Treasury To Reward Further Cellaring
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The turnaround at Treasury has seen the shares rise to levels just under $12, which capitalises the company at $8.8 billion, and has delivered shareholders a return of 52% a year over the last three years.
Every investor understands – or should understand – that successful participation in the stock market requires a long-term view.
The paradox is that investors are so often assailed by overwhelming short-term noise that it is difficult to bring to bear the foresight required for this long-term view.
Take the case of Treasury Wine Estates Limited (TWE), the world's biggest listed stand-alone wine company. At least three times, investors in Treasury have required a big dose of foresight.
The first time was when the company was spun-off on to the stock market as a separate company by its parent, Foster’s Group Limited, back in May 2011 – just four months before Foster’s itself left the market, taken over by Anglo-South African brewing giant SABMiller.
To put it mildly, Treasury did not impress. On debut, the share market valued the company at $2.1 billion ($3.28 a share), about $1.1 billion less than Foster’s had assessed it on its books. At the time, the Australian dollar was buying US$1.05 and the common refrain was that was too strong a headwind for Treasury, especially when coupled with perceived consumer reluctance to pay high prices for premium wines. Nor was the China opportunity inherent in Treasury well understood at the time.
The second time that Treasury tested investors’ belief was in 2013-2014, when it reported a 50% slump in net profit and warned that it would have to make write-downs of $160 million for 2012-13, to reduce excess inventories – including tipping down the drain $35 million worth of wine that its US business could not sell. Treasury’s share price fell by 22% in total after two damaging announcements in July and August 2013, and by March 2014 the stock had slipped to $3.53, down 44% from its peak, and not far short of debut price.
It’s important to note that the company’s actions at the time are still subject to a class action – in July 2014 law firm Maurice Blackburn and litigation funder Bentham IMF filed a class action alleging that Treasury knew – or ought to have known – that the write-downs were inevitable, and that the Australian Securities Exchange (ASX) should have been informed. (That is still “live,” and investors who believe they were affected must register with Maurice Blackburn by 26 May 2017.) But what the company has done since that time makes it almost a new company.
The damaging 2013 write-downs were a long-overdue recognition of the problems that had plagued the US business since Foster’s US$2.9 billion purchase of the California-based Beringer Wine Estates in August 2000, in a deal that was billed as creating the world's largest premium wine company. But Foster’s/Treasury did not manage Beringer well, bedevilled by exchange rate difficulties, cultural and management problems, and a litany of problems that would qualify the deal as a Harvard Business School reverse case study, of what not to do. But through all the pain, Foster’s/Treasury retained a chunk of the world’s biggest wine market.
In September 2013, chief executive David Dearie was replaced, and in March 2014 by former Kraft and Coca-Cola executive Michael Clarke was in place as the new chief executive. Clarke, whose background was in fast-moving consumer goods (FMCG), not wine, has presided over a turnaround – in both culture and performance – that has involved some very big calls.
Just three months into the job, in June 2014, Clarke decided to delay the release of the top-of-the-range Penfolds vintage from May to October, reasoning that Treasury had been sacrificing a truly premium price to bring the revenue into the soon-to-end June financial year (and assist executive bonuses).
Six months into his tenure, private equity groups Kohlberg Kravis Roberts (KKR) and TPG Capital ran the books over Treasury, offering to buy the company at about $5.20 a share. Clarke and chairman Paul Rayner knocked them back, precipitating a 15% share price slump, to $4. This was the third time that Treasury Wine shareholders had to swallow hard and show some faith.
Since then, however, the Clarke-led turnaround has seen an impressive rise in the share price, to levels just under $12. Some shareholders wanted him to sell the US business: he did not see it that way. In late 2015 Treasury bought the US-based wine business of British drinks giant Diageo for $754 million, gaining its premium brands, including Sterling Vineyards, Beaulieu Vineyards, Acacia, Provenance and Hewitt (but also its lower-end commercial wine brand, Blossom Hill).
However, the premium brands were the main attraction, in keeping with Clarke’s strategy to move away from bulk “commercial” wines toward premium wines. This strategy is based on moving away from being an “order-taking, agricultural company,” to become a “brand-led, marketing group.” And as the company moves along this transition, its margins are growing accordingly.
Another key part of the strategy is to cash in on Asia’s burgeoning middle-class consumers, which Treasury believes is best done through premium wines.
Its brand portfolio now includes not only the great Australian brands such as Penfolds (known as “Ben Fu” in China), Wolf Blass, Wynn's and Lindeman's, but a suite of equivalent US brands, such as 19 Crimes, Beaulieu Vineyard, Sterling, Beringer, Chateau St Jean, Etude and Stags' Leap.
In March Treasury announced the establishment of an upmarket French wine portfolio with a new brand mainly targeted at the China market. The new brand, which is yet to be revealed, is scheduled to arrive on the market in North Asia in the first half of 2017-18.
The “premiumisation” strategy started to show its power in FY16, with earnings from the Americas rising by 64%, to $136.3 million, and Asia posting a 40% growth in earnings to $102 million, on the way to total group profit more than doubling to $179.4 million, and sales revenue jumping 20%, to $2.23 billion.
Then, for the December 2016 half-year, a 76% rise in earnings from Asia, to $79 million, helped interim net profit more than double, to $136.2 million. The Australasian operations lifted earnings by 13.2%, to $53.1 million, while the Americas division increased earnings by 75.4%, to $90.7 million.
At the time of the interim result, Treasury announced that Clarke would temporarily shift to California over the next few months to drive the next stage of the company’s growth, with a new chief financial officer also operating from the Napa Valley office.
The turnaround at Treasury has seen the shares rise to levels just under $12, which capitalises the company at $8.8 billion, and has delivered shareholders a return of 52% a year over the last three years. While on analysts’ consensus price targets Treasury appears fairly fully valued, analysts still see the company boosting earnings per share (EPS) by 32% in FY17, to 40 cents a share, and then by 21% in FY18, to 48.5 cents. With 32 cents expected in dividends in FY18, the prospective unfranked yield is 2.7%.
But the “story” for investors – particularly those who had the foresight at the troubled times – is of an outstanding turnaround that has made Treasury Wine Estates a global leader, with a growing market for its products, and great potential to boost margins and profits.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au