Treasury Wine Estates: Demand for Luxury Wines Remains Strong

We maintain our AUD 11.50 fair value estimate for shares in Treasury Wine Estates TWE. We make no changes to our forecasts, which broadly track qualitative guidance. We expect fiscal 2024 revenue growth of about 8% and an underlying EBIT margin of about 24%—a 57-basis-point increase from fiscal 2023. We expect the firm’s strategic focus on high-end wines and its increased geographical diversification to benefit both long-term revenue growth and profitability. But despite some strong brands, Treasury lacks an economic moat. The wine industry is highly competitive, and volatility in consumer preferences limits Treasury’s ability to maintain excess returns over the long term.

The firm provided a qualitative earnings update at its AGM. Treasury’s long-term objective is to deliver durable top-line growth, high-single-digit earnings growth, and to lift underlying EBIT margins above 25%. And it appears the winemaker is on track, with the September quarter of 2023 broadly tracking the company’s expectations with continued resilience in luxury and premium wine demand. Fiscal 2024 guidance was similarly vague, but the firm said it should deliver growth “in line with our long-term ambition”, with continued underlying EBIT margin expansion.

Treasury expects fiscal 2024 earnings to be second-half weighted. The strategic decision to hold back Penfolds product means about 55% of underlying EBIT is slated for the second half. This inventory build provides flexibility ahead of any possible future review of tariffs on Australian wine in China—and potentially sell into China at a higher price point. We’ve previously noted the improving relationship between Australia and China could potentially open the door for a future review of tariffs. But this is not baked into our base-case forecasts.