Analysts don’t share Treasury’s US hopes

Penfolds maker Treasury Wine Estates is persisting with its American dream, despite the US division weighing on earnings.

Investors dumped Treasury Wine stock this week, wiping more than 25 per cent off its market value.

Penfolds maker Treasury Wine Estates is persisting with its American dream, despite the US division weighing on earnings and analysts warning a timeline for recovery is far from certain.

Investors dumped Treasury Wine stock this week — wiping off more than 25 per cent of its market value — on Wednesday after company’s outgoing chief executive Michael Clarke attributed weaker than expected earn­ings to a wine glut and leadership changes in the US.

While Mr Clarke, who has began a strategic review into Treasury Wine’s operations, expected US growth to return sometime in financial 2021, analysts are not convinced.

“Management is hopeful that the structural headwind of excess US wine supply could start to alleviate following the next vintage. However, at this stage, it is too early to accurately determine when the US market will return to greater balance and the earnings drag from the commercial business will likely weigh on the overall group,” Morgans analyst Belinda Moore wrote in a note to investors. “We question whether conditions will get worse before they get better.”

Citi analyst Craig Woolford agreed, saying “the shares are unlikely to rise until there is clarity on both the US and China demand outlook and the new CEO settles into his chair”.

As well as Penfolds, Treasury also has a large portfolio of wines including Wolf Blass, Beringer and Lindeman’s.

It managed to claw back some of its market losses on Thursday, with its shares closing 5.3 per cent higher at $13.

In the six months to December 31 last year, the company “walked away” from about 500,000 cases of wine in the US, choosing not to source the volume, after its competitors poured their surplus wine into private label and engaged in deep discounting.

“We deliberately reduced our inventory intake in October and inventory situation at the moment in America is actually really good across luxury and masstige and commercial.

“But what we hadn’t foreseen was everyone aggressively moving their inventory, their surplus, through exclusive and private label brands.

“It obviously made a huge amount of sense for the retailers to do this because they’ve now all of a sudden got good quality juice being moved through them at good margins, whereas all the suppliers took discounts to get rid of that inventory. From a structural point of view, that’s what’s driven this change.”

Treasury’s North American earnings before interest and taxes fell 17 per cent to $98.3m.

Mr Clarke, who will retire in September this year, said the strategic review, would include looking at the internal structure but he ruled out any prospect of demerging poorly performing Treasury Wine businesses.

“We will be exploring a range of options including refined supply chain structures and operating models and this would include options such as internal divisionalisation but not demerger.”