Treasury Wine Estates Limited

TWE Details

Deposit Rate of 169.3% Imposed on the Import of Australian Wine to China: Treasury Wine Estates Limited (ASX: TWE) is involved in growing and sourcing grape; and is a producer and distributor of wine in Australia and New Zealand. Beringer, Penfolds, Wolf Blass, Lindeman's are a few of its key brands. As on 18^th December 2020, the market capitalisation of the company stood at ~$6.91 billion. As per the update provided by TWE on 30^th November 2020, the company is planning a series of steps to mitigate the impact of a provisional anti-dumping measure introduced by the Chinese Ministry of Commerce (MOFCOM). As part of the provisional measures, from 28 November 2020 onwards, a deposit at a rate of 169.3% is being applied to the imported value of TWE’s wine in containers of two-litres or less. In order to reduce the impact of these measures on the company’s earnings and to maintain the strength of TWE’s business model and brands, the company is planning several initiatives. These initiatives include reallocation of Penfolds Bin and Icon range from China, accelerating investment in sales and marketing resource and capability across these other luxury growth markets, acceleration of the multi-country of origin portfolio growth strategy and several other initiatives. The benefits of these initiatives are expected to reach their full potential over a two to three-year period. Notably, China accounts for two-thirds (30%) of the total earnings from the Asia region for TWE. TWE distributes a premium portfolio with 63% volume of luxury, and 91% masstige wines, and the largest commercial brand of Rawson Retreat by volume in China.

Issue of Equity Shares: Through an announcement on 15^th December 2020, the company notified the issue of equity shares in respect of 2,837 deferred share rights granted under the Company’s Mid Term Incentive Plan (MTIP).

Q1FY21 Result Highlights: In the Asian markets, the company is experiencing a recovery of demand every month with units sold for the full TWE brand portfolio growing 14% in Q1FY21 vs the prior year. The China market reflects a strong recovery in consumer demand for TWE’s brands. The consumption was enhanced due to the brand building investment by the local teams and the arrival of the holiday season (Golden Week) and mid-autumn festival from September to early October. In the US, TWE witnessed 12% growth in value in Q1FY21 due to strong growth in retail channels. In Australia, trading conditions are in sync with the guidance provided for FY20. The share of total portfolio is weighted towards masstige and lower luxury brands. Its masstige portfolio grew by 21% in Q1FY21 and is growing ahead of the market.  

FY20 Annual Highlights: The revenue from the ordinary activities fell by 7.1% from $2,883 million in FY19 to $2,678 million in FY20. The NPAT declined by 25.3% to $315.8 million in FY20.

Financial Highlights, FY20 (Source: Company Reports)

Outlook: Looking ahead, the company is focused on improving its trading performance, implementing structural changes in the US and executing plans to mitigate the impact of MOFCOM’s investigation. The company is looking at internal avenues for an operating model to generate long-run value through a distinct focus across its brand portfolios.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of TWE gave a negative return of 6.55% in the past three months and a negative return of 11.78% in the past six months. The stock is trading close to its 52-week low level of $7.87, offering a decent opportunity for accumulation. The stock of TWE has a support level of ~$8.66 and a resistance level of ~$10.264. We have valued the stock using the Price to Book Value multiple based illustrative relative valuation method and have arrived at a target price with an upside of low double-digit (in % terms). For the purpose, we have used peers like Coca-Cola Amatil Limited (ASX: CCL), Costa Group Holdings Limited (ASX: CGC), Australian Vintage Limited (ASX: AVG), etc. Considering the current trading levels, recovery of demand across TWE’s markets in Asia & China, growth of depletions (units sold) in Q1 in Asia & EMEA, company’s decent performance in Q1FY21, modest outlook and valuation, we give a ‘Buy’ rating on the stock at the current market price of $9.430, down by 1.669% on 18^th December 2020.

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

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