Wine company Treasury Wine Estates (TWE.AX) jumped 11.5% as profits more than doubled to $179.4 million (compared to $77.6m in the same period last year) as Asian demand continues to drive robust growth for the company. TWE has been one of our strongest holdings in our Australian Model portfolio, with its shares up +98% since we bought it in September last year. TWE offers investors an attractive play on the gentrification of the Asian pallet. Growth remains strong in this sector and we expect the momentum to continue over the longer term.
Revenues also jumped, up 20% on reported currency basis to $2.2 bn (constant currency rose $13%). The company reported a dividend of 0.12 cents a share bring the full year payout to 20 cent s a share, up 6% from last year. The company has altered its strategy over the past 3 years, shifting to a luxury and prestige wine focus. It sold off/exited its lower margin lines and focussed its efforts through its Penfolds, Wolf Blass and newly acquired California premium brand. This has seen the company’s margins grow materially and accordingly profit handsomely from the growing demand from Asia. The company outlined a big rise in the amount of high-end wines it currently holds in inventory ready for bottling and sale in years to come. This is expected to underpin continued profit growth and an increase in profit margins. Its Luxury wine inventory jumped by $255 million to $798 million at the end of June. It will be bolstered further by a high-quality 2016 grape harvest, particularly in the Barossa Valley in South Australia, where high-end shiraz is grown.
As an exporter, TWE directly benefits from a fall in the Australian dollar, and we estimate a positive 1% move in the AUD/USD exchange rate for example adds about AU$3.1m to the company’s operating profit (conversely moves in the AUD higher result in a negative impact to profits). We expect a fall in the AUD will provide an added boost to TWE's earnings going forward.
TWE offers investors an attractive play on the gentrification of the Asian pallet. Growth remains strong in this sector and we expect the momentum to continue over the longer term. The company reported a dividend of 0.12 cents a share bringing the full year pay-out to 20 cents a share, up 6% from last year.
Outlook
believes the strong earnings momentum for TWE will continue. The main driver of growth within our forecasts is greater sales from the Luxury and Masstige portfolio into the growing Asian region. The improving sales mix at higher price points is resulting in higher EBITS margins. TWE has brought forward its targets on EBITS margin of “high teens” to FY18 (prior was expected in 2020). This is the confidence that management has in the business and their ability to achieve greater market share and significant growth. The brand prioritization, structural reform and marketing initiatives are resonating with consumers and driving increased volume and price. This is particularly noticeable in this result in the Asian region which continues to have significant head room for growth. While the business is well positioned. TWE appears well placed to capitalise on this trend as its inventory shifts toward Masstige and Luxury wines and away from commercial. The shift in sales mix is helping to lift EBITS margin in the region. We forecast that Asia will be a key driver of earnings for TWE as it leverages its premium Australian and US brands into the market. In addition, we think over time the AUD will continue to fall and provide further stimulus to the business.
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