Treasury Wine Estates (OTCPK:TSRYY) has gotten hammered after a disagreement between China and Australia. The stock should recover when we get back to normalcy and the quarantine comes to its end.
From Treasury’s website
The stock trades for 9.71 in Australian dollars, has 720 million shares, and the market cap is $7 billion Australian ($5 billion U.S.). I’m going to use Morgan Stanley’s 2020 estimate of 44₵, so that would put the stock at a price to earnings ratio of 22. The global peer group (according to Morgan Stanley) is 27, so the stock is cheap based on that metric. The dividend yield is 3%. That’s a nice little dividend in today’s low interest rate environment.
Treasury’s stock has taken a hit as China and Australia have had a run-in over COVID-19. The Australian government wanted to investigate the origins of the coronavirus, and the Chinese government has taken umbrage. According to the Financial Times article linked, China accounts for A$2.84 billion of Australia’s wine exports – 40%. Australia held 37% of the Chinese import market – 10 points ahead of France! My guess is that, when the quarantine ends, this blows over.
From the company’s website
About 40% of sales come from the Americas, 21% from Australia/New Zealand, 12% from Europe/Middle East/Africa, and 26% from Asia. Some of their brands include: Penfolds, Sterling, 19 Crimes, Lindeman’s, Beringer, Acacia, and Stag’s Leap. Some of these brands go for a few bucks a bottle, and some like Penfolds sell for over $600.
The balance sheet is strong with $402 million in cash and $661 million in receivables. The liability side shows $927 million in current liabilities and $1.078 billion in debt.
I’m going to do a little research on the real estate, but it’s just a rough estimation. According to last year’s Annual Report, the company has 13,025 hectares, of which 3,317 are leased. So, the company owns 9,708 hectares. There are 2.47 acres in a hectare, so the total land is 23,978 acres. I looked at vineyards for sale, and they almost always include buildings and often tasting rooms. So, you seem to get a lot of other stuff, not just land. I’m going to guess that each acre is worth about $30,000. That would put the land value at $719 million. That would be about $1 billion in Australian dollars. The company lists the value at $1.4 billion, and that’s after depreciation.
The stock was $19 earlier this year, fell to $8.61 when the markets crashed, rose to $12.85, and crashed again. Below is the U.S. listing.
I wrote about Treasury five years ago on Seeking Alpha but didn’t buy the stock. That was a big mistake – it skyrocketed.
It took $1.74 Australian dollars in March to buy a U.S. dollar. The Aussie has recovered to $1.38.
Morgan Stanley had a price target of $14 Australian dollars, but that was from August 13. Morgan Stanley has an estimate of $2.996 billion in sales and earnings per share of 58₵ in 2022. If you can get your hands on the report (I can’t link it), it’s very good. I reached out to the analyst, Niraj Shaw, to see if they will update the target price with the news from China.
CEO Tim Ford has a five-year plan that includes cost cutting and focusing on higher end wine. Management is considering spinning off Penfolds. Profits were down 36% for the quarter.
As for the valuation, I’ll use market cap to revenues which is about as simple as it gets. At this point, the stock trades at 2.4 times revenues. Earlier this year, it traded at 4.4 times sales. Competitor Constellation Brands (STZ) trades at 4.26 times sales. Based on this simple metric, I think Treasury has been an upside. Dare I say a double in a few years? Maybe?
Of course, there are risks. One risk is that restaurants remain weak for a long time. If restaurants can’t make it in the best of times, how can they make it in a depression? Who buys expensive wine in a depression? An annoying thing is that, if you live in the U.S., the Australian tax authority keeps a healthy amount of your dividend. Australians are franked, meaning they don’t pay taxes on local companies. Another risk is that the stock is thinly traded in the U.S.
As I stated, when the quarantine ends, I think China and Australia resume their friendship. It’s a symbiotic relationship. China needs Australia’s natural resources, and Australia needs the money. When this happens, Treasury Wine Estates should return to high profitability.
Disclosure: I am/we are long TSRYY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.