Why Treasury Wine Estates Shares (ASX: TWE) is a Buy

This article was originally published at MF & Co. Asset Management.
Treasury Wine Estates shares (TWE: ASX) is the largest and leading wine company in Australia. With its strong performance in Asia recently, the company has seen its share price surge. With consecutive years of profit growth in all major markets, further expansion in the Asian market has made TWE share a wine company with a strong future.

However, lack of control with problems such as counterfeit products in Chinese markets could potentially lead to possible damage of reputation and sales drop should the company not tighten the reigns with personal shoppers.

About Treasury Wine Estates Shares (ASX: TWE)

Treasury Wine Estates Limited (ASX TWE) is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers and owns a portfolio that includes Australian labels such as Penfolds.

Treasury owns over 130 wineries, with more than 13,000 planted hectares. It is a large growth stock with 12.9 billion of market capital which is about ten times of its competitor Australian Vintage.

Treasury Wine Estates strong performance in Asia

After many consolidation phases in the wine industry in Australia, TWE obtained full control of two of the five most popular wine brands in Australia, Penfold and Wynns, and became the biggest and leading wine company in the nation.

Four major global markets are focused on by TWE: Australia and New Zealand, USA, Europe and Asia, All of these four major markets showed high growth trends as shown in the table below.

Treasury Wine Estates (ASX TWE) AmericasTreasury Wine Estates (ASX TWE) ANZTreasury Wine Estates (ASX TWE) AsiaTreasury Wine Estates (ASX TWE) Europe

Source: TWE 2017 Annual Report

As a domestic market, the Australia and New Zealand market is predominately controlled by Treasury Wine Estates.

$591 million in revenue was achieved in the 2017 financial year in the Australian and New Zealand market, five times more than its biggest competitors. Europe markets were optimistic and witnessed growth during this period as well.

From all of these four major markets, the Asian market has fast become the most potential growth market and generated the highest percentage EBIT among all of the four markets.

The table below highlights the 11% projected annual sales growth in the Asian market in the following five years.

Treasury Wine Estates (ASX TWE) Growth

Source: TWE 2017 Annual Report

The Asian market is poised to support the group’s constant growth, with TWE in the process of rolling out warehouse facilities in China in the first half of 2018, which shows a further expansion movement in the Asian market. The consistent focus on the Asian market promises TWE further growth in the future.

Treasury Wine Estates benefits from Explanatory Schedule of Chinese Tariff Commitments

Wine exported to China by Australian producers soared 63 per cent in 2017 to $848 million. This is partly because of the Explanatory Schedule of Chinese Tariff Commitments, which specifies that a Chinese tariff put on Australian wine would gradually decrease from 14% to 0% in 5 years.

This agreement significantly reduces the total price of Australian produced wine for Chinese consumers. TWE, as one of the major wine companies in Australia, experienced a profit rise of 37.4 percent, supported by strong demand in Asia in H1 18 and 47% increase of share price in FY17.

Other than normal distribution channel, an arising industry is the daigou, which is the freelance Chinese retail consultant, which works to contribute extra revenue to wine sales in Australia. The process of the Chinese daigou or personal shoppers is that the personal shopper buys wine at a local price then ships to China and applies a surcharge on it.

Although there is an increasing trend for Australia wine sales, there is potential threat of changing of Chinese regulations that could negatively affect the company. Added tariffs or other related costs increase would significantly change the sales.

The Australian government may also put a quantity limit on wine buyers similar to what they have had to do for bulk buyers of baby formula.

Another threat could be Chinese counterfeits of Treasury Wine Estates products, which would significantly damage TWE’s reputation and decrease the company’s profit.

Wine Australia, the country’s wine export regulator, has announced that they will have more power to vet exporters and deny exporting of wines to a country if they are found to be counterfeit wines, affording it the power to suspend or cancel export licenses.

Treasury Wine Estates (ASX TWE) China Imports

Quantitative Figures Show Strong Performance by TWE

The second largest listed wine company is Australia Vintage Limited (AVG ASX). Taking AVG into comparison, ASX TWE shares shows better position in quantitative figures.

Profit margin demonstrates the percentage of a company’s net profit after all expenses deducted from its total revenue in a financial year. The higher the profit margin is, the better a company performs since it runs at a lower expense percentage. ASX TWE shares profit margin in 2017 financial year was 8.82%, whereas competitor AVG showed a 1.74% number in the same year.

Another ratio is the return on equity (ROE). This indicates how much net profit the company generates for one dollar equity the company owns. Same as profit margin, the higher the ROE is, the better the company performs. Financial year 2017 shows ASX TWE shares 6.02% ROE, and AVG shows 1.37%.

The third ratio is called earning per share (EPS). EPS shows how much net profit the company generates for one share the shareholder holds in ASX TWE shares. Generally, a higher EPS shows a better result. A growing EPS is preferred because this shows that the company is growing its earnings. ASX TWE shares EPS in 2017 financial year was 39.8 cent, 30.5% more than it was in 2016 financial year.

All the above ratios back TWE’s strong position in the market as a leader in the export of Australian wine.

TWE Shares Potential Growth Is Strong

Based on both qualitative and quantitative factors, TWE, as the country’s biggest wine company, looks to have a bright future ahead.

If TWE continues to focus on the Asian market and continues to expand such as introducing warehouse facilities in China, it will have an even brighter future.

This article on Treasury Wine Estate is written by Henry Fung, Managing Director at MF & Co. Asset Management, a boutique investment firm based in Sydney, Australia. For MF & Co.’s full website and further articles follow the link: MF & Co.

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