Guilty

GUIDANCE UPDATE

Need To Know

• FY23 group revenue to be down 2-3% on FY22
• FY23 EBITS guidance now $580-590m, cf consensus at $606m
• FY24f market forecasts likely to be downgraded 5-8%

Weak sales in the lower value brands is dragging on Treasury Wine Estates’ earnings. The strategy to reform the Treasury Premium Brands business and Treasury Americas is the right one, but it is facing some challenges.

TWE said its key 19 Crimes brand is seeing a meaningful sales decline in North America, despite heavy promotion. Sales for entry-level Premium wine in the US remains challenging across the industry and has deteriorated in recent months, according to the company.

The outcome is a downgrade for FY23 guidance with Net Sales Revenue expected to be down by 2-3%, mostly attributable to Treasury Americas and Treasury Premium Brands divisions. The luxury Penfolds divisions continues to perform well globally.

On the back of the lower revenue guidance, TWE is now guiding to EBITS between $580-590m compared to consensus forecasts at $606m prior to the update. 

Group EBITS margin is being guided to 23.5% for FY23. The recent Investor Day indicated that it is making progress towards its FY25 goal for 25%+ margins.

TWE is about to introduce new packaging for the 19 Crimes brand which represents about 20% of group volume. Clearly this cannot come soon enough but there may be some destocking of the old stock ahead of the change that is worsening the near-term sales fall.

Investment View

It seems likely there will be consensus forecast downgrades to FY24f because of the soft ending to FY23f. Gross margins have been increasing as the supply chain and grape costs have improved and this is translating into better EBITS margins for the group.

TWE’s strategy of ‘premiumisation’ is the right one, but it is taking time to execute. The Premium (A$10-30/bottle) and Commercial (below A$10) categories are where TWE needs to rationalise, while the Luxury (A$30+) category is where the expansion and growth will occur. TWE certainly has the right brand in the luxury category (Penfolds) and this supports the long term appeal of the stock.

A return to selling product into China remains a possibility as relations between Australia and China continue to thaw. In a valuation sense, this could be worth $1.50-$2.00 per share largely through stronger selling prices (and margin) in China vs Rest of World.  We retain our Buy recommendation.