This ASX giant has regained its most important market – But can it execute?

Treasury Wine Estates (ASX: TWE) is making a return to its former glory - as a growth story that’s taking advantage of both the fast-growing Chinese and luxury US wine market.

The reopening of China as a key market, following crushing tariffs in March 2021, dusts off a long-lost growth avenue for the Penfolds owner. 

Managing Director Thomas King says the initial key performance indicators for the Chinese market, including June shipments, initial depletion performance, and customer reordering patterns, signal optimism around the demand for Penfolds in the market. 

"I was in China last week and saw firsthand the energy and buzz around the return of Penfolds Australian portfolio,” he said.

"Whilst much is being said about the current consumer environment in China, we continue to see the market as a highly attractive long-term growth opportunity for Penfolds, and we intend to play a key role in leading the revival of the wine category, particularly from FY26."

But Treasury Wine's growth trajectory is not without challenges. Today's result included a post-tax impairment of $318.1 million, relating to the impairment of goodwill and restructuring costs.

In this wire, Hailey Kim – investment analyst at Wilson Asset Management – runs the ruler on the company's results and outlines why Treasury Wine's growth story is back on track.

FY24 Key Numbers

• Revenue +13.1% to $2.73 billion
• EBITS +12.8% to $658.1 million
• Net profit after tax -61.1% to $98.9 million
• This drop reflects $318.1 million relating to impairment of goodwill and commercial brands
• Net profit after tax before material items +8.3% to $407.5 million
• Total dividend for FY24 +2.9% to 36 cents/share
• FY25 EBITS guidance in the range of $780-810 million

1. In one sentence, what was the key takeaway from this result?

A strong delivery of FY24 results in a very complex operating environment, FY25 guidance range implies a solid Americas and Penfolds performance.

2. Were there any surprises in the result that you think investors should be aware of?

We liked the divisional mix in the result, where Penfolds and Americas divisions including the recently acquired DAOU, which are higher multiple businesses, were stronger than expected, offsetting the slight weakness in the Premium brands which include Commercial brands that are pegged to be divested.

The company provided colour around China despite the re-entry into the market still being early stages. It was noted that they are seeing strong demand from customers and distributors which have supported the initial depletion, and the company is expecting customer reordering in this September quarter. This provides confidence in the management's ability to execute the re-entrance into the Chinese market in the coming years.

TWE also announced a new operating model, separating the Premium portfolio from the Luxury business. We see this as a positive as it signals the management's intention to realign sales and marketing efforts to its distributors and drive continued growth in Luxury brands.

3. Would you buy, hold or sell Treasury Wine on the back of this result?

Rating: BUY

We think the investment proposition of TWE is very unique. It's a staples company with global exposure and has a strong growth outlook that's expected to deliver double-digit earnings growth over the next few years. The current valuation of 19x P/E does not reflect this in our view.

Today's result reaffirmed that the quality of the business has improved over the last few years, with a global distribution model, improving mix with the luxury brands outperforming the overall group, Penfold's margin profile, as well as a strong balance sheet.

4. Are there any risks to Treasury Wine or the Staples sector that investors should be aware of?

There are some concerns around the global wine market from a shift in consumer tastes, and broader macroeconomics environment and the implications that might have on discretionary spending. While the broader global wine market outlook appears neutral, we are more upbeat about the luxury categories TWE is most exposed. Consumer demand for luxury wine remains strong and is less exposed to the overall economy. The demand/supply set-up is also positive which allows companies like TWE to continue to push through price rises.

Management has successfully navigated through a very challenging and complex market environment over the years. The company generally doesn't provide full-year guidance this early in the financial year, but providing one today shows confidence in the execution of the strategy they set out. Current valuation implies the market is ascribing little expectations to the stock and we continue to see a sizeable upside potential to the share price.

5. From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today? Are you excited or cautious about the market in general?

Rating: 3

Relative to historical levels, overall market valuations currently screen high, however, this is largely driven by a few sub-sectors including banks and discretionary stocks.

We still see value in certain parts of the market and continue to favour companies with valuation supports, and also those with company-specific growth drivers that can deliver earnings growth less reliant on the growth level of the overall economy.