Treasury Wine Estates Limited

TWE Details

Treasury Wine Estates Limited (ASX: TWE) is involved in grape growing and sourcing; wine production, and wine marketing, selling and distribution. The company operates its business in Australia and New Zealand (ANZ), Asia (including China), the US, EMEA (the Middle East and Africa), Europe and Latin America. The company has a market capitalisation of around $8.54 billion on July 27, 2021.

Results Performance (Half-Year ended 31 December 2020 – H1FY21)

TWE has posted a decline in its net sales revenue (NSR) by 5.9% in 1HFY21 due to disruptions to sales channel caused by the global pandemic and the ongoing MOFCOM investigations in China and the proactive reduction of commercial volume in the US. However, the decline in revenue was partly offset by strong performance in retail and e-commerce channels in the Americas, ANZ and AMEA. The company has improved on its Cost of Doing Business (CODB) by reducing it to $276.1mn in 1HFY21 as compared with $316.5mn in 1HFY20. TWE has posted a NPAT of $175.3mn in 1HFY21, down by 22.7% due to lower EBITS.

TWE has announced, on 22 March 2021, a dividend of 15.0 cents per share  for its shareholders. 

Key Data (Source: Company Reports)

Recent Update:

The company, on 29 March 2021, acknowledged the release by China’s Ministry of Commerce (MOFCOM) of the final determination in its anti-dumping and countervailing investigations into certain Australian wine exports into China. The final determination is that a combined anti-dumping and countervailing duty rate of 175.6% shall be applied to TWE’s Australian country of origin wine in containers of two litres or less imported into China. The duty rate is consistent with provisional measures. The final determination will apply from  28 March 2021 and will remain in place for at least five years.

Outlook:

While fundamentals of the company’s business remain strong across the globe with the best global portfolio of premium wine brands, strong market position and global distribution footprint, the global pandemic-related supply chain disruptions have adversely affected the shipments of higher-margin luxury wine in key markets. Further, shipments to China have been impacted by the anti-dumping and countervailing investigations initiated by the Chinese Ministry of Commerce.

Key Risks:

The company is exposed to risks of an increase in primary costs, supply chain disruptions and movements in foreign currencies which can have a material impact on the company’s performance.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

TWE prices are trying to recover from the lower levels and showed significant upside gains in recent months. However, prices are now getting resistance of the downward sloping trend line which indicates that stock prices might get downward correction in the coming weeks ahead. Volumes have decreased in the last couple of months along with increase in prices . Immediate support levels are $11.05 and $10.04 while immediate resistance levels are $12.40 and $14.04.

Stock Recommendation:

The company’s current ratio for H1FY21 stood at 2.39x, better than the H1FY20 result of 2.25x, implying that the company possesses better capabilities to meet its short-term obligations. Its Debt-to-Equity ratio for H1FY21 stood at 0.43x, lower than the H1FY20 result of 0.48x, depicting a reasonable leverage position of the company. However, the company experienced a sharp decline in net margin to 8.5% in H1FY21 against 13.6% in H1FY20. Also, the company expects to register lower EBITS in 2HFY21 as compared with 1HFY21.

We have valued the stock using EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a decline of low double-digit (in % terms). We have applied a slight discount to EV/Sales Multiple (NTM) (Peer Mean) considering fall in the profitability margins.

Considering the aforesaid facts, we give a “Sell” rating on the stock at the current market price of $11.950 per share (Australian Eastern Standard Time: 2:07 PM) on July 27, 2021.

United Malt Group Limited

UMG Details

United Malt Group Limited (ASX: UMG) is the fourth largest commercial maltster globally, with ~1.25Mtpa of capacity in 12 processing plants in Canada, USA, Australia, and the United Kingdom. The company also operate an international distribution channel, which offers craft brewers and distillers, including malt, hops, yeast, adjuncts, and related products.

Results Performance (Half-Year ended 31 March 2021 – H1FY21)

• Revenue fell by 11% YoY to $590 million, primarily driven by the second and third wave of COVID-19 restrictions on volume and shifts in mix in the key geographies during the period.
• EBITDA stood at $52.7 million, slightly above the company’s guidance. This comprises of $6.3 million of negative effect of the translation of earnings into Australian dollars, and one-off costs of $7.4 million for the closure of the Grantham facility and transformation costs.
• Reported net profit after tax of $13.2 million, down 30% on the prior corresponding period
• The gearing ratio (Net Debt/ EBITDA) stood at 2.41x, which is within the company’s target ratio of 2.0-2.5x.

Key Data (Source: Company Reports)

Outlook:

The management is expecting some level of COVID-19 restrictions to continue in H2FY21. Further, it expects the H2FY21 volume to be below pre COVID-19 levels and expects volume recovery once restrictions on social gatherings are lifted across the focused geographies and a return to mass gatherings, including sporting events, concerts, and travel. Meanwhile, the company is working closely with clients to navigate fluctuation in demand and supply due to COVID-19 including container disruption. Capex expected for FY21 to be ~$120 million and gearing to be in the range of 2.0-2.5x Net Debt/EBITDA at the end of FY21.

Key Risks:

The company is exposed to risk associated with continued COVID-19 circumstances, climate and environmental risk, water access risk, customer & supplier risk, seasonal fluctuation in working capital risk, and transportation and supply chain risk, capital requirement risk, commodity pricing and agricultural risk, project management risk, hard Brexit, product and food safety risk, and taxation and regulatory risk, among others.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Analysis

Daily Price Chart

Source: REFINITIV

Note: Purple color line reflects Relative Strength Index (14-Period)

UMG is trading in a primary upward trend and after a long consolidation, prices recently made a new year till date high of $4.76 on 21 July 2021. However, prices are getting downside correction from higher levels and the stock recently broke the crucial support level of $4.61. Volumes have increased drastically in the last three trading sessions along with decrease in prices that indicates some selling pressure. Immediate support levels for the stock are $4.39 and $4.23 while immediate resistance levels are $4.68 and $4.87.

Stock Recommendation:

The stock rose by ~4.4% in 3 months and ~12.7% in 9 months. It has made a 52-week low and high of $3.530 and $4.970, respectively.

We have applied EV/Sales multiple-based relative valuation (on an illustrative basis) and there are expectations that the stock price might witness a fall of low double-digit (in % terms). We have applied a slight discount to EV/Sales Multiple (NTM) (Peer Mean) considering lower asset turnover as well as risks associated with the business. Thus, we suggest investors to liquidate the stock. 

We give a “Sell” recommendation on the stock at the current market price of $4.57 per share, (Australian Eastern Standard Time: 1:39 PM) as on 27^th July 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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