Portfolio Update – Purchase of Treasury Wine Estates (ASX: TWE)

By March 27, 2020Portfolio

Across investors portfolios, we have bought Treasury Wine Estates (ASX: TWE). TWE is a vertically integrated global wine company focused on growing & sourcing grapes, winemaking and marketing & sales of its expanding portfolio of brands. The business has established a global footprint operating over 13,000 hectares of vines across 127 vineyards, 17 wineries and sales networks across more than 100 countries throughout Australia & New Zealand, the Americas, Asia and Europe.

We are positive on the medium-term outlook for Treasury Wine Estates for the following reasons:

  • A growing portfolio of valuable brands, led by Penfolds, from multiple countries-of-origin enables the targeted regional premiumisation strategy based on local tastes which increase average selling prices and margins
  • Asia is a material opportunity with wine consumption significantly below developed market averages but growing solidly particularly at premium price points. China, in particular, offers substantial opportunity via a growing middle-class and underpenetrated Tier 2+ cities in terms of wine consumption
  • The shift to Luxury and Masstige segments away from the Commercial segment over recent years leaves the company less susceptible to inventory write-downs since the cheaper wines do not store as well as premium wines
  • Changes to the US distribution model that provides the opportunity to capture a portion of the distributor margin combined with the consolidation of the Commercial segment provides scope to increase profitability over time

With the aim of maintaining a style neutral exposure within the portfolio, we are constantly balancing value against growth. We think TWE offers both. Softer conditions in the USA market followed by short term concerns around the CoronaVirus and Asian based sales has seen TWE’s share price fall substantially from close to $18 down to current levels around $9. We have forecast a CoronaVirus lead pullback in revenues within our modelling however we view this as a short-term cyclical event and not structural in nature. We also note TWE’s strong balance sheet which should allow the business to withstand any earnings decline. We see the market reaction as a short term disconnect between price and value providing an opportunity to longer-term investors such as ourselves. With regards to growth, TWE maintains a robust outlook. The business has a track record of generating earnings growth and with the exception of lower earnings forecast for the current year, the business is expected to continue to achieve robust levels of earnings growth going forward.

We have funded the acquisition of TWE through selling our position in Fortescue Metals. Our main investment thesis for holding Fortescue was the narrowing of the pricing discount applied to Fortescue’s lower quality ore. This thesis has played out which combined with iron ore prices currently well above our expectations going forward means we see limited long term upside for the miner.


WARNINGS AND DISCLOSURES: This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.

Prepared by:
EP Financial Services Pty Ltd
ABN 52 130 772 495 AFSL 325 252 (“ELSTON”)
GPO Box 2220
Brisbane Q 4001