The Treasury Wine Estates Ltd (ASX: TWE) share price traded flat this morning as the market digested the company's latest results. With growing profits and wider margins, there was certainly a lot to like. Here's what you need to know:
- Revenues rose 20% to $1,368 million
- Net Profit After Tax rose 132% to $132 million
- Earnings before interest, tax, self-generating assets, and material items (EBITS; a measure of cash flow) up 59% to $227 million
- Earnings of 18.5 cents per share
- Dividends of 13 cents per share
- Outlook for similar EBITS for the second half of the year assuming constant currency
- High-teens EBITS margins (currently 16%) expected by Financial Year 2018
So What?
A strong result from Treasury Wine Estates, and management has justified its decision to reject the attempted takeover of the company in 2014. I thought they were crazy at the time, but EBITS margins have gone from 2% to 16%, and profits grew from a loss of $100 million (including $280 million of significant items) for the full year, to a half-year profit of $136 million since the 2014 report.
The recent acquisition of part of Diageo's portfolio contributed materially to the increase, although Treasury expects to extract another $40 million per annum in cost savings from its ordinary business, as well as another $35 million in synergies from Diageo by 2020.
Globally, Treasury is looking to lift its EBITS margins from the mid-teens experienced across most of the portfolio, towards the frothy 36% margins seen in its Asia portfolio. This it will achieve through a combination of cost savings, and increased 'premiumisation' – a word I'm certain Treasury just invented for today's presentation. Readers can find a good overview of the company's premiumisation and brand refresh initiatives in the presentation that accompanied today's results.
Now What?
If Treasury's second half performs similar to the first half, as management has indicated, then the company appears to be priced at around 33x its full year earnings. While that does appear expensive, the company has a solid strategy in place to lift earnings, both through cost savings as well as better market positioning of its products (read: making them more 'premium' and expensive).
This strategy is already bearing fruit and as a result I would be more inclined to back management's efforts in this area. A good result from Treasury, although I note that it is still priced for several more years of significant growth, and caution investors not to pay too much for the company today.
