Treasury Wines wrestles $4b China problem
Simon EvansSenior Reporter
Treasury Wine Estates, the maker of Penfolds and Wolf Blass, has built up a powerhouse business selling into China which analysts estimate is worth $4 billion alone after six years of robust growth.
While Treasury also operates large businesses in Australia and North America, it is the Asian operations, of which China makes up the lion's share, that drove the share price to beyond $19 in late 2019. Investors anticipated the thirst for luxury wine by affluent Chinese would keep expanding, but that has unravelled in a major way since August.
The prospect of punishing tariffs by Chinese authorities and speculation about widepsread bans on imports of a variety of Australian products including wine, lobster, sugar, copper and timber sent the share price tumbling to a five-year low of $7.96 on Thursday. But some analysts think fear may have replaced common sense and that might have represented a low point.
A substantial rebound in Treasury shares of almost 9 per cent to $8.67 by 2.30pm AEDT on Friday showed the doom and gloom might have gone too far.
Much is at stake. Treasury's Asia division made up 45 per cent of the company's total profits in 2019-20, which were down 25 per cent overall because of the big hit from the COVID-19 pandemic to wine sales across the world as hospitality venues shut down.
UBS and Citi both suggested the downside from looming tariffs and trade bans had already been factored in to the share price and for those investors brave enough to wade in, Thursday's close represented a 'buy' opportunity.
Citi analyst Craig Woolford said the bind which Treasury found itself in was political, but if tariffs by the Chinese government were mainly targeted toward lower-priced wines then Treasury wouldn't be as affected because it is pitched at higher-priced wines.
“While the situation is political, we believe there is no evidence of dumping in China of premium wines and Treasury may be in a better position than most if tariffs are targeted towards lower priced wines,” Mr Woolford said.
"Given the recent share price fall, the upside risk is now appealing.''
But he emphasised it was a high-risk situation for investors as he lifted his recommendation to a 'buy'. He said the 'buy' call won't suit all investors given its high risk nature and the outcome on China being ''binary''.
UBS analyst Aryan Norozi now has a 12-month price target of $8.80 on the stock, cut from $12.50 per share.
Mr Norozi said ''risk, reward is now favourable'' but there were a myriad of different outcomes which may eventuate.
UBS values the China business alone at around $4 billion on an enterprise value basis, which equates to $5.50 per share.
Stockbroking house Jefferies has a 12-month price target of $9 on the stock and warned that the outcome was impossible to predict.
Treasury chief executive Tim Ford said on Thursday the company was ready for whatever might be coming down the line from China. "We've just got to deal with the cards that are dealt to us,'' he said.
The group has crunched the numbers internally for every scenario ranging from ''mild to severe'' tariffs. Two years ago, it began projects to stretch the Penfolds brand from its Australian roots, to become a global brand by developing a Californian version of Penfolds red wines, and then a French range of Penfolds reds and champagnes. Mr Ford said the first of the Californian Penfolds reds will hit the market in March.
But the sheer size of the China business, which makes up most of the $617 million in sales to Asia for Treasury in 2019-20, means that any China exports that are blocked will be extremely difficult to replace.
In 2013-14, Treasury's Asian business produced annual revenues of $138 million and $48 million in profits. Profits increased fivefold over the next six years.
Australian Vintage, the second largest ASX-listed wine company with brands including McGuigan, Nepenthe and Tempus Two, has been largely spared from the China trade fallout because its main business is centred on Australia and the United Kingdom.
Australian Vintage shares are sitting around 42.5¢, similar levels to mid-August when the prospect of China tariffs first emerged.
Profits from Australian Vintage's UK division improved to $8.6 million in 2019-20 from $8.2 million a year earlier, helped along by a weaker Australian dollar which meant the value proposition for UK wine buyers at specific price points was even better.
Only about 2 per cent of the company's sales are earmarked to come from China exports in 2020-21.
With brands including Hardys, Banrock Station, Grant Burge, St Hallett and Petaluma, it has been stepping up a push into China and is also attempting to move to a more upmarket position in the wine category.
Former Treasury Wines executive Robert Foye was elevated to chief executive of Accolade earlier this year. Mr Foye spent five years at Treasury Wines until 2019. He was central to its robust profit growth over several years in China, and was seen as a likely future chief executive of Treasury Wines before a sudden exit.