The company behind the Penfolds, Wynns, Wolf Blass and budget Lindeman's and Blossom Hill wine labels Treasury Wine Estates Ltd (ASX: TWE) has been growing sales into South East Asia and China at a rapid rate over the past couple of years.
Consequently Treasury's share price is up 130% in just two years as smart investors have profited from the growing demand for Australian wines from Asia's increasingly wealthy middle and upper classes.
However, in China's high-society serving a carton of Australian goon just won't do and French wine brands have long been the first choice for Asian hosts keen to impress their dinner party guests.
The sky-high profit margins earned on French plonk and difficulty in marketing Australian wines at the luxury end of the market means Treasury Wine Estates' management has probably correctly concluded if you can't beat 'em, join 'em.
As such Treasury is to launch three of its own French brands into the high-end North Asian markets at prices retailing around $270, $120, or $60 a bottle, with the popular Bordeaux and Burgundy reds leading the charge.
The products are to be launched in the second half of 2017 and will not involve Treasury owning any French vineyards, which de-risks some of the strategy and adds to the scalability and potential return on invested capital of the project.
Are Treasury shares worth a look?
For the six-month period ending December 31 2016 Treasury Wines more than doubled its net profit to $136.2 million and doubled earnings per share to 18.5 cents. The key profit margins also increased 2.5% to 17.5%, with Asia enjoying easily the highest profit margins at 36.2%, compared to the more price sensitive Europe or Austalia where profit margins stood at 12.3% and 16.4% respectively.
Analysts are forecasting earnings per share of around 39 cents for the full year which means the group trades on a high 31x estimated forward earnings when selling for $12.28 per share, although the group is aiming to lift group profit margins to the "high teens" in FY 2018, with $100 million of run-rate cost savings by FY 2020.
Arguably Treasury offers reasonable value given the outlook for sales growth and rising margins underpinned by growing demand from Asia. Still this is a business that carrries considerable risks, with a mixed track record that operates in a highly competitive environment. For those reasons I would prefer to see the premium leave the valuation before considering buying shares.
If you're looking to play the rise of the Asian middle classes, I would prefer shares in vitamin maker Blackmores Limited (ASX: BKL). It trades trade on a better valuation with a stronger balance sheet and superior track record.
