Treasury Wine Estates Limited

TWE Details

Revenues Impacted from China Region: 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's wine portfolio includes Commercial, Masstige and luxury wine brands, such as Penfolds, Beringer, Lindeman's, Wolf Blass, Chateau St Jean, and Sterling Vineyards. The Asian region contributes more than 40% EBITS from the total EBITS of $284.1mn in 1HFY21, which has reduced by 27.5% due to ongoing investigations from the Chinese ministry of commerce (MOFCOM) since August 2020. The investigation is going on for anti-dumping and countervailing imports of Australian wine in containers of two litres or less. MOFCOM has announced measures against such activity with a deposit rate of 175.6% on the imported value of TWE’s wine into China. 

Financial Highlights for 1HFY21: As per the company report, TWE has posted a decline in its net sales revenue (NSR) by 5.9% in 1HFY21 on the back of Covid-19 impacts and due to ongoing MOFCOM investigations in China. 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.  

NSR and NSR Per Case (Source: Company Reports)

Dividend Declaration: TWE has announced on 22 March 2021 a dividend of 0.1500 per share for its shareholders. The ex-date for dividend is considered on 3 March 2021 and the payment date is considered on 1 April 2021.

Outlook: As per the management comments, TWE expects to register lower EBITS in 2HFY21 as compared with 1HFY21 due to ongoing investigations from the Chinese Ministry of Commerce (MOFCOM), leading to minimal contribution from the Chinese markets. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: In the last one month, TWE has decreased by 2.47% and increased by 12.84% in the last three months. The current market capitalisation of TWE stands at ~$7.77bn as on 29 March 2021. The stock is currently trading slightly higher than the average 52-week price level range of $7.87-$13.12. On the technical analysis front, the stock has a support level of ~$10.18 and a resistance of ~$11.22. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering the long-term positive outlook as the company is executing a long-term plan to strengthen its brands and business model. For the purpose, we have taken peers, Lark Distilling Co Ltd (ASX: LRK), Australian Vintage Ltd (ASX: AVG), to name a few. Considering the decline in the company’s cost of doing business, recently announced dividend, rising cash balance, and valuation, we recommend a “Hold” rating on the stock at the current market price of $10.63, down by 1.392% as on 29 March 2021. However, investors with low risk-appetite may take out profits from the stock.

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

Synlait Milk Limited

SM1 Details

Dairyworks Increased Market Share, Generating Higher Revenues: Synlait Milk Limited (ASX: SM1) is engaged in dairy manufacturing and sells milk powder and milk powder-related products. It manufactures milk powders for infant formula manufacture and base pediatric powders. The Company has 140,000 metric tons of annual production capacity and packages up to 30,000 metric tons of canned infant formula. Dairyworks has contributed significantly towards the total revenues of the company during H1FY21. Dairyworks has contributed $112.6mn to the total revenues of $664.18mn in H1FY21, on the back of increasing market share in Australia.

Operation Director Resigned: As per the company report on 22 March 2021, Director Operations, Mark Toomey has resigned from his position and returned to Australia from New Zealand for new opportunities.

Financial Highlights for 1HFY21: The company has registered an increase of revenue by 19% YoY to NZ$664.18 million in 1HFY21 on the back of robust global trade pricing and a significant contribution from Dairyworks towards the total revenue. The company has posted a decline in its net profits to NZ$6.37 million in 1HFY21 as compared with NZ$8.61 million in 1HFY20.

Sales Volume (Source: Company Reports)

Outlook: SM1 is expecting to control their response against Covid-19 going forward. The company will be focusing on managing costs and capacity to create value and accelerate the execution of their strategy. The company will work towards reducing waste and improve their yields.

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

** 1NZD = ~0.91 AUD 

Stock Recommendation: In the last one month, SM1 has decreased by 17.89% and by 33.89% in the last three months. Market capitalisation of SM1 stands at ~$714.76mn as on 29 March 2021. The stock is currently trading below the average 52-week price level range of $3.060-$7.350. On the technical analysis front, the stock has a support level of ~$2.93 and a resistance of ~$3.78. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering a significant contribution from Dairyworks towards the total revenues. For the purpose, we have taken peers like Ridley Corporation Ltd (ASX: RIC), Bega Cheese Ltd (ASX: BGA), Inghams Group Ltd (ASX: ING) to name a few. Considering the company has registered an increase in Dairyworks market share, increase in cash and cash equivalents, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $3.120, down by 4.588% as on 29 March 2021.

SM1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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