- Treasury Wine Estates faced a number of headwinds over the preceding 3 years.
- Management navigated these challenges well - the business was restructured, including the creation of new operating segment.
- We believe TWE evidences a number of value latencies.
The following segment was excerpted from this fund letter .
Treasury Wine Estates ( OTCPK:TSRYY )
We also built on a position in Treasury Wine Estates during the quarter.
The company has faced a number of headwinds over the preceding 3 years including:
- US price competition;
- Chinese tariffs on Australian wine;
- Covid-19; and
- higher grape prices following small Australian vintages.
Management has navigated these challenges well; the business was restructured including the creation of new operating segments for greater focus on key brands, the divestment of low margin commercial volumes in the US, supply chain optimisation and the reallocation of Penfold’s volumes from China to previously neglected markets.
The business is now on a more sustainable footing with less reliance on China (approx. 30% of group earnings in FY20) and more exposure to long-term premiumisation trends (consumers choosing quality over quantity). Competitor results and industry channel checks also suggest the higher margin on-premise and cellar door channels are recovering from lockdowns and restrictions. The company’s multi-regional sourcing model positions the company to take advantage of lower grape prices in Australia and NZ.
Finally, we believe the strength of the Penfold’s brand in Asia is underappreciated with an investor at a recent conference remarking that in Asia it’s “either French or Penfold’s”. There is some uncertainty around where the sales base is following the reallocation of volumes from China, but we’re confident in high single-digit to low double-digit sales growth once it’s found.
We believe TWE evidences a number of value latencies before the successful execution of some of the company’s growth initiatives, including the release of new Penfold’s country of origin (French, China) wines in China later this year, which won’t be subject to the prohibitive tariffs applied to Australian wine.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Cooper Investors - Treasury Wine Estates: On A More Sustainable Footing