Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Treasury Wine Estates’ glass half full as China demand lifts

Mark LaMonica, CFA  |  14 Aug 2020Text size  Decrease  Increase  |  
Email to Friend

No-moat rated Treasury Wine Estates closed out a difficult 2020 with a full-year revenue drop of 7.1 per cent due to competitive pressures in the US and the impact of covid-related disruptions.

Despite the weak results, Morningstar’s regional director of equity research Adam Fleck believes there is room for optimism. Fleck believes Treasury (ASX: TWE) will benefit from rebounding demand in China and improved economic conditions following an expected vaccine in early 2021.

The market agreed on Wednesday, pushing the winemaker’s share price up more than 12 per cent to $12.85. It is now in line with Fleck’s fair value estimate of $12.30.

Treasury’s 2020 results were dragged down by a 16 per cent drop in revenue and a decline in adjusted operating earnings (referred to as EBITS by the firm) of 50 per cent.

The near-term picture remains murky for Treasury and the company declined to provide earnings guidance for 2021.

"While we have recently seen positive signs of recovery across a number of our key markets and channels, we are cautious on the near-term outlook given the uncertainty that remains around the pace of that recovery," said chief executive Tim Ford.

Treasury Wines Estates (TWE) - 1YR

Treasury Wines Estates (TWE) - 1YR

Source: Morningstar Premium

In response to challenges in the North American market which makes up 34 per cent of revenue, the company is undergoing organisational and structural changes that should start to deliver savings. Fleck warns that the process will involve upfront costs and volatility in the short-term. 

In recent years Treasury has shifted focus to higher priced wines by growing the company’s portfolio of luxury (bottles priced above $20) and “masstige” (bottles priced from $10 to $20) wine. These two categories made up 71 per cent of revenue in fiscal 2020 versus 43 per cent in early 2014.

While the strategy has benefited from continued premiumisation in Australia, North America and Asia, Treasury was disproportionately affected as consumers moved to at-home drinking during COVID related lockdowns. Morningstar believes this shift is temporary.

“I expect the availability of a covid-19 vaccine in first-half 2021, should boost demand for high-priced luxury wines”, says Fleck.

He is also optimistic on increased demand from China. “Chinese demand has rebounded following the country’s reopening, including a 40 per cent lift in June volumes versus the prior comparable period.”

Given these two factors, Fleck maintained his fair value of $12.30 a share and expects 5 per cent revenue growth in fiscal 2021 and improving margins.

This article is part of Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

is a product manager, individual investor, Australia.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend