China trade fight complicates Treasury’s Penfolds plans

Australia’s trade disputes could have a bearing on Treasury Wine Estates’ plan to spin off Penfolds says, Bank of America. Source: Supplied

The China trade dispute has the potential to hit Treasury Wine Estates hard ahead of its planned spin-off of the Penfolds brand next year, says analyst Bank of America analyst David Errington.

The report comes as talk elsewhere suggests TWE is looking at the potential of bringing in a Chinese buyer as a cornerstone investor in the Penfolds float in an attempt to mitigate the damage.

China last year accounted for 17 per cent of TWE’s sales and 35 per cent of earnings before interest and tax, and according to BoA, over the next three years it will account for $200 million of the $273 million increase in earnings forecast.

Over the last three years China has accounted for $200 million of the $350 million increase in earnings.

Outgoing chief Michael Clarke has invested heavily in China creating a strong local distribution unit, with around 400 locals on staff.

The increase in Penfolds sales in China has also created a perceived shortage in Australia, which has driven up domestic prices.

Sales of Australian wine over the last four years have been relatively flat at around $4 billion, but exports over the period have grown from $2.3 billion in 2017 to $2.9 billion this year.

Exports to China have accounted for all the increase, growing from $568 million in 2017 to $1.2 billion in 2020.

Exports of bottled red wine have been the big mover over the period, with exports to China more than doubling from $502 million to $1.1 billion.

TWE ‘s stock price closed at $9.75 a share on Thursday, down from just under $18 a share in late January.

This compares to the $3.50 a share price when Clarke first started at TWE in 2014.

The big fear is an official Chinese government edict against Australian wine, or worse, a health scare, would put the price of TWE back towards the levels when Clarke first started at the company.