Uncorking Treasury Wine Estates’ future
Takeover talk is mounting for the no-moat producer, but it faces stiff competition in one of its key markets.
Mentioned: Treasury Wine Estates Ltd (TWE)
This week we caught up with Morningstar alumnus Jun Bei Liu, who these days oversees the Alpha Plus Long/Short Fund at Tribeca Investment Partners. Liu is upbeat about Australia’s recovery and sees opportunities across every sector.
One stock she thinks is particularly promising is Treasury Wine Estates. The company has increasingly become a purveyor of high-end wine, particularly in luxury (bottles priced above $20) and “masstige” (bottles priced from $10 to $20) wine. Along with land assets in California and Australia, TWE is holding a huge inventory of Penfold wine in the warehouse but the share price has yet to outperform because of the tariff impact from China—one of its major markets.
Treasury Wine Estates (TWE) – share price over five years vs Morningstar fair value estimate
Source: Morningstar Premium; data as of 7 May 2021
“Quite frankly the Asian consumer just couldn’t get enough of it before China imposed a very, very harsh tariff,” Liu says, adding that she thinks the premium value will be realised in the next six to 12 months. Shares in TWE hit six-month highs last week following talk French luxury goods brand Pernod Ricard was looking to make an offer for the company. Liu says that’s a strong possibility.
“The share price would have been $20, almost double where it is now, if it was not for the Chinese tariff changes,” Liu says. “In my view, in the next twelve months I’ll be surprised if the share price will be here without attracting any takeover offer. But of course, you’re not buying it for that; you’re buying it for the value, you’re paying for the physical asset that’s backing the share price.”
Morningstar’s director of equities Adam Fleck is more cautious, however, saying a $20 estimate ignores the competitive pressures in the wine industry.
“Treasury is a no-moat business, and the vast majority of its revenue comes from the mid to low-level brands where pricing is very competitive,” Fleck says. “There has been sharp discounting, which contributed to the tumble in the share price. And Treasury admits that the US market is much more competitive than it thought, and it has shed low-end US brands. Be careful because most brands don’t have pricing power.” You can read Fleck’s views in full here.
As for dividends, the big four banks announced strong profits this week and turned the dividend tap back on. Liu thinks strong commodity prices will also help resources companies deliver bigger payouts.
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