What is TWE Worth Ex-China?

With the news that the Beijing Ministry will apply a tariff rate of between 107 per cent and 212 per cent on Australian wines, there has been considerable political chat here on the TWE HotCopper Forum, but not much discussion about what this implies for the valuation of this blue-chip ASX company.

Let's take a quick back of the envelope look at what is the worst-case scenario and then build our investment case from there. For the below analysis, I have looked at the NSR (net sales revenue), EBITS (earnings before interest, tax, SGARA and material items) and NPAT (net profit after tax) of Treasury Wine Estates at the group level AND ex-Asia.

Looking at the group level results ex-Asia is extremely conservative for 2 reasons. Firstly, China obviously does not comprise 100% of TWE's Asian sales and profits. Secondly, even with harsh political tariffs on Australian products, it is not going to eliminate all of TWE's China sales/profits. But, regardless, let's look at this because it gives us a baseline for what is the absolute floor in the share price.

I am also using FY19 results not FY20 results, which were impacted by lockdowns around the world. This is because any investor buying into TWE at this stage is no doubt investing on the thesis that the world will emerge into a post-lock down world in CY2021 and beyond. The markets are forward-looking and the norm for TWE moving forward is a non-lockdown world. This is a blue-chip company and it has decades that lie ahead of it.

Treasury Wine Estates Revenue, EBITS & NPAT analysis

Where will the share price find equilibrium with post trading-halt?

Entering the trading halt, the current share price stands at circa $9 after the stock was sold off approximately 11% on the last trading day. $9 equates to a market cap of circa $6.5B AUD. This corresponds to a PE multiple of 15.5x for the Group level and a PE multiple of 28x for the Group level Ex-Asia on FY19 results. I.e. At $9, you are paying a PE of 28x if you assumed that the entire Asian division of TWE was eliminated entirely.

What is a fair value earnings multiple for TWE?

• The historical 5-year average PE ratio of Treasury Wine Estates Limited is 25x
• The PE ratio of TWE's peer group (Constellation Brands, Jiugui Liquir Co, United Spirits, Compania Cervecarias, Remy Cointreau) is 27x
• The PE ratio of the sector (Distillers & Vintners) is 23x

Conclusion:

My conclusion is that even when you consider the extremely conservative and hypothetical scenario in which TWE's Asian operations are eliminated entirely, the current share price ($9) already prices this in. At $9, you are paying an FY19 PE of 28x for the business EX ASIA. This is in-line with TWE's 5-year historical PE average. This is in-line with TWE's peer group PE. This is in-line with the PE ratio of the sector. The share price at $9 is an excellent bet for a long term hold.

We may find that with some emotional over-reactions the share price moves below $9. The share price might trade in the $7 to $9 range (but I suspect it will be brief) post trading halt. Institutional funds who have done their work will likely be taking the opportunity to buy at this point for a medium-long term hold. I think there is very little chance that the share price will fall below $7 given NTA and the analysis above, but we can't rule it out entirely.

T.E.P.