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.
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