Treasury Wine Estates (TWE) – Plentiful grapes

Treasury Wine Estates is a vintner whose brands include Penfolds, Wynns, Seppelt, Wolf Blass, Lindemans, Squealing Pig, DAOU Vineyards and Beringer Bros, and operates in Australia, the US, the UK, China and elsewhere. The company markets and sells its products to distributors, wholesalers, retail chains, independent retailers, and on-premises outlets, as well as directly to consumers. Treasury Wine Estates was founded in 1843 and is headquartered in Melbourne, Australia.

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Ord Minnett has reviewed its Treasury Wine Estates model, which has resulted in increased debt assumptions in our numbers as the vintner deals with tight grape supply contracts in both the US and Australia. Our previous expectation was that a reduced intake of grapes from its suppliers would generate a net working capital inflow in FY27, but Treasury management has signalled its contracts are relatively inflexible. In the US, the contracts are generally in a fixed ‘take-or-pay’ form, which constrains Treasury’s to cut its grape intake and thus its inventory levels. Meanwhile, in Australia, where the company has much-deeper and longer-running history with growers, it can reduce annual grape intake but at the cost of a contract extension. Our read from the Australian industry is that Treasury has been able to reduce its annual grape intake by circa 20–30% in return for extending grower contracts by 3–5 years.

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Combined, the impact of these contract terms means Ord Minnett estimates Treasury’s inventory will increase again in FY27 before scaling down in the following years. Size-wise, we see inventory topping out at circa $2.9 billion, a whisker away from the company’s current market capitalisation and twice the inventory size it held a decade ago. Post the review, we have cut our EPS estimates by 1.3%, 6.3% and 4.0% for FY26, FY27 and FY28, respectively, to incorporate increased debt assumptions (we make no changes to our operating assumptions), which leads us to cut our target price on Treasury to $4.50 from $5.00. We raise our recommendation to Hold from Lighten, however, given the stock’s lost 18% slide in March and fall of decline of almost 30% in the year to date.