Australia | 10:00 AM
Treasury Wine Estates is increasingly confident, reiterating expectations for 25% growth in FY19 earnings and guiding to a further 15-20% growth in FY20.
-Expects to increase products sourced in France
-Needs to absorb double-digit lift in Penfolds inventory
-Weak cash conversion disappoints brokers
By Eva Brocklehurst
Strong margins in Asia and a positive mix towards luxury wine underpin the outlook for Treasury Wine Estates ((TWE)). Guidance for FY19 earnings (EBITS) growth of 25% has been reiterated as well as the margin target of 25% over time. FY20 guidance is for earnings growth of 15-20%.
Macquarie suspects this early guidance for FY20 was provided because of market uncertainty about the low volumes in the 2017 vintage, which will be released from FY20. Further afield, FY21 risks are skewed to the upside because of the anticipated release of the high-quality 2018 vintage, while 2019 is expected to be even higher quality and higher volumes.
CLSA believes strong growth in luxury wine augurs well for future earnings. Guidance was lower than expected for FY20, although management has signalled stronger growth is more likely in FY21-22. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $23 target.
Considering the extended growth phase, and reviewing PE history, Credit Suisse is confident the company can reach its growth targets, upgrading to Outperform from Neutral.h
Yet Morgan Stanley questions whether earnings growth can really re-accelerate in FY21, suspecting it more likely that longer-term earnings growth slows. While inventory of luxury wines is rising the broker believes customer demand is more relevant to the earnings outlook. Profit growth is likely to remain strong but, in the absence of M&A, the broker struggles to envisage any acceleration.
The company is expecting to grow product sourced in France from the original Maison de Grand Esprit as well as Beaulieu Vineyard and Penfolds. Treasury Wine has indicated that demand for Beaulieu Vineyards has been exceptionally strong, and intends to acquire two small wineries in France as well as a number of premium brands and increase productivity with its own throughput.
The company has confirmed demand for Penfolds remain strong and sourcing will be extended to France and the US as well. Treasury Wine is keen to walk away from commercial volumes in Asia in an effort to optimise its mix.
China
The company's business represents around 8% of imported value share in China and expansion in distribution of more than 50% is forecast over the next three years. UBS believes the market has underestimated the growth and potential penetration in China.
Credit Suisse, in acknowledging the need to absorb the double-digit lift in supply of Penfolds luxury wine, remains confident that, as expansion in China deepens, plenty of growth is on offer. Morgans also points to the significant opportunity to grow the market share by increasing breadth and depth of distribution in China.
Cash Conversion
The one area that disappointed brokers was the weak cash conversion. The company has pointed to the timing of sales in Asia and the US and unfavourable FX translation of US working capital balances as the cause.
Also, Asian earnings margins have moderated as Treasury Wine invests in new brands. American margins declined to 18.5% in the first half while European EBITS margins were flat and affected by short-term pricing pressure.
While acknowledging the reasons behind the weak cash conversion, Morgan Stanley is becoming concerned that the company is stretching its key brands and potentially leaving them exposed. UBS also suggests, while comfortable with the company's explanation, achieving cash conversion of 60-70% in FY19 will be a challenge
Goldman Sachs was disappointed with the cash flow, and the fact net debt increased materially. Has the share price run ahead of fundamentals? Goldman Sachs, not one of the eight monitored daily on the database, believes the valuation is not aligned with execution risks.
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