MS report re impact of proposed US tax cuts.... Rating:...

MS report re impact of proposed US tax cuts....

Rating: Overweight
Industry View: Cautious
Price Target: A$15.00
Treasury Wine Estates Impact of US Corporate Tax Cuts

TWE is well placed to benefit from the proposed US Federal corporate tax rate cut from 35% to 20% during 2018. We estimate that TWE generates 33% of group profits from the US. A reduction in the US corporate tax rate from 35% to 20% could drive FY19 EPS 7% higher. Lower US corporate tax rate a 'free kick' for TWE in FY19: According to our USeconomics team (US Public Policy Brief: 9 Takes from the "Big 6" Tax Framework (27 Sep 2017)) the US corporate tax rate appears set to reduce during 2018. President Trump has indicated that he feels a 20% rate is the 'perfect number' and said he is 'not negotiating that number'. Across our coverage TWE generates the highest share of profits from the US. Based on FY17 disclosure TWE generated 42% of group EBITS from its Americas business, we estimate that the US accounts for c.80% of Americas earnings or c.33% of group earnings. During FY17 TWE recorded a tax rate of 30.8% citing the higher proportion of US earnings as a driver of the higher tax rate. The current statutory Federal tax rate in the US is 35% and with state based taxes we understand that during FY17 TWE had a tax rate in the US of >35%. If we assume TWE continues to generate 80% of Americas EBITS from the US and the effective US tax rate reduced from 37% to 22% in FY19 the uplift to EPS would be c.7% on our estimates. Our existing forecasts already provide for 26% EPS growth in FY19 as TWE starts tobenefit from the outstanding 2016 and 2017 vintages, but the lower tax rate could fuel another wave of earnings upgrades.

Key upside risks:

- A weaker AUD relative to other wine- producing countries' currencies
- Stronger consumer demand from China
- Faster than expected margin expansion, driven by positive mix changes.

Key downside risks:

- Wine consumption trends, especially in Australia and the US
- Slowdown in demand growth from China
- Ongoing promotional pressure in the US commercial category.