Company Overview:Treasury Wine Estates Limited is engaged in grape growing and sourcing; wine production, and wine marketing, selling and distribution. The Company's segments include Australia and New Zealand (ANZ), which is engaged in the manufacture, sale and marketing of wine within Australia and New Zealand, and distribution of beer and cider under license in New Zealand; Americas, which is engaged in the manufacture, sale and marketing of wine within the Americas region; Asia, which is engaged in the sale and marketing of wine within the Asia (including the Middle East and Africa), and Europe, which is engaged in the manufacture, sale and marketing of wine within Europe and Latin America. It is also engaged in the sale of branded wines, principally as a finished, bottle product. The Company's wine portfolio includes Commercial, Masstige and luxury wine brands, such as Penfolds, Beringer, Lindeman's, Wolf Blass, Stag's Leap, Chateau St Jean, Beaulieu Vineyard and Sterling Vineyards.


TWE Details

Strong Organic Growth in NSR in 1H FY19: Treasury Wines Estates Limited (ASX: TWE) is one of the world's largest players in Wine industry which offers wine products under the brand name of 19 Crimes, Acacia, Beaulieu Vineyard, Beringer Vineyards, Blossom Hill,  Chateau St Jean,  emBRAZEN, Cavaliere d'Oro,  Lindeman's, Maison de Grand Esprit, Matua, Penfolds, Pepperjack, Rawson's Retreat,  Rosemount Estate, Stags' Leap Winery, Sterling Vineyards, Wolf Blass, and many others. As of now, the group focuses on three principle activities i.e., Grape Growing and Sourcing, Winemaking and Brand-led Marketing which will support to meet the evolving consumer interests throughout the globe and volume growth of the company in the upcoming period. As on March 11, 2019, TWE’s market capitalisation stood at $11.07 billion. The company had generated NSR (or Net Sales Revenues) amounting to $1,507.7 million in 1H FY19 (half year ended December 2018) reflecting a rise of 16.4% on reported currency basis while, on constant currency basis, it implies 12.7% growth on PCP (or prior corresponding period). During the same period, the company’s EBITS amounted to $338.3 million which implies the rise of 19% and there was growth across all the regions on the back of top-line execution which includes growth in volumes, portfolio premiumisation, and price realization. Treasury Wines managed to deliver EBITS margin accretion of 0.5ppts bringing it to 22.4% which demonstrates another step forward on the company’s journey to EBITS margin of 25%. In a nutshell, we expect, TWE to be aided by the strength of its routes-to-market, particularly in important markets like China and the US which has provided it with a competitive advantage. Also, it would be aided by a strong balance sheet position which might help it in meeting investment priorities. The company’s management was highly optimistic about the results for 1H FY 2019 as the foundation which they have established has supported in delivering the sustainable growth which is evident from a robust set of financial results for TWE.

 
1H FY19 Financial Highlights (Source: Company Reports)

Analysing TWE’s margins’ position: TWE has also managed to stand at a decent margins’ position with respect to its key margins for 1H FY 2019. The company’s net margin stood at 14.3% in 1H FY19 which implies 1.9% YoY growth which is reflective of TWE’s capability to convert the top line into the bottom line. Also, there has been a YoY improvement of 2.3% in 1H FY 2019 in its operating margin which stood at 21.6% which hints towards the company’s cost-effective approaches. Also, the company enjoys its strong cash-generation capabilities and, we expect, that these would strengthen its cash position thus, providing them with sufficient headroom for growth.  

Key Update Related to dividend reinvestment plan: Based on the decent performance in 1HFY19, the company has released its dividend/distribution update in which the Board of Directors declared a fully franked ordinary dividend of 18 cents per share and it will be payable on April 05, 2019 with the record date of March 08, 2019. Further, the dividend reinvestment plan (DRP) has been reinstated which would be available to Australian resident shareholders for the 2019 interim dividend. The eligible shareholders can reinvest either all or part of their dividend in additional fully paid ordinary shares in the company instead of getting a dividend in cash. However, participation in the dividend reinvestment plan is voluntary. Since DRP was last available in 2014 to the shareholders, the company showed its intention to refresh the invitation to shareholders to participate in DRP.

An Announcement of Departure of Chief Operating Officer: Treasury Wine Estates had stated that Mr. Robert Foye who was Chief Operating Officer has left TWE on account of breach of the company’s internal policies unrelated to TWE’s trading performance.

New Route-to-market model Aided TWE’s Americas Region: Treasury Wines Estates generated NSR of A$604.6 million from Americas region in 1H FY19 which reflects YoY growth of 20% (reported currency) and there was 12.5% growth on a constant currency basis. The YoY increase of 12.5% was on the back of higher volume because of positive execution under new route-to-market model and cycling of proactive destock in 1H FY18 ahead of transition. However, the growth was also aided by a 10.4% rise in NSR per case which was a result of volume growth in Luxury and Masstige segments and benefits from route-to-market changes in the US. With respect to Americas, the EBITS margin witnessed a YoY decline of 1.9ppts (on constant currency basis) and stood at 18.5% in 1H FY19 because of unfavourable CODB (cost-of-doing-business) including incremental sales and merchandising teams to help the growth under new operating model, transitional overheads and costs, and it is expected that it would be removed from 2H FY19 onwards. We expect that TWE is well-positioned to achieve sustainable growth momentum in the Americas region moving forward because of its continued focus towards growing Luxury and Masstige portfolios and the exit from lower margin Commercial volumes which it did in the previous years. Also, the implementation of transformational route-to-market changes might also support the momentum from the company’s Americas region. 
 
 
Historical EBITS and EBITS Margin Trend- Americas Region (Source: Company Reports)

Robust Sales Execution, Increased Availability Helped Asia Region: Treasury Wines Estates’ Asia region generated NSR amounting to A$393.8 million in 1H FY19 reflecting a YoY growth of 32.4% (reported currency). However, on a constant currency basis, the YoY growth was 31.4%. The robust growth in NSR was supported by higher availability of Luxury and Masstige wine and strong sales execution. The growth in volumes demonstrates a more balanced sales profile of Rawson’s Retreat volumes and continued exit of lower margin commercial volumes in SEAMEA. The EBITS stood at $153.1 million reflecting the rise of 36.7% and the EBITS margin stood at 38.9% reflecting an accretion of 1.5ppts.  Moving forward, we expect that the company’s Asia business would be strongly helped by market fundamentals, route-to-market (which gives a key competitive advantage) and new strategic partnerships. With the help of multiple country of origin portfolio, the company expects to grow the market share. The company expects that Asia would be delivering EBITS margin of more than 35% in FY 2019 and beyond.

 
Historical EBITS and EBITS Margin Trend - Asia Region (Source: Company Reports)

Understanding Europe Region’s Performance: TWE’s Europe region posted NSR amounting to A$175.6 million which implies growth of 9.6% (reported currency) and 5% growth on constant currency, Y-o-Y basis. The growth in NSR of 5% was witnessed on the back of volume growth throughout key regional markets and 3.6% NSR per case growth, mainly because of Masstige-led mix improvement. The region’s EBITS witnessed the rise of 4.8% and stood at $26.3 million and EBITS margin was flat. Moving forward, the company expects that the growth from the Europe region would be supported by strengthening partnerships with the strategic customers.

 

Historical EBITS and EBITS Margin Trend- Europe Region (Source: Company Reports)

ANZ’s NSR Witnesses Marginal Fall on YoY basis: TWE’s Australia and New Zealand (or ANZ) region generated NSR of A$333.7 million in 1H FY19 which implies the marginal YoY fall of 0.1% (on reported currency). The region’s NSR got influenced volume increase of 3.8% in Australia, volume decline in New Zealand (which reflects the transitional impact of a change to the distributor model in 1H FY 2018) and by NSR per case decline of 0.6%. However, the improvement in CODB demonstrates ongoing focus and disciplined approach towards cost management. The region’s EBITS stood at $77.4 million which was up 15.9% and EBITS margin stood at 23.2%. The company has been targeting 25% volume and value market share in Australia on the back of deployment towards portfolio growth and innovation within the Masstige segment. Its current value market share happens to be 22%.
 
 
Historical EBITS and EBITS Margin Trend- Australia and New Zealand (Source: Company Reports)

Drivers for Future: Treasury Wines Estates happens to have a workforce, business models and the brands to maintain the competitive advantages with respect to all the markets and these might also help TWE in driving the strong global momentum. The company stated that the growth prospects in Asia are attractive. The company added that distribution expansion and the market share growth in imported wine category would be helping the future prospects. Treasury Wines Estates has reiterated the guidance for around 25% reported EBITS growth in FY 2019. Also, EBITS growth rate of around 15%-20% is expected for FY 2020 which happens to be broadly in line with the consensus.
The company had stated that they have entered FY 2019 with the increased availability of Luxury wine, a robust pipeline of innovation and new product development, strengthening of customer partnerships in all the regions and the brand portfolio initiatives which possess potential to be incremental to TWE’s existing 5-year expectations. TWE would be providing a further update on the expectations for FY 2020 at the time of full-year results which would be published on August 2019.

Stock Recommendation: In the last three months, the stock has risen 12.07% and is trading at close to 52-week lower level of $13.380, posing an attractive opportunity for accumulation at the current juncture. From the technical standpoint, a technical indicator, Exponential Moving Average or EMA has been applied, on the monthly chart of TWE, and default values were used for the purposes. After careful observation, it was noticed that the stock price is trending towards the EMA and soon a crossover might take place. If the crossover happens, it would provide a hint that the stock price might witness a rise moving forward. On the other hand, the company is expected to be aided by the strength of competitively advantaged regional business models and the strong balance sheet which is efficient and flexible. The new US$350 million syndicated debt facility which was established in the month of November 2018 had increased the flexibility of the balance sheet and would help in key investment priorities. Hence, we have a “Buy” recommendation on the stock at the current market price of A$15.430 per share (up 0.13% on March 11, 2019), considering aforesaid facts and current trading level.

 
TWE Daily Chart (Source: Thomson Reuters)

 
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