Treasury Wine Estates Ltd (ASX: TWE) is a company that continues to puzzle me, as its share price does not appear to accurately reflect the performance of the business.
Take any of numerous companies on the S&P/ASX 200 (INDEXASX: XJO) delivering 10% or more profit growth per annum and you'll find that business probably trades on a Price to Earnings (P/E) ratio of around 20-30.
Treasury Wines, meanwhile, saw its P/E skyrocket to a staggering 51+ yesterday because it managed to post a profit in 2015.
The What
- Revenues up 9.6% to $1,962m
- Net Profit After Tax (NPAT) attributable to shareholders of $77.6m, up from loss of $100.9m in 2014
- Earnings per share of 11.9 cents
- Dividend of 14 cents per share
- Positive free cash flow
- Cash at bank of $122m at June 30
- Plan to 'refresh' brands and focus on marketing to drive sales in 2016
- Focus on improving capital efficiency, selling and consolidating non-core facilities
So What?
Well, it wasn't a bad performance and the weaker Australian Dollar provided solid tailwinds and a decent boost to profit. Assuming it stays around today's levels, investors can expect another currency lift to profits in 2015.
Treasury managed to bring in free cash flow (the amount of cash left over from profits after dividends, capital expenditure etc are paid) for the year although it looked to be a near thing with a fair chunk of money coming from profits on currency swaps.
This is concerning as it indicates that dividend growth is unlikely unless the company takes on more debt or experiences a further improvement in profit in 2016.
On the plus side TWE is launching the greatest pipeline of marketing programmes in company history in 2016, hoping to strengthen its brand image and thus sales. The costs of this program is expected to be met by efficiencies and cost savings in other parts of the business.
Now What?
I wrote some time ago that Treasury Wines has ample opportunity to build its brands, especially in foreign markets, and it is pleasing to see the company develop this strategy further. I also think the focus on improving efficiency is a sensible one given the risks and capital-intensive nature of wine production.
Treasury's balance sheet is acceptable although I would watch closely to see that the company can maintain free cash flow, or at least that major cash outlays are highly likely to be returned through improved performance in immediately subsequent years.
While I like the company, I am not considering a purchase as I think today's price is outrageous and possibly reflects speculation that an improved buyout offer will emerge. A P/E of 51 is more usually seen with a high-growth tech company that is expected to multiply its profits severalfold in future years. I believe there is ample scope for Treasury to increase its profits but not enough to justify today's valuation.
