Analysts mixed on Treasury Wine after China earnings boost
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The news: Analysts had mixed responses on Treasury Wine Estates' announcement that it expected an earnings boost for its luxury Penfolds brand off the back of the reopening of its key China market.
The numbers: Jarden analysts retained their target price of $14.50 but upgraded their rating on the stock from 'overweight' to 'buy'. They forecast a 19% three-year earnings per share compound annual growth rate (CAGR), with a stabilising global luxury wine market, growing direct-to-consumer segment, and China all presenting opportunities.
However, Macquarie analysts kept their 'outperform' rating on the stock and reduced their target price 1% to $13.60, noting that an increase to the risk-free rate from 3.80% to 4.24% "more than offset" upgrades to its earnings forecast.
Meanwhile, Morningstar analysts increased their fair value estimate by 4% to $12 per share, maintaining their FY24 underlying EBIT forecast of $662 million, but lowering their FY25 underlying EBIT forecast by 2% to $804 million, due to a step-up in investment and overheads in China.
Treasury shares fell 0.08% to $12.43 on Thursday, despite Australia’s top winemaker saying that it expects Penfolds' earnings margin to be around 42%, with FY24 earnings before interest and tax between $418 million and $421 million.
In early trading on Friday, its shares were up 0.76%.
The context: Jarden analysts said their conviction level in Treasury is rising and flagged that it was increasingly a luxury business, operating brands with growing demand, scarce supply and pricing power, which "warrant a higher multiple".
Macquarie analysts said they saw "significant opportunity" for the Penfolds brand to regain a favoured position in China, with upside risk to pricing over the medium term.
They noted that the company's decision to reinvest in Penfolds over the next couple of years, despite the impact to margins, as a "sound move". They said the investment in marketing and rebuilding staff on the ground expected to help Penfolds secure its position in China over the long term.
Macquarie also viewed minor adjustments to Treasury's distribution model, with the use of national and regional distributors, as likely to make it more scaleable.
Morningstar analysts noted that strong brand equity in some brands was eroded by the rest of Treasury's portfolio, leading to a no-moat rating in aggregate.
The sources: Jarden research, Macquarie research, Morningstar research
