Treasury Wine Estates recently hosted its 2019 investor day at a well-attended event in Adelaide. Guidance for growth in FY20 earnings before interest, tax and SGARA* (EBITS) of 15–20% was reiterated, but with a skew to the second half due to US route-to-market costs and global business support costs, including the core processes of finance, IT and supply chain. Volume, revenue and gross profit growth in the luxury and ‘masstige’ segment have exceeded that of the overall group, indicating a positive shift in product mix.
A spin-off of the challenged commercial business was considered but not progressed, as overall costs have been reduced and commercial margins have improved, although Treasury will reconsider this option in any future M&A plans.
Treasury is seeking to grow the overall wine category in China, with the company achieving market share gains in imported wine versus domestic wine and other alcohol, including beer and spirits. Destocking by competitors is occurring, weighing on overall category growth, although Treasury’s depletion growth in China continues to accelerate.
We have adjusted our Americas EBITS forecast for FY20 due to the 2H20 skew and more conservative route-to-market costs, while FY21 and beyond should benefit from the premiumisation strategy and progress towards the 25% EBITS margin target. We have lifted our Australia and New Zealand EBITS estimate in the near term, based on increased confidence in the mix shift towards luxury, with higher EBITS from FY21 due to the larger 2018 vintage and the expansion of the Wolf Blass Bilyara luxury wine facility. Our Europe, Middle East and Africa EBITS estimates for FY20 and beyond have been tempered by higher cost pressure from the Australian commercial wine portfolio.
Management turnover has been high recently, yet we remain confident the broader team can execute the strategy well. We maintain our Accumulate recommendation with a $20.00 target price.
* SGARA, or ‘self-generating and regenerating assets’, is a reference to the impact of accounting standard AASB 141 (Agriculture), which requires changes in the net market value of agricultural assets such as crops to be recognised in revenue accounts.