Treasury Wine/TWE

Anytime you open a result presentation pack you’ll want to see the words “pleased” prominently displayed. “Solid” is usually bad. “Challenging” is usually awful. Treasury have managed to fit all those words into the below, which is probably the real summary of the result.

The possibility of corporate restructuring / spin-off (Penfolds, and possibly DAOU) is well taken by the market; those assets are going to be worth more outside the company, than being subject to the holding company discount.

The good bits are getting better (Penfolds) and the bad bits (commercial wines) are getting worse.

The premiumisation strategy continues, with ASP’s rising across all divisions.

Adjusted EBIT continues to rise, although the problems in Treasury Americas is very evident. Management point to the major destocking event from customers over the prior half, as well as issues with their own supply, and that it will bounce back in the next half more materially. Transparency here is not great.

Opex looks well controlled, whilst COGS rose…

…although management expect this to improve in the second half. CODB (cost of doing business) improved due to cost out activities taken last half.

The decision to hold back on Penfolds, in anticipation of the tariff review, weighed on earnings overall, as did the noted weakness in commercial (low budget undifferentiated) wines, alongside the aforementioned Treasury America’s issues (19 crimes underperforming).

And this was visible in weaker earnings growth overall, although the bulk of the declining EPS was attributable to the increase in number of shares outstanding associated with the DAOU cap raise.

As a reminder, the DAOU acquisition closed in late December, so you’ve got the share count weighing on EPS and the debt balance weighing on the gearing, but the revenue and earnings haven’t started to come through (e.g contribution from the next half onwards).

Management commentary is also pretty clear that the guidance for mid-to-high single-digit eps growth is not dependent on that review coming through…

…nor on the DAOU acquisition. I think that’s worth restating. Earnings guidance is not dependant on a positive tarrif review, or on including the DAOU acquisitions.

Clearly, a good outcome on the tariff review, and the future inclusion of DAOU earnings, will be cherry on top.

EBIT margins fell…

Although they are expected to normalise in the second half.

Cashflows were light on…

And whilst management expect a higher full year conversion rate, and have a longer run target of c90%, it isn’t clear that things are as good as they could be, here.

Gearing at 2.37x is actually better than the 2.5x guided to in the pro forma (from the DAOU capital raise documentation). It should trend lower as those newly acquired earnings come in.

Also interesting were the comments on luxury wine overall. There’s been lots of mixed noise in the media and marketplace about luxury stocks in general, with some downgrades, some upgrades, across luxury items like handbags and spirits. Quite varied. Thus it was good to see the TWE pricing environment remains robust.

Valuation overall seems reasonable. 18x forward earnings for a luxury branded, growing collection of assets in high demand.

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