Treasury Wine Estates share price: FY20 earnings preview

When will the company report its FY20 results?

Global winemaking company Treasury Wine Estates (TWE) is set to report its full-year (FY20) results this Thursday, 13 August.

A year of disappointing surprises

Much has been made of the impact that the coronavirus pandemic has had on Treasury Wine Estates operating and share price performance over the last eight or so months. Indeed, year-to-date, the stock has been bid over 30% lower off the back of a number of disappointing developments.

Looking at the broad strokes of this news flow:

• In February, Treasury's management reported that due to the coronavirus pandemic, the company would be unlikely to meet its previously stated FY20 Earnings before interest and tax (EBITS) growth guidance of between 5-10%.
• Between this, in April, the company said it was considering a de-merger of its Penfolds brand, in a move that the company said 'would facilitate the creation of incremental long-term value by allowing one team to focus on driving the luxury Penfolds multi-country of origin portfolio.'
• Despite the potential benefits of a Penfolds demerger, negative news continued to dominate TWE. In July, the company said it now expected to report full-year (EBITS) of between $530-540 million, representing a decline of around 21%.

In spite of those developments, the operating environment looks to have improved somewhat over the last few months, with the company in July reporting that depletions in China had risen 1% – between April and May – after collapsing during the height of the pandemic in March.

Elsewhere, retail channel sales have also improved in Australia, remaining at ‘elevated levels’ on a year-over-year basis, the company said. In saying that, TWE’s local luxury wine sales have lagged in FY19.

Treasury Wine Estates share price: the analyst view

Despite expecting earnings (EBITS) to contract in FY20, some investment banks, such as Morgan Stanley (MS), have taken a bullish stance on the company. MS, which has an Overweight rating and a $13.50 price target on the stock, recently said:

‘In light of TWE’s asset backing vs. precedent transaction multiples and current peer valuations, we believe the risks are asymmetrically skewed to the upside.’

Interestingly, while MS cites a lower Australian dollar as a risk to the upside, as well as ‘value adding corporate actions’ and ‘a 'faster-than-expected recovery from COVID-19', they do not cite the inverse – namely, a higher Australian dollar – as a risk to the downside for TWE.

Yet it is such a risk that Macquarie Wealth Management analysts highlighted during a recent research note. Based on Macquarie’s bullish view on commodities – it was argued that the Australian Dollar (AUD/USD) still had potential to run higher – a move which may prove beneficial to companies with mostly onshore earnings.

On the other hand, companies with significant non-AUD earnings exposure may be at risk of posting disappointing FY21 guidance, according to Macquarie.

‘Given ASX listed stocks are priced in Australian dollars, we think investors should care more about the lower AUD earnings of offshore companies. We do not think the market is giving enough attention to the potential impact of the stronger AUD on offshore earners.’

Treasury Wine Estates, notes Macquarie, is one such company.

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