Treasury Wine Estates: luxury wines still pouring into...

Treasury Wine Estates: luxury wines still pouring into China

Consumers' move away from cheap wine towards pricier plonk means Treasury Wine Estates' shares are undervalued, according to Morgans analyst Belinda Moore.Treasury, which owns wine brands such as Penfolds, Wolf Blass and Yellowglen, has been divesting labels that sell for less than $10 a bottle and shifting to more expensive wines, she said."[Treasury] is doing the right thing by positioning in luxury ... That's when you can incur the strongest growth in those categories and the margins are a lot higher," Ms Moore told The Australian Financial Review.Penfolds wine, owned by Treasury Wine Estates, is still in high demand in Asia, according to Morgans analyst Belinda Moore. SuppliedPositioning itself with more up-market wine labels gave Treasury a stronger brand portfolio than competitors, leading her to rate Treasury's share price as undervalued by 20.7 per cent when the Australian Securities Exchange opened on Monday.In a note on the $7.3 billion company, Ms Moore also listed factors such as the lower Australian dollar creating favourable export prices, rumours of a possible acquisition of American wineries company Chateau Ste. Michelle Wine Estates, and continual over-delivery on earnings forecast as reasons to buy Treasury shares.Related QuotesAdvertisementDemand is rising for so-called "mass-tige" wines, priced between $10 and $20 a bottle, and luxury wines (selling for more than $20) and these deliver better margins than those on the lower shelves, which Treasury refers to as commercial wines, according to Ms Moore.Treasury bolstered its luxury wines inventory from 23 per cent of its inventory in 2011-12 to 37 per cent in 2017-18. "Given the inventory for luxury and mass-tige on its balance sheet, [Treasury] looks well-positioned for growth over the next few years," she said.Global consumer appetite for top-shelf wines had largely been driven by demand from Asia, with Australian exports increasing 21 per cent in the past year, she said. "They're wanting our aspirational brands. Its Penfolds brand is doing extremely well over there."Treasury had reaped the rewards of a tightly controlled inventory when it delayed the release date of Penfolds wines by about seven months in 2014, allowing it to avoid a spike in earnings at the end of the fiscal year, Mrs Moore wrote in her note. "It's been building up that inventory. That's important because it's going to release those wines in a deliberate and prudent way over coming years," she said.Although Australian wine exports to China have slowed in recent months, Ms Moore noted Treasury was still well-positioned for growth in the region."They do have a very low per capita consumption versus other regions ... so there's plenty of opportunities for them to drink more wine," she said.Customers in China drank less than five litres per capita a year, compared to Australians who each drank almost 25 litres annually and Italians who put away almost 40 litres, she said. However, market researcher Euromonitor forecast Chinese wine consumption would increase 6 per cent a year for the next five years.Ms Moore's pricing recommendations follow Treasury confirming on January 10 its full-year guidance of 25 per cent growth on its earnings before interest, tax and self-generating and regenerating assets for 2018-19.Analysts from Morgan Stanley, J.P Morgan and Macquarie agreed that Treasury was trading below its worth, with buy recommendations for the stock.However, Adam Fleck of Morningstar had a sell recommendation, pricing the wine business at $11.70 per share.Treasury's stock closed at $14.22 on Monday, down 27.8 per cent from its 12-month high of $19.85 on March 9 last year.