TWE

The premiumisation strategy continues, for TWE.

They are having no trouble selling Penfolds…

…which trades at a considerable premium to everything else, below, average selling price by segment..

Things are a touch harder outside of Penfolds, however, as you can see with the Treasury America’s business. There’s a few things happening in there.

Firstly, the commercial wines are struggling, which TWE blame on the economy. That’s slightly harder to understand, given the economy is very strong, but the general pitch is that inflation has hurt the kinds of consumer that drink wines priced in that segment, and competition is fierce.

Secondly, in luxury, due to fires in the Napa valley a few years back, TWE this year had less wine to sell. So volumes dropped materially.

The two issues together put a dent in the Americas business.

Still, margins were either steady or up, excepting the premium brands division, despite this volume impact, and the poor performance of commercial wines.

Cashflows were weaker than we would like, however, this does reflect the usual seasonal drag. The last half (as in, not the 116.8 below, but the half prior) was supposed to be seasonally strong, and there was some “payback” from the overly strong cashflows during the pandemic.

We accepted that explanation at the time, although it may have also been a “warning red flag” that conditions had slowed. The pandemic effects make it very, very difficult to tell.

Still, management seek to reassure us once again, and remain confident of that material step up. Seasonally, the next half should be much stronger, and we will once again take it on faith.

Gearing is creeping a touch…

The story behind TWE has been one of steadily improving returns, and that still seems on track, for the most part. Low returns are not necessarily bad, if they growing over time.

Valuation remains reasonable

The dispersion is broker price targets is large.

If you think China is coming back (tariffs removed) you are likely to be quite excited, given how much the Asia segment revenues fell when the tariffs were introduced. If you don’t think that’ll happen, you are less keen.

We absolutely think it will happen. China’s economy is looking very wobbly at the moment, and they are highly incentivised to repair any and all trade relations.

Overall, we thought the result acceptable for now. Guidance seems a bit weasel-ish, to us, in that they are blurring the line between what they expect for FY24, with their longer-run strategy.

Precisely what grows, earnings, revenues, cashflows, all, some? Our guess is that they continue to prioritise margin, through the luxury and premium wines (e.g. continuing to focus on Penfolds) and are kind of hoping for a “China trade resolution” kicker.

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Please note that past performance is not a reliable indicator of future performance.

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