Ord Minnett has cut its FY18 earnings estimates for Treasury Wine Estates due to the impact of the Australian vintage size and quality versus that of a year ago and the 2015 vintage, along with the start-up costs for the new US and French portfolios and regional mix.
Treasury Wine is better able to manage the agricultural cycle yet the size and quality of vintages is important. This impact is most felt in Asia, given its luxury masstige skew and Penfolds skew versus other regions. In FY17, Treasury Wine enjoyed a high quality 2012 vintage Penfolds Grange and Penfolds St Henri, as well as a robust 2014 vintage in Australia. In FY18, the applicable vintage size and quality is not as strong, weighing on growth in earnings before interest and tax and self-generating and regenerating assets* provisions, especially in Asia.
The US portfolio growth in Asia was 200,000 cases in the first half of FY17, which is encouraging yet it requires brand investment and has a higher cost of goods sold versus Australian wine. The pending launch of a French portfolio will also incur brand investment yet will contribute volumes, with our modest estimates of 100,000 and 200,000 cases in FY17 and FY18. The risk is skewed to the upside, however, due to the value of the French wine trust mark despite the brand as yet being unknown.
Due to the aforementioned vintage and cost issues, we lower our EPS estimates for FY18 and FY19 by 6.0% and 3.4%, respectively, while leaving our FY17 estimates unchanged.
The Treasury Wine turnaround continues and we believe the risk-reward equation remains attractive. We note, in particular, the structural opportunity in luxury and masstige markets, especially in Asia and the US.
*Self-generating and regenerating assets, also known as SGARA, is an accounting revaluation of the company’s vines and grapes