Buffett Style Valuation, page-7

Excellent analysis, and really good points. If there was a button to the right of 'Great Analysis', I would have clicked on it twice!

Totally agree with 2sigma, there is value in the balance sheet to be unlocked and this should put a floor under the price. I have gone back to my notes and redone my calculations for asset value - perhaps I am not as bullish on the wine valuations, but happy to share.

a) For the land, it's crazy that they don't have it based on valuations! Back in 2016 TWE looked at unlocking balance sheet value and I think they were tossing up the idea of a TWE-REIT (like what Telstra has done with their land for instance). It never flew, though it has serious merit. In their annual report, they calculate land based on a cost basis less depreciation - total value around $360m. Looking at Rural Funds, they are an A-REIT that has to do valuations. Their 6 vineyards / 666 planted hectares leased to TWE is valued at $64m. Similarly, there was a sale in NZ for around $6m at NZ$100,000ha a couple of years back. At a minimum, you would think the land is $1bn, so +$600m on their balance sheet. If I was a corporate raider, I would be looking to unlock this value by spinning it off into another a-REIT or even selling the best bits to RFF, and using that as the deposit for the debt to finance the purchase.

B) Noted above that building, plant and property is $190m, but in their report (Consolidated statement of assets and liabilities) they have it closer to $1bn. I've used that, but maybe I missed something.

C and D) This totally stumped me that it's not based on current valuations. Note 10 in their report shows it's the lesser of cost of net realisable value! The great thing about TWE's inventory is it appreciates over time. I have put in $4bn conservative based on the non-current premium wine being valued x4.5 times the cost basis. Though word of caution, without real valuations being done, it's hard to estimate, which is why I am conservative. And if I was a corporate raider, I would go to a financial institution, borrow the $4b value of the wine at record low rates knowing the value of the wine is appreciating greater than the interest rate. Essentially load up the balance sheet with long term debt to fund the acquisition.

E) I made some adjustments to the above calculations based on the most recent report filings, not much difference in aggregate: Cash ($554m) - Net Trade Receivables ($200m) - Net Tax Liabilities ($200m) - Borrowings ($1.9bn).

F) I have also included brand values ($970m) but excluded goodwill ($274m) from my calculations (note 13). The general reasoning is that you can sell "Penfolds" name, but you can't sell the intangible benefits of previous acquisitions which are stored under goodwill. This is expected to be unlocked in a split with TWE's premium and other brands, though it won't unlock the balance sheet value. This is around $1.20 per share.

G) I have also included in my calculations earnings potential from the assets, which if you take the Enterprise Value less Asset Value, essentially that is being valued at around $2bn at today's price or $3 per share. As others have noted, the market has basically excluded China already in these calculations. This along with the brand values is what a corporate raider would then sell off in a couple of years, and make a killing on current prices.

Overall, my calculations are $11.90 per share in total (or $7.70 if you exclude the intangibles of F and G and compare with A-E from @2sigma. And I reckon if there is a corporate raid, that's the ballpark figure you could expect. We saw that happen recently with Coca Cola for example, which went from around $8.50 to $12.50 with the announcement of a takeover. And if there is no corporate raider, well the Free Cash Flow analysis ex China is around $7.70, and with China is around $11, based on post-Covid results.

Please, do your own research, and feel free to poke holes in mine.