Treasury Wine Estates Limited

TWE Details

Effective Use of Working Capital: Treasury Wine Estates Limited (ASX: TWE) is mainly engaged in the production, marketing, and distribution of wine. The market capitalisation of the company stood at $6.45 Bn as on 18^th September 2020.

Response to Investigation Notice:  On 18^th August 2020, the company responded to the investigation notice of the Chinese Ministry of Commerce into Australian wine exports into China, wherein, it stated that TWE is committed to the Chinese market and will co-operate with any requests regarding the investigation.

Flexible and Efficient Capital Structure: During FY20, the net sales revenue amounted to $2,649.5 million, reflecting a fall of 6% on pcp, because of the impact of the COVID-19 market and challenging conditions in the US. EBITS for the period experienced a fall of 22% to $533.5 million, and NPAT declined by 25% to $315.8 million. The company added that the net operating cashflow for the year was in line with the previous year, with full-year cash conversion of 94.7%. The company has resolved to pay a fully franked final dividend of 8 cents per share, reflecting a payout of 64% of NPAT. The company possesses a flexible and efficient capital structure, which happens to be the key strength of the business. TWE has a net debt to EBITDA ratio of 2.2x, which indicates the maintenance of the investment-grade credit profile. The company ended the year with total liquidity of around $1.4 billion.

Key Financials (Source: Company Reports)

Outlook: The company seems to be well placed to return to growth in the future, upon stabilisation of the market. This would be supported by the best global portfolio of premium wine brands, with strong market positions, global distribution footprint, a world-class asset base as well as a strong and flexible capital structure. The company has scheduled to conduct its 2020 Annual General Meeting on 5 November 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Current ratio of the company stood at 2.14x in FY20 against the industry median of 1.49x. This indicates that the company is in a decent position to address its short-term obligations against the broader industry. The stock of TWE has corrected 27.47% and 19.08% in the past one and three months, respectively. As a result, the stock is inclined towards its 52-week low levels, offering decent opportunities for accumulation. On a technical front, the stock of TWE has a support level of ~$8.796 and a resistance level of ~$10.126. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering decent liquidity position, flexible and efficient capital structure, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $8.850 per share, down by 1.117% on 18^th September 2020.

TWE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Mcpherson's Limited

MCP Details

Strong Brand and Channel Mix: Mcpherson's Limited (ASX: MCP) is engaged in the supply of health & beauty, consumer durable and household consumable products in Australasia. The market capitalisation of the company stood at $318.84 Mn as on 18^th September 2020.

Growth in Topline and Bottom Line: For the year ended 30^th June 2020, the company experienced a rise of 11% in total sales revenue from continuing operations, which came in at $222.1 million. MCP witnessed a growth of 75% in Dr. LeWinn’s sales revenue on pcp via its strategic and exclusive China facing partner ABM and strong domestic growth. In addition, underlying PBT for the period amounted to $23 million, reflecting a rise of 33% over the prior corresponding period (pcp) from continuing business. During the year, the company was very disciplined in its assessment of numerous merger and acquisition opportunities in order to complement the strength of its existing brands. The company declared a fully franked final dividend of 7.0 cents per share, which took the total dividends for the year to 11.0 cps. 

Underlying PBT Bridge (Source: Company Reports)

Outlook: The company seems to be very well placed with a strong balance sheet and significant operational capacity, to assess and execute appropriate opportunities.

Stock Recommendation: Gross margin and EBITDA margin of the company stood at 47.8% and 15.4% in FY20, reflecting YoY growth of 0.7% and 4.6%, respectively. In the past six months, the stock of MCP has moved up by 81.10%. As a result, the stock is inclined towards its 52-week high level of $3.400. The stock of MCP is trading a premium P/E multiple of 52.11x as compared to the industry median (Personal & Household Products & Services) of 19.3 on TTM basis. The stock has EV/EBITDA multiple of 9.9x against the industry median (Consumer Non- Cyclicals) of 8.8x on TTM basis. On a technical front, the stock of TWE has a support level of ~$2.872 and a resistance level of ~$3.370. Therefore, considering the aforesaid facts, current trading levels and price movement in the stock, and higher valuations, we give an “Expensive” rating on the stock at the current market price of $3.140 per share, up by 5.724% on 18^th September 2020.

MCP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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