Treasury Wine hit by Morgan downgrade

Shares in Treasury Wine Estates have dipped as Morgan Stanley cut its earnings outlook for the group.

TWE’s earnings are highly sensitive to movements in the Australian dollar.

The share price of winemaker Treasury Wine Estates has slumped as much as 3.5 per cent after Morgan Stanley analysts downgraded their outlook on the firm.

Treasury shares recovered some ground in early afternoon trade after it announced the sale of a winery in California, amid a shake-up of its supply and production network in the US.

However, they still traded down 1.8 per cent at $10.10 at 2pm (AEST), up from $9.88 at the low and just ahead of Morgan Stanley’s $10 price target.

The investment bank warned a rally in the Australian dollar through March and April had forced it to revise its earnings per share forecasts down by between 5 and 6 per cent for the next three financial years.

The Australian dollar has faded from highs above US78c in April to levels around US72c recently, but Morgan Stanley has still been convinced to lift its forecast for the current financial year from US72c to US73c and from US71c to US72.5c for the 2017 financial year.

“TWE’s earnings are highly sensitive to movements in the Australian dollar given the translation and transactional impact currency movements make,” the investment bank’s analysts said.

“After 23 per cent outperformance since January, risk-reward looks balanced.”

As a result Morgan Stanley has lowered its view on Treasury stock from ‘overweight’ to equal-weight’.

The investment bank added the downgrade was largely due to outperformance on the market, rather than any issues with the firm’s performance.

“We remain attracted to TWE’s long-term outlook driven by rising penetration in China and the tightening wine cycle,” the note read.

The commentary came as the winemaker detailed plans to divest a US winery and ramp up its investment in its remaining US wineries between 2016 and 2018.

The changes in the company’s US supply and production operations are part of the integration of the Diageo Wine business, which it bought for $US600 million in October.

“These initiatives will enable brands recently acquired from Diageo to benefit from the positive transformation already undertaken with the company’s established portfolio, and are consistent with strategic plans announced at the time of the Diageo Wine acquisition,” Treasury Wine said.

“It is expected that this next stage of US supply chain optimisation will be complete by the end of fiscal 2018.”

The company’s Australian brands include Penfolds, Wolf Blass, Rosemount, Lindeman’s and Wynns, while in the US it owns Beringer, Chateau St Jean and Stags’ Leap.

Diageo Wine’s key US brands include Beaulieu Vineyards, Sterling Vineyards, Acacia, Provenance and Hewitt.

Treasury Wine will sell the Paicines winery on California’s central coast, with production to be consolidated at Paso Robles winery.

The Beringer winery, Sterling Vineyards and Beaulieu Vineyard will focus on producing luxury wine, while the Paso Robles winery will concentrate on mass prestige, or ‘masstige’, wine.

Winemaking will be discontinued at the Chateau St Jean winery in Sonoma County, with production moving to Beringer.

With AAP