Treasury Wine Estates (TWE) – Sour taste

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 as new CEO Sam Fischer takes the reins, which has led to significant changes to our FY26 earnings forecast and a steep reduction in our target price to $6.50 from $8.00. Our changes are driven by the following factors: (i) excessive inventory in its Americas business, which will need to be cleared – we forecast revenue declines of $150 million at a margin of 55% as stock is depleted from its sales channels; (ii) weak demand for its Penfold products in China during the mid-autumn festival season; and (iii) removal of earn-out payments on its acquisition of Daou Vineyards in 2023.  Further on the Americas segment, the new boss will need to consider Treasury’s future in what has always been a difficult US market, with the company lacking scale and the high-profile brands, Daou excluded, to compete in what is a highly fragmented market.

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In our view, Fischer will also have to significantly cut the vintner’s grape intake from future harvests given its inventory sits at $2.5 billion, including $1.8 billion in its luxury brands, largely due to over-optimistic forecast for China demand post Beijing’s removal of tariffs. Looking internally, our review of Treasury’s history since being separated from Foster’s 15 years ago suggests the culture of the business needs to be renewed given what we see as a record of ignoring bad news and not taking accountability. The profit warning delivered on 13 October, with little elaboration via media or analyst briefings being the latest example of why investor confidence in the board and management is fragile.

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Post our review, we have cut our EPS estimates by 12.8%, 2.6% and 0.5% for FY26, FY27 and FY28, respectively. We maintain our Hold recommendation on Treasury and await Fischer’s strategy to bring the vintner back to health.