Ann: TWE Update , page-15

I don't think this is the end of the downgrade cycle for TWE. A great article in todays AFR online by Angus Grigg which I hope I am allowed to part quote "But the bigger issue for Treasury is the trashing of the Penfolds brand across China. Prior to this wave of discounting, China offered some the highest per-bottle margins anywhere in the world. Those margins will be very hard to claw back now that consumers are accustomed to big discounts. Take Rawson’s Retreat. It previously sold for 228 yuan ($A43), but has been marked down 74 per cent to 59 yuan on yhd.com, a Chinese website that sells everything from groceries to electronics. The lower Australian dollar will help somewhat, but is not going to make up for the massive discounts being offered." I thoroughly recommend the reading of this entire article.

As for some basic financial & valuation, here are my numbers .... this year TWE will generate OCF of ~$230m (EBITS = $200m + $85m D&A - $15m int costs - $40m tax). Then if we deduct maintenance Cap Ex which runs at a minimum of $100m pa we have a business which is delivering Free Cash Flow of ~$130m.

So at $3.60/share or Mkt Cap of $2.34bn, stock has a FCF yield of 5.5%. Is this reasonable for a business with 3 highly variable and largely uncontrollable earnings features ie Weather/Agri Risk, FX risks & consumer tastes? I think the new CEO will take a razor to asset values and reduce book value to ~$2.50/share from the current $4/share .... which would be more in line with current CF generation of the business?