Penfolds' China Expansion And DAOU Integration To Strengthen Future Performance

Key Takeaways

• The expansion into the Chinese market with strong Penfolds demand indicates robust future earnings potential and improved profit margins.
  
• Shifting to a luxury-focused business model and retaining commercial brands supports further earnings growth and operational efficiency.
  
• Declines in key segments and markets, along with lower EBITS expectations, suggest potential risks to Treasury Wine Estates' revenue and earnings stability.

Catalysts

Operates as a wine company primarily in Australia, the United States, the United Kingdom, and internationally.

• The successful reestablishment of the Penfolds' Australian country of origin portfolio in China, with significant brand demand, suggests strong future earnings potential. This expansion is expected to boost revenue and profit margins.
  
• The integration of DAOU within Treasury Americas is progressing well, with net sales revenue from DAOU growing 11%. The business is expected to deliver additional USD 15 million in cost synergies, increasing overall earnings and supporting future earnings growth.
  
• The transformation towards a luxury-led business model has seen luxury portfolio net sales revenue increase by 52%, now representing 56% of the total group’s net sales revenue. This shift towards higher-margin luxury products is expected to enhance net margins.
  
• The transition to a Global Premium Division and global alignment of brand and investment planning are expected to optimize operations and drive value from premium brand portfolios, potentially enhancing revenue and improving cost structures.
  
• The decision to retain commercial brand operations, instead of divesting at lower-than-compelling valuations, allows Treasury Wine Estates to maintain a stable base of revenue while implementing structural changes to improve cost and margin profiles moving forward.

Treasury Wine Estates Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Treasury Wine Estates's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 18.7% in 3 years time.
• Analysts expect earnings to reach A$686.6 million (and earnings per share of A$0.84) by about February 2028, up from A$153.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, down from 56.8x today. This future PE is lower than the current PE for the AU Beverage industry at 56.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Treasury Wine Estates Future Earnings Per Share Growth

Risks

• Treasury Wine Estates' commercial and premium portfolio declined by approximately 5%, indicating continued softness in demand around the globe for wine at lower price points, which could impact revenues and net margins.
  
• Despite strong performance in Asia, Penfolds faced relatively modest NSR declines in some key markets like Australia and EMEA due to the reallocation of products, potentially affecting overall revenue stability.
  
• Treasury Premium Brands saw NSR decline 8%, driven by lower commercial and premium shipments, suggesting challenges in consumer demand at lower price points, which could negatively impact revenue and earnings.
  
• Treasury Americas, excluding DAOU, experienced an 8% decline in NSR across other luxury portfolio brands, reflecting below planned performance in the U.S. trade, which might affect overall earnings growth.
  
• The company’s EBITS is expected to be at the lower end of the previously guided range, primarily due to reduced expectations for Treasury Premium Brands, indicating potential risks to earnings targets.

Valuation

• The analysts have a consensus price target of A$13.687 for Treasury Wine Estates based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$15.5, and the most bearish reporting a price target of just A$11.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.7 billion, earnings will come to A$686.6 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of A$10.72, the analyst price target of A$13.69 is 21.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.