Treasury Wine Estates (TWE.AX): Upside to consensus Penfolds EBITs in FY27/FY28E if all goes to plan... initiate at Neutral.

Research evidence excerpt

Treasury Wine Estates (TWE.AX): Upside to consensus Penfolds EBITs in FY27/FY28E if all goes to plan... initiate at Neutral.

Goldman Sachs Treasury Wine Estates (TWE.AX)

creates execution risk, and any further disruption or delay in transitioning

distribution partners could drive incremental downside to Americas earnings.

4. Balance sheet fragility and valuation (-): TWE’s balance sheet remains fragile

driven by poor historical capital allocation, leaving limited flexibility to absorb

earnings disappointment. The stock trades at 15x/11x our FY27E/FY28E EPS vs.

global Liquor peers at 15.5x NTM EPS, and while this looks relatively cheap, we note

execution risk across Penfolds, Americas and Collective with balance sheet

constraints.

Investment Thesis

We initiate coverage of TWE.AX with a Neutral rating. We see upside to consensus

Penfolds EBITS driven by a step-up in sell-in growth as NSR catches up to depletions

following the China inventory unwind, supported by strong ‘Demand Power’ trends in

Asia, greater marketing investment behind Power Brands (Penfolds, DAOU, Matua), and

distribution gains in China and emerging markets. However, this is offset by Americas

margin headwinds and supply chain dis-synergies as US assets are right-sized, alongside

Collective earnings pressure as non-core brands enter managed declines. Combined

with excess channel inventory in China/US, a major supply chain restructuring, US

distribution changes, and balance sheet fragility from poor historical capital allocation,

we see the risk reward as balanced and initiate at Neutral.

Valuation: We are Neutral rated. Our 12m target price of A$5.2 is based on a 50/50

weighted DCF valuation at A$5.2/share (assuming a WACC of 9.1%, 2.0% TGR and beta

of 1.2); and FY27 P/E multiple valuation of A$5.1.