China the key to open TWE’s treasure chest
The reopening of China to Australian wine could pour as much as $100m in extra earnings into the coffers of the nation’s largest winemaker, Treasury Wine Estates, over three years, analysts believe.
However TWE is not tipped to regain all of its lost sales from before the tariffs were imposed in late 2021.
The winemaker, famous for its brands such as Penfolds, Pepperjack, Wolf Blass and Lindemans, will also need some time to build up inventories of wine aged between two and five years to sell to Chinese consumers, slowing the rebound in earnings.
Despite this, hopes of a looming end to the tough tariff regime – which placed crushing tariffs of more than 200 per cent on some Australian wine imports – sent TWE shares up more than 1 per cent on Wednesday to $12.69 after investors reacted to a potential trade breakthrough.
The move followed an interim draft determination by the powerful Chinese Ministry of Commerce that proposed a lifting of tariffs.
TWE said it had been advised of the news bur noted it was not final and was “subject to change” by the ministry.
E&P Financial analyst Phillip Kimber said that prior to Covid-19 and the tariffs, TWE’s China operations delivered $180m-$200m of annual earnings, mostly through the sale of about 600,000 cases of luxury Penfolds wines.
He said if TWE were to regain half of that – 300,000 cases – it would add 10 per cent to group earnings by the third year. But getting its hands on enough supply could be a short-term challenge, countered by the opportunity to increase prices and make more profit. The extra bump to earnings would be as much as $100m by 2026 if half that business came back.
“It will take some time to rebuild additional inventory levels for the Chinese market,” he said. “In the interim, TWE may be able to take some additional price, noting every 1 per cent price increase in its Penfolds business equates to an additional $9m of earnings.”
Jarden analyst Ben Gilbert said there tariffs would probably be removed, with TWE stating it expects any earnings contribution to be minimal in fiscal 2024.
“The above said, we would expect some benefit in the second half, with upgrades to be more material into 2027 and beyond once supply is rebuilt on the Icons range,” he said
Mr Gilbert added he didn’t believe the tariff removal issue was fully priced in, with more than $2 per share of implied medium-term valuation upside, or as much as $3 per share as scarcity emerges for the luxury Penfolds brand.
“We remain positive on Treasury Wine, and if tariffs are eased, it would drive material near-term upside, with our estimates implying a more than $3 per share of valuation upside. We continue to believe the market is materially undervaluing Penfolds, which is one of the valuable wine brands globally and trades, on our estimates, at an implied 5 per cent discount to market.”
TWE said it expected that a final determination would be issued regarding tariffs by the end of the month. The company has maintained a foothold in China in recent years by sending wine made in the US and France to China and supporting the development of the Chinese wine industry, including production of a Chinese-made Penfolds that was released last year.
The company’s chief executive, Tim Ford, has maintained confidence in the future of the Chinese market despite the tariffs, and told investors at the company’s half-yearly results in February that the winemaker was holding back some supplies to be ready to re-enter the China market with Australian wine if the tariffs were lifted.