverage, Jarden has lowered its target to $10.00 from $10.60 and maintains an Overweight rating, which sits one notch below Buy in this broker’s framework.

While the rating is unchanged on valuation grounds, Jarden analysts acknowledge few immediate catalysts for the share price.

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