TWE's Stars Are Aligning
Stock Rating: Overweight
Industry View: Cautious
Price target: A$16.00
Bull: $19
Bear: $10
We lift FY18-FY20 EPS estimates by 2-5% on strong China demand, poor Europe 2017 harvest and FX movements. Valuation still looks cheap vs global peers and we don't think the market prices the attractive LT growth runway. OW
The 2017 Penfolds release:
Our pricing analysis of the latest Penfolds range release shows increases have moderated vs 2016. Only St Henri (+25%), Bin 150 (+11%), Bin 389 (+6%) and Bin 407 (+6%) saw price increases which we believe is reflective of: (a) the lower quality 2015 vintage; and (b) more broad based price increases taken in 2016. Dan Murphy's pricing analysis shows that it has reduced the discount to the RRP from 16% to 14% last year. Discounts are reducing as product becomes more scarce in Australia.
China is booming:
Wine Australia (WA) indicates that growth in Australian exports to China accelerated to +56% on a MAT basis in Sept. vs +44% to June. Higher price point wine remains the driver with growth per litre at A$30-50 +121%, A$50-100 +79%, A$100-200 +178% and >A$200 +101% over the same period. WA indicates the 10 biggest exporters to mainland China doubled (TWE is a clear No.1), while the remainder grew 29%. We note that part of the acceleration is likely from TWE stocking its new distribution centre in China.
Peer comments on China very encouraging:
Our review of peer company comments (Exhibit 16) on China shows growth is continuing, perhaps even accelerating. A few selected comments: Remy Cointreau, "very solid double digit in value led by strong trends in Continental China, in particular"; Pernod Ricard, "return to growth of China, which we hadn't seen since FY13"; LVMH, "confirmed recovery in China for all qualities" and "numbers are still extremely solid in Q2 (in China)"; Diageo, "China very quickly is having a stellar year .in the last quarter the business doubled"; Prada, "improvement in China"; Estee Lauder, "the 4Q results came largely from terrific strengths in China". We think TWE is still relatively immature relative to these long established global brands.
Is TWE a luxury company?
We feel TWE's most relevant valuation comparison group are global wine / spirits companies and on a growth adjusted basis it is cheap. However, given that TWE is increasingly exposed to the luxury wine market (China) we thought to compare to a luxury peers. This shows TWE trades at a 13% premium (C2018), yet is set to generate 2x the EPS growth vs peers. We lift earnings forecasts by 2-5% on China demand, weak Europe harvests and FX
TWE Price at posting:
$15.02 Sentiment: Buy Disclosure: Held
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