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Who Owns Penfolds Grange?

Brent King

Tuesday 14th January 2014

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Brent King

During the festive season we tend to consume not invest. Even with the focus on spending you may have invested in some very famous brands. This is the first in a series of articles on alcohol companies.  You can invest in these companies either via NZX or ASX.

Treasury Wines Estates (TWE): This Company is listed on ASX and is engaged in viticulture and winemaking, and the marketing, sale and distribution of wine. The Company operates in four segments: Australia & New Zealand (ANZ), Europe, Middle East & Africa (EMEA), Americas and Asia.

Mkt Cap   A$ 3.14B

Price         A$4.86

EPS             6.5cps

DPS           13.0cps

Div yield     2.74 %

P/E             74.77

NA/S         A$3.09

*Calculations based on Midday price as of 13th Jan, 2014.

Value

TWE is selling on a very high P/E (74.77) and at over 1.5 times net assets

On basic fundamentals you would be probably assume that the stock is overpriced.

Key Matrix

The business has 11,000 hectares of vineyards. It produces 32 Million cases of wine p.a. Revenue is approximately A $1.7 B and employs 3,500 staff in 16 countries.

Why would you buy?

TWE is the holding company for some iconic brands. These include the highly rated Penfolds Grange (plus all other Penfolds brands).

There are over 50 other iconic brands such as Wolf Blass, Wynns Coonawarra ,

Greg Norman Estates, Seppelt, Jamieson Run etc.

The most well-known NZ brand is Matua, the pioneer of the Sauvignon Blanc grape variety.

You would only buy if you believed that the future offered higher returns for investors as the company leveraged off its extensive portfolio of brands.

In the year to 30/6/13 the company made a provision of $97m (after tax) as part of its strategy to reduce stock levels in the US.

This is not expected to be reoccurring and as such you could expect the NPAT to be approximately A$160m for the year to 30-6-14. EPS will triple to 20cps and the P/E will drop to 24.

Note

As with most exporters, the Chinese market is going to be very important to this company .It will create the demand to hold and increase prices, particularly for the top end wines. Currently the expectation is that there will be a continued growth in demand for top in wines in China.

The Christmas just gone appears to have been good for domestic demand, so this should help also.

The History

The business was essentially the wine division of Fosters Group until the demerger in May 2011. The business was built by Fosters. They continued to acquire brands with the major acquisition being the takeover of Southcorp in 2005 .This added the famous brands of Penfold, Lindemans and Rosemount. However Fosters could not gain operational gains and the Wine Group has always been a cash drain on the profitable brewing business of Fosters

The split was inevitable and it now stands alone and must generate its own funds for investment. The Board seems to be making the right decisions to correct the performance of the business.

The question for you now is..Do you invest in the wine … or the shares?

That’s a choice only you can make.

If you want further information please contact research@IRG.co.nz

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