Stocks’ Details

Treasury Wine Estates Limited

Signs of Recovery in the Chinese Market: Treasury Wine Estates Limited (ASX: TWE) is primarily engaged in the production, marketing, and distribution of wine. The company recently responded to the investigation notice of the Chinese Ministry of Commerce into Australian wine exports into China, stating that it has been committed to the Chinese market and will co-operate with any requests regarding the investigation.

FY20 Results: During the year ended 30^th June 2020, the company’s net sales revenue stood at $2,649.5 million, down 6% on pcp, due to the impact of the COVID-19 market and challenging conditions in the US. EBITS for the period was down 22% to $533.5 million and NPAT declined by 25% to $315.8 million. Net operating cashflow was in line with the previous year, with full-year cash conversion of 94.7%. The company declared a fully franked final dividend of 8 cents per share, representing a payout of 64% of NPAT.

Segment-Wise Revenue: During the year, total revenue from the ANZ, Americas, Asia, and EMEA segments amounted to $890.5 million, $1,135.5 million, $617.9 million, and $399.9 million, respectively. The retail channel in the Americas, ANZ and EMEA regions experienced high volume and value growth through the second half. However, on-premise, cellar doors and global travel retail were closed for a significant proportion of 2H20.

Key Financial Highlights (Source: Company Reports)

Outlook: The company is witnessing positive signs of recovery in China, which reported growth of ~40% in June 2020. Moreover, it is making key changes to the US operating model and global supply chain and expects to deliver $35 million in cost savings from FY21 and $50 million by FY23. Due to COVID-19 led uncertainty, the company did not provide earnings guidance for FY21 but retains a strong and flexible balance sheet to ensure business continuity.

Key Risks: Unfavourable climate changes can impact the availability of grapes to produce wine and the capability to cater to the demand. Delivery of key strategic initiatives is reliant on suppliers, distributors, and retailers, which can impact operations and results at times of suboptimal performance of these parties. Performance in the short term is threatened by the anti-dumping probe by China, which can adversely affect revenues from China.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of the company gave positive returns of 8.29% in the last three months and is currently inclined towards its 52-week low of $8.4. On the technical analysis front, the stock of the company has a support level of ~$8.7 and a resistance level at ~$11.7. With a diversified business model and a strong foothold in key global markets, the company seems to be well placed to navigate the impacts of COVID-19. Although conditions in China have been improving, investors are suggested to keep a close watch on the updates regarding the investigation by the Chinese Ministry of Commerce into Australian wine exports to China. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the strength of the portfolio, decent balance sheet, improved market conditions, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $9.68, down 8.507% on 19^th August 2020, possibly due to the ongoing investigation by the Chinese Ministry of Commerce.

Tabcorp Holdings Limited

Strong Lotteries Performance in FY20: Tabcorp Holdings Limited (ASX: TAH) is a provider of gambling and other entertainment services. The company recently revised its capital management targets, with the new gearing range at 2.5 – 3.0x, as compared to 3.0-3.5x previously. Target dividend payout ratio is now in the range of 70-80%. The above revisions are aimed at improving credit metrics and to conserve more capital. The company also announced an underwritten pro-rata accelerated renounceable entitlement offer with retail trading rights to raise ~$600 million. Proceeds from the offer will be used to pay down existing drawn bank debt facilities and the achievement of the revised target gearing range.

FY20 Results: During the year ended 30^th June 2020, group revenue stood at $5,224 million, down 4.8% on pcp. EBITDA went down by 11.5% and came in at $995 million. The company witnessed strong lotteries performance during the year, with like-for-like sales up ~15-30% during COVID-19 restrictions. Statutory net loss amounted to $870 million and included a non-cash goodwill impairment charge of $1,090 million relating to the Wagering & Media and Gaming Services businesses. The company did not declare a final dividend for the year. The interim dividend was fully franked and came in at 11 cents per share.

Financial Results (Source: Company Reports)

Outlook: A diversified portfolio of businesses is expected to provide support amid the current market challenges. Following the completion of the Entitlement Offer, the company’s pro forma Gross Debt / EBITDA will go down from 3.8x to 3.2x. The company expects to further reduce the revised gearing target range. Progress on the Tabcorp/Tatts integration delivered EBITDA benefits worth $86 million, with cost synergies on track to deliver at least $95 million of annual savings.

Key Risks: The company’s operations can be adversely impacted by changes in the regulatory environment and breach of laws and licenses. In addition, intense competition in the gaming industry can weigh heavily on the business fundamentals.

Stock Details: The stock of the company gave positive returns of 15.77% in the last three months. On the technical analysis front, the stock of the company has a support level of ~$3.2 and a resistance level at ~$4.1. The stock is currently on a trading halt, pending the release of an announcement regarding the outcome of the institutional component of the entitlement offer and is expected to remain in halt until the commencement of normal trading on 24^th August 2020. The stock last traded at $3.670.

Lovisa Holdings Limited

Exuberant Growth in the Online Channel: Lovisa Holdings Limited (ASX: LOV) is engaged in the retail sale of fashion jewellery and accessories. The company recently announced that as a result of the Victorian government’s decision to move to Stage 4 restrictions in Melbourne, it will be temporarily closing 30 Lovisa stores until the restrictions are lifted. In addition, 19 of its stores in California are closed since 14^th July due to government directives.

Key Business Highlights: Due to COVID-19 disruptions to Q4 operations, the company witnessed a significant reduction in sales for the June quarter. For the full year ended 28 June 2020, sales revenue ex. Franchise revenue stood at $237 million, against $249 million in FY19. Strongest results came from Australia and New Zealand as the markets have been trading with the least restrictions. The company’s online business delivered a whopping growth rate of 256% on the prior year during Q4. Careful cost and cash management resulted in a strong balance sheet position, with $21 million in net cash at the end of the period.

What to Expect: For the half-year ended 31^st December 2019, the company declared a fully franked interim dividend of 15 cents per share, to be paid on 30^th September 2020. The company expects to release its FY20 results on 26^th August 2020. Below is a snapshot of LOV’S 1HFY20 performance.

1HFY20 Results (Source: Company Reports)

Key Risks: The business is exposed to a competitive retail landscape, ever changing consumer preferences and general economic conditions. Failure to implement growth strategies and supply chain disruptions are the other challenges in the current unprecedented times.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of the company gave positive returns of 13.87% in the last one month and is currently trading below the average of its 52-week trading range of $2.34 - $14.13. On the technical analysis front, the stock of the company has a support level of ~$5.77 and a resistance level at ~$8.2. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the online sales performance, decent balance sheet position, price movements, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $7.04, down by 0.283% on 19 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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