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Treasury Wine Estates Video


 

Stock Of the Day  - Treasury Wine Estates  (Expensive)

With regards to the release of the interim results for 2015, Treasury Wine Estates (TWE) reported EBITS of $85.2 million which is up 86.0% on a reported currency basis and 77.5% on a constant currency basis in comparison to 1H14. However, this amounted to a drop of 40% in comparison to 2H14. Primarily, TWE reallocated Penfolds release from March to October which affected the result.

The net sales revenue rose 8.7% on a reported currency basis and by 6.2% on a constant currency basis in comparison to 1H14. This has been indicative of improved portfolio mix. Statutory net profit after tax of $42.6 million has been witnessed. A strong rise in EPS of 7.8 cents per share on prior period has been conveyed while the reported EPS amounts to 6.6 cents per share. The Company declared an interim dividend (unfranked) of 6 cents per share in consensus with the prior period. TWE’s net debt rose $73.7 million to $283.1 million wherein $39.7 million was to do with lower period end exchange rates used to increase foreign currency borrowings at balance date.



Profit and Loss (Source – Company Reports)

The Company reported on track performance to have 50% rise in consumer marketing investment and $35 million overhead reduction program in FY15. In 2014, the Company rejected a US$2.90 billion takeover bid from Kohlberg Kravis Roberts which would have given a different shape altogether. The talks primarily ended given mismatches in price expectations.


In general, the divisional EBITS were not very empowering. ANZ witnessed EBITS raise of 80% to $43.9m. The market concentration in Australian wine segment is fragmented. TWE’s Australian customers, Coles and Woolworths, now adopting strategies of augmenting levels of in-house brands puts a pressure on TWE. North America saw 3% volume growth and 8% growth in the luxury range. The marketing expense was seen to witness an increase. In the US, EBITS was reported to be up 46% owing to better mix. The administration costs were lower given the $35 million cost-out programme. TWE reported that it is on track with regards to its distributor inventory realignment program in the US for completion in FY15.

The revenue for EMEA dropped 2.7% to $132m with a sharp dip in margins. Increased competition in the commercial segment along with the decision to exit unsustainable volume led to 8% drop in volume and 41% decrease in EBITS. Europe witnessed 1H15 lackluster volume. The wholesale inventories in US and China were high irrespective of the destocking efforts. Asia looks to be a striking growth market for TWE.


Brand Activation in 1H15 (Source – Company Reports)

TWE provided a very qualitative outlook commentary that requires more understanding. For instance, efforts directed in supply chain optimisation have been indicated but more clarity is required. There is a likelihood that a re-organization to further separate the commercial wine business from the luxury may be announced in 2H15. The weakening in business and lack of Penfolds release in 2H may make it difficult for TWE to achieve the consensus FY15 EBITS estimates of about $218m as per market expectations.


Group Debt Maturity Profile (Source – Company Reports)

The Company still seems to be of interest to private equity. However, reformation of the business with sale and leaseback deals of winery infrastructure may make TWE a less attractive option when the balance sheet will reflect lesser amount of tangible assets. Then, there is pressure developing on branded wines, thereby creating a challenging environment for TWE, in view of the growth of private and exclusive labels in concentrated retail markets (Australia and the UK for instance).


TWE Daily Chart (Source - Thomson Reuters)

Given the above, we believe that the stock is EXPENSIVE at the current price of $5.37.