Uncorking Treasury Wine Estates’ future

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.

In Firstlinks this week, Graham Hand contemplates how Josh Frydenberg is using next week’s budget to lay the foundations for an election.   

Hand also hears from Heath Behncke, managing director and a portfolio manager at Holon Global Investments, who argues value stocks face structural decline. “Understanding and investing in accelerating innovation is likely to be the safest and best approach to deliver sufficient investment returns,” Behncke says.

Elsewhere, in the first of a three-part series, Lewis Jackson has crunched the numbers so you don’t have to on that perennial debate: which asset class offers better returns, property or shares?

Jackson also peers under the hood of Australia’s largest sustainability-themed exchange-traded fund and finds that despite strong performance and strict exclusion criteria, the ETF includes firms accused of tax evasion.

As Berkshire Hathaway announces a successor to Warren Buffett, Emma Rapaport combs the Oracle of Omaha’s latest musings and unearths some lessons for first-time investors. And the result may surprise you.

Rapaport also sits down with Tim Murphy to examine the updates to the Morningstar Model ETF portfolios.

Loan deferrals, high savings rates, and government stimulus helped the big four banks avoid the worst and stage a stunning rebound. We speak to Nathan Zaia about how the wide-moat lenders dodged a covid catastrophe.

Apple brought the smartphone to the masses and has produced staggering gains for investors over the last forty years. Can it maintain its dominance? James Gard reports.

What will higher bond yields mean for equities? Growth companies are particularly exposed while banks could withstand any rise, writes Nicki Bourlioufas.

And finally, in Your Money Weekly, it hurts to say but let's face it: China, not the US, is leading the global recovery, says Peter Warnes. Many countries have rebounded because of the Middle Kingdom's participation.