Jamie Nicol
Treasury Wines reinvigorating its business and defending against takeover
Treasury Wines has announced some changes to their business model on the same day as newspaper speculation suggesting a number of interested parties are running the ruler over various parts of their business. Dalton Nicol Reid entered the company during the past six months having met its quality criteria.
“The changes announced today reflect management’s focus on reinvigorating the business and defending the KKR bid. They appear to be near enough to hitting 2014 earnings guidance, a bit of a surprise, which we suspect was the result of aggressive action on costs. They also announced plans to change the release date for Penfolds premium wines from May to October which should reduce the volatility in future profits by allowing them nine months to sell rather than two,” said Jamie Nicol, Dalton Nicol Reid Director and CIO.
“However the most effective form of defence will be to realise the value embedded in the business.
“We have no doubt KKR will be looking at the asset value underpinning Treasury Wines and will be considering the value that can be extracted via a breakup and regearing strategy. Treasury Wines can also seek to extract this value for shareholders and by the sound of the newspaper speculation there are interested parties in various assets such as the US business and the premium brands.”
According to Mr Nicol, the US business has significant hard assets across agricultural assets and infrastructure as well as a portfolio of well-regarded brands that Dalton Nicol Reid values at close to $1bn excluding inventory. This along with $2bn in realisable inventory means at $4.70 per share, KKR would be buying the entire Australian and New Zealand business for under $400m. This business includes 36 brands including Penfolds, Wynns, Lindemans, Rosemount and Wolf Blass with substantial agricultural assets and infrastructure. “These businesses have material earnings potential and with good management execution, we see value well in excess of the implied value from KKRs initial bid.”
“The company has suffered from neglect, poor management and a cyclical downturn. Australian vineyard production had doubled from the late 90’s creating a grape glut. This was a global trend, which is now starting to ease following a number of years where uneconomic producers have exited the market and with demand picking up in China and the US. However in the past year Treasury Wines has also suffered a number of short term profit issues, including a crack-down on gift giving in China, an inventory issue in the US and a poor promotional performance over Christmas in Australia.”
Mr Nicol said he believed the market has been too short term focused on this company.
“The market is focused on the current poor profit performance and if you apply a multiple to these distressed earnings, then a valuation is indeed difficult to justify. However, we prefer to take a medium term view of a company such as Treasury Wines and are interested in the quality of the underlying brands such as Penfold’s. We also like the strong balance sheet including long term inventory, which enables investment to drive stronger profit growth in the future.”