Wine Australia has released its June wine export report. Exports to China have accelerated to +66% with strong growth at price points >A$20/litre (90-220%) for the 12mths ended Jun '18. Broadly, a strong China end market should allay earnings risks for TWE.
Australian exportgrowth to China has accelerated….but we caution a direct
read across. On May 17 TWE flagged that it had experienced delays from some
Australia country of origin wine destined for China, so Australian wine exports
mightn't necessarily align with TWE's sales given border issues. That said China is
strong with wine exports by value for the 12 months ended June '18 accelerating
to +66% from +64% to March '18. TWE is also in the process of stocking its
distribution centre in Mainland China which distorts a direct read across from
export data. Finally in late 2017 TWE began shipping its new French portfolio to
China which obviously isn't captured within the Australian export data.
….that said we think it's encouraging high value wine exports to China remain
strong. TWE over-indexes in China within the luxury end of the market so a re-
acceleration in export growth within the luxury segment bodes well for TWE, in
our view. For the 12 months to June '18 value growth to China by price point (per
litre) was; A$20-20.99 +113%, A$30-49.99 +90%, A$50-99.99 +202%, A$100-
199.99 +141% and >A$200 +220%. Wine Australia's Regional GM for China noted
'the momentum for Australian wine is clearly being maintained and, what is more
encouraging, especially over recent months, is the strengthening of demand for
premium price point brands...' The bottom line is end demand for TWE's products
in China remains very strong, which allays near term earnings risks.
Australian exports becoming more competitive. Wine Australia notes a 15%
increase in the number of wine exporters in the prior 12 months compared with
the preceding 12 months which suggests competition is rising. In part this has
been driven by the Australian Government's A$50m export and regional support package launched in Aug '17. While TWE isn't immune from greater competition, we think its' long established distribution network and powerful brands
(Penfolds) enable it to continue to grow considerably with more competition.
Global supplyconstraints helping Australian exports. As we flagged here the
low volume 2017 European vintage has driven shortages and is helping
Australian wine take share, especially at low price points.
Valuation Methodology & Risks:
Our price target of A$20.00 is our base case scenario value, derived from our one-year
forward DCF valuation, in which we assume 8.9% WACC and 3% terminal growth.
Key downside risks to our price target:
Wine consumption trends, especially in Australia and the US.
Slowdown in demand growth from China.
Ongoing promotional pressure in the US commercial category.
TWE Price at posting:
$19.34 Sentiment: Buy Disclosure: Held
A personalised tool to help users track selected stocks. Delivering real-time notifications on price updates, announcements, and performance stats on each to help make informed investment decisions.
(20min delay)