China Sell Off Overdone - OW
TWE's 20% sell off post FY18 results provides an attractive entry point to a unique growth story, in our view. We think
China growth concerns are overplayed so the multiple earnings drivers available to TWE are underappreciated.
WHAT'SCHANGED
Treasury Wine Estates (TWE.AX) From EW To Overweight
TWE has sold off on China growth concerns, that we think are overdone. China has been the greatest contributor to TWE's earnings growth and stock
performance recently, so when macro economic indicators weaken investors
understandably became cautious. We think the recent de-rate from 30x to 23x one year forward EPS has been driven by the China outlook.
Leveraging our global peers views across multiple stocks/countries suggests no
slowdown in China. We think the TWE share price is now reflecting slower
growth in China ahead, we reflect this in our forecasts, yet still arrive at a healthy
18% FY19-21e EPS CAGR. Our global peers across Luxury, Spirits and China
consumer indicate their companies are yet to experience a slowdown in China as
we show here;
Luxury Goods: What we are hearing in China;
Beverages: Read across from Moutai on Spirits in China (29 Oct 2018).
Accordingly, we see little risk to FY19 guidance for 25% EBITS growth, although we note weakness in October China macro data points and leadership concerns over downside risks to growth, which have led to pledges of support for the private sector.
TWE is more than just a China story too. TWE has a number of FY19+ earnings
drivers that don't rely on the China macro, that we believe are now underappreciated that include;
1) A$36m FX tailwind;
2) recent Penfolds price rises (A$58m);
3) launch of French/Italian portfolios (A$4m);
4) Simplify for Growth program (A$30m);
5) US distribution changes (A$45m).
How we think about valuation.
TWE now trades at a discount to global spirits companies (24.7xv 25.3xFY19e) despite offering significantly faster EPS growth. We think that as the market becomes more comfortable with FY19 earnings, it begins to focus on FY20 where TWE trades on 20.8x.
Wherecould we be wrong?
Clearly, should macroeconomic conditions
deteriorate significantly in China TWE would experience slower demand that
would ultimately impact pricing power slowing earnings growth. Should stock in
the channel build this could hurt the Penfolds brand. A sharply higher AUD
and/or weak execution on US distribution changes would also slow earnings
growth.
TWE Price at posting:
$15.50 Sentiment: Buy Disclosure: Held
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