A good time to take a sip
Treasury Wine Estates Limited (ASX:TWE)
Treasury Wine Estates Limited (TWE) has been hit hard by the COVID-19 pandemic-related shutdowns, with premium wine sales globally suffering amidst the closure of restaurants and other licensed venues (where purchasing of premium wines is more likely for social status reasons).
While alcohol sales have surged, these have predominantly been take-home purchases or lower cost bottled wine, to which TWE does have exposure, however, profit margins are much lower in this category. Recently TWE has advised progress on its strategy and a move to sell some poorly performing US assets which will both raise $100m in cash and reduce exposure to the lower-priced inventory risk. We believe the gradual reopening of economies around the world should help bring about a positive reversal in TWE’s favour over the coming months.
The company also suffered share price weakness following China’s decision to impose a massive 176% import tariff on imported wine from Australia (related to geopolitical issues in recent months). While China has recently confirmed this effective ‘ban’ will remain in place, TWE has already devised a plan to adjust production and redirect sales into other regions which we believe may face relative shortages due to other country sales moving into China to fill the Australian void.
While TWE’s US business still requires work, and the China issue is significant, we believe TWE’s share price has lagged, both the overall market and other ‘re-opening’ plays, and represents an attractive opportunity to buy a world-class recognisable brand name at discounted levels ahead of what we believe should be a better period for sales and profits.
Given TWE’s ownership of Penfolds, Beringer, Wolf Blass, and other premium labels – which are arguably some of Australia’s most globally recognised brand names – we believe that in time the company may be a target for a takeover, but in the meantime, we are encouraged by recent operational moves and updates and are comfortable buying a modest position.
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