Analyst Research
1 March 2020
TWE reported a strong FY18 result, with group operating earnings (EBITS) up +16.5%, driven by ANZ (up +22.5%) and Asia (up +36.7%).
COMPANY DATA
| Date of Report | ASX | Price | Price Target | Analyst Recommendation |
| 20/08/18 | TWE | A$19.02 | A$18.60 | NEUTRAL |
| Date of Report 20/08/18 | ASX TWE |
| Price A$19.02 | Price Target A$18.60 |
| Analyst Recommendation NEUTRAL | |
| Sector : Consumer Staples | 52-Week Range: A$12.91 – 20.20 |
| Industry: Beverages | Market Cap: A$13,699m |
Source: Bloomberg
INVESTMENT SUMMARY
We rate TWE as a Neutral for the following reasons:
- Significant opportunity to grow its Asian business, driven by the demand in China for premium international wine.
- Group margin expansion opportunity from premiumisation and good cost control.
- The turnaround in Americas business could lead to significantly higher margins in that business from current levels.
- Ability to gain market share on competitors.
- Favourable currency movements (leveraged to a falling AUD/USD).
- Further capital management initiatives.
We see the following key risks to our investment thesis:
- Slowdown in wine consumption in key market.
- Slowdown in key growth markets could see the stock de-rate from current high PE-multiple levels.
- Adverse movement in global wine supply and demand.
- Increase competition in key markets.
- Unfavourable currency movements (negative translation effect).
- Policy and / or demand changes in China leading to an impact on volume growth.
Figure 1: TWE revenue by region
Source: Company
Figure 2: TWE EBITS by region 
Source: Company
ANALYST’S NOTE
TWE reported a strong FY18 result, with group operating earnings (EBITS) up +16.5%, driven by ANZ (up +22.5%) and Asia (up +36.7%).
U.S. underperformance was driven by the exit from lower margin Commercial volumes and reduced shipment to the U.S. due to change in U.S. route-to-market strategy. TWE expects FY19 EBITS growth of 25% on the back of higher availability of high-end wine.
Management also reiterated their aspiration of achieving 25% EBITS margin (versus current 21.8%). We maintain our Neutral recommendation given the stock is trading on a PE-multiple of 30x, which suggests little downside is being attributable to execution risk.
- Australia & NZ (NSR up +1.3%; EBITS up +22.5%). Volumes were up +1.3%, with growth outpacing the Australian wine category according to management (believed to be growing at 0-1%). Net sales revenue (NSR) per case was -0.5% below the previous corresponding period (pcp), however adjusting for the route-to-market transition underlying NSR per case was up +4%.
- Asia (NSR up +38.9%; EBITS up +36.7%). Solid volumes growth, up +23%, with North Asia up +41% while South East Asia, Middle East & Africa was down -6%. The strong volume growth was led by Australian (+27%) and French (+296%) brand portfolios. The Company noted that the fundamentals of Asia wine market remain attractive with growth in imported wine category coming at the expense of domestic peers.
- Americas (NSR down -9.4%; EBITS up +2.1%). Segment volumes were down 11.6% on pcp, driven by the exit from lower margin Commercial volumes and reduced shipment to the U.S. due to change in US route-to-market. Operating earnings (EBITS) rose +2.1% on the back of underlying premiumisation offset by a $25m impact from the route-to-market transition in 4Q18.
- Europe (NSR down -9.4%; EBITS up +3.1%). Segment volumes were down 10.4%, reflecting exit from lower margin Blossom Hill Commercial volumes as well as the exit from under-bond wholesale market in the UK. Growth in operating earnings (EBITS) of +20.7% was driven by favourable costs of goods sold (COGS) and overheads largely stable year on year.
- Group cash conversion was disappointing. TWE net operating cash flow fell -10% on pcp. TWE’s headline cash conversion fell to 68%, however management called out a number of one-offs which meant underlying cash conversion was approximately 83%. Whilst we agree a number of these are one-offs, we will be closely monitoring this in the coming periods.
- U.S. still represents execution risk. Management noted that the impact from the change in distribution strategy detracted from EBITS by approximately $25m. However, this impact isn’t likely to automatically reverse in FY19 and is more likely to flow through over a long-term timeframe as new distribution partnerships start to take shape.
FY18 RESULTS SUMMARY …
Figure 3: TWE FY18 group headline numbers versus pcp 
Source: BTIG, Company
Group headline numbers. Compared to the previous corresponding period (pcp): 1. Group revenue was slightly up +1.1% (or up +1.7% in constant currency terms) driven by solid growth in net sale revenue per case (+6.5%) on the back of portfolio premiumisation and price realization. Volumes were down -2.7% driven by planned exit from lower margin Commercial volume and route-to-market transition in the U.S. 2. Operating earnings (EBITS) (before SGARA) was up +16.5%, with margin expanding 280bps. 3. TWE FY18 dividend of 32cps was up +23% on pcp. 4. $300m on-market buyback completed at an average price of $15.41. 5. Outlook – TWE reiterates guidance for expected FY19 EBITS growth of approximately 25%; committed to EBITS margin target of 25%.
TWE RELATIVE VALUATION …
On consensus estimates, TWE trades on a significant premium to global peers, reflecting its near-term strong EPS growth trajectory. Figure 4: TWE peer group valuations – consensus 
Source: BTIG, Bloomberg
Our valuation.We value TWE using three methods: DCF (A$17.20), EV/EBITDA (A$20.62) and PE-relative (A$18.01). Our 5-year forecasts assume on a CAGR basis: revenue growth of +10.9% p.a., operating earnings growth of +21.1% p.a. (we assume TWE achieving 25% EBITS margin target by FY20) and WACC of 8.2%. For our relative valuations, we use global peers (including Diageo, Pernod Ricard) and apply a 15% premium to the multiple to reflect TWE’s above average earnings growth profile. We arrive at an equal weighted valuation of A$18.61 and our price target of A$18.60 is rounded to the nearest ten cents.
Figure 5: TWE Financial Summary 
Source: BTIG, Company, Bloomberg
COMPANY DESCRIPTION
Treasury Wine Estates (TWE) is one of the world’s largest wine companies listed on the ASX. As a vertically integrated business, TWE is focused on three key activities: grape growing and sourcing, winemaking and brand-led marketing. Grape Growing & Sourcing – TWE access quality grapes from a range of sources including company-owned and leased vineyards, grower vineyards and the bulk wine market. Winemaking – in Australia, TWE’s winemaking and packaging facilities are primarily located in South Australia, NSW and Victoria. The Company also has facilities in NZ and the US. Brand-led Marketing – TWE builds their brands through marketing and distributes its products across the world.
This Week’s News
Analyst Research
7 August 2019