How Treasury Wine Estates is turning tariffs into triumph
The Australian Eagle Asset Management investment team has had a long history with Treasury Wine Estates (ASX:TWE). The most recent holding was for several years prior to the pandemic with positive performance supported by growing profit and margins generated by the success of Penfolds in China. This time around, we see another opportunity for medium-term change thesis that may drive a material re-rating of the share price.
The deterioration of Sino-Australian relations during the pandemic led to the imposition of Chinese tariffs on Australian-made wine. In response, Treasury Wine Estates diversified its customer base and implemented a multi-country of origin strategy to produce Penfolds. There was little expectation that only a year later, these tariffs would be removed and the company would be gearing up for re-entry into the lucrative Chinese market.
In a June 2024 update, the company announced it is increasing its headcount in China by 67 per cent to 200 and provided a forecast of double-digit profit growth for the critical Penfolds brand for the next three years. Penfolds is expected to deliver this growth through a record 2024 vintage which will be released progressively over the next three years. Treasury Wine Estates is confident that demand for Penfolds in China has not diminished while they have been out of the market as the multi-country of origin strategy established Penfolds winemaking operations domestically in China and initial demand from Australian-made exports has been reported to be very strong.
Aside from Penfolds, Treasury Wine Estates purchased DAOU Vineyards in the U.S. for U.S.$900 million in late 2023. This increased the weighting of luxury wines in the U.S. portfolio from 38 per cent to 53 per cent of revenue and provides a cushion in difficult times where luxury (more than $30 per bottle) continues to grow. The broadening of the luxury brand category allows Treasury Wine Estates the optionality of establishing separate luxury and premium wine (retail price between $10 and $30 per bottle) operations. Should this come to pass, it may lead to a potential demerger of the premium wine operations with Treasury Wine Estates focusing on Penfolds and a smaller portfolio of high performing luxury brands.
The investment team believes that this could lead to a re-rating of the shares closer to a global luxury brand multiple of 25x earnings from the current 20x price to earnings (P/E) multiple on financial year 2025 earnings expectations.
The Montgomery Fund and the Montgomery [Private] Fund owns shares in Treasury Wine Estates. This article was prepared 12 July 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Treasury Wine Estates, you should seek financial advice.
Alan Kwan joined Australian Eagle Asset Management in 2011 and is the principal analyst for many of Australian Eagle’s portfolio stocks and the coverage universe, particularly medium-capitalisation companies. He is a key member of the portfolio management team and implementation process. His prior experience includes 3.5 years as the Director Investment Management at WorkCover NSW, and investment roles with Aon Consulting and Legal & General. Alan spent nearly five years in Europe investing in global equity markets with Allianz Asset Management.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
