In the news ..., page-33

New MS sp target released today... $18

Still the Top Dog – OW
Stock Rating: Overweight
Industry View: Cautious
A$18.00
Lifting estimates on lower US corporate tax rate and surging Asia demand with softer Americas an offset. As the market looks to FY19 – a vintage year – TWE shares should re-rate. 22.6x FY19e P/E is too cheap vs. market and global peers. OW.

WHAT'S CHANGED :
Treasury Wine Estates From Price Target A$16.00

Asia set to surge: We expect very strong underlying results from TWE's Asia business (1H18E EBIT +28%) based on our channel checks, our November China trip, and peer trading Kweichow Moutai Company Ltd.: Price hike plan indicates strong demand in 2018 (28 Dec 2017)). The later Chinese New Year timing (Feb 16 vs. Jan 28) (Global Cognac tracker: Soft shipments in December impacted by CNY timing (16 Jan 2018)) and distribution re-phasing in China as it starts a Mainland DC are likely to push some 1H profits to the 2H. TWE has grown strongly in China recently, so to illustrate the future opportunity, we compare FY18E profits from China (A$110m) with those of leading Baijui operator Moutai (A$7.3bn) which shows TWE's long growth runway in China.

Cautious on Americas, but trade data point to improvement: TWE indicated at FY17 results that in the Americas it had reallocated spending from A&P to discounts/rebates to improve shelf availability. It appears this investment has improved retail pull through, based on Nielsen data, with value growth going from -3% in July to +0.4% for 1H18. We think continued growth in the high-margin direct-to-consumer channel likely means that Americas performance is better than Nielsen scan data suggest. We acknowledge the long-term US opportunity, but think this may take longer to play out, given recent signs of increased competition and a slowing market from US peer, Constellation (STZ).

Lifting PT and FY18-20e EPS by 5-8%. With US corporate rate cuts now in law, we update our model to reflect a 22% US corporate rate tax (from 37%) which reduces our group FY19 tax rate from 30.5% to 25.7%. The EPS lift attributable to a lower corporate tax rate is in line with estimates we first outlined in Treasury Wine Estates: Impact of US Corporate Tax Cuts (28 Sep 2017). Our underlying forecasts rise 1-2% across FY18-20 to reflect stronger demand in China, offset by softer Americas performance. Our DCF valuation increases from A$16 to A$18 to reflect higher earnings estimates. We believe the market will soon begin focusing on TWE's very strong FY19 outlook – aided by healthy vintages, French brands gaining traction, and tax cuts. Hence, valuation at 22.6x FY19e EPS looks attractive, relative to the growth outlook and global peers.