Treasury Wine Estates Ltd (ASX: TWE) shares have returned to form in recent sessions.
Since this time last week, the wine giant's shares have risen almost 7%.
As a comparison, the S&P/ASX 200 Index (ASX: XJO) has dropped 1.7% over the same period.
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Why are Treasury Wine shares outperforming?
Investors have been buying Treasury Wine shares this month thanks to some promising news out of China.
As readers may be aware, the company was effectively kicked out of China in 2020 when the government slapped tariffs on Australian wine imports. With tariffs of ~200% being placed on these products, it was no longer viable to continue selling in the lucrative market.
Well, the good news is that last week China removed tariffs on Australian barley products. This is being seen by some as a sign that tariffs on wine products could follow, which would be a huge boost to Treasury Wine.
Goldman Sachs has been looking at recent events and notes:
On August 4th, China's Ministry of Commerce announced the lifting of the anti-dumping and anti-subsidy tariffs on Australian barley, effective from August 5th 2023. The Australian government has confirmed that they will continue to pursue the removal of Australian wine tariffs through the WTO process, with an outcome expected later calendar year 2023.
Is this now priced in?
The even better news is that analysts at Goldman Sachs don't believe that the potential removal of wine tariffs is priced into Treasury Wine shares yet. As a result, anyone buying its shares today is effectively getting this side of this business for free. It explains:
Our forecast assumes a return back to pre-tariff revenue size of ~A$400mn by FY27e, with a lower Penfolds segment EBIT margin of 41.5% vs. 45.9% in FY19 to factor in higher marketing cost. In FY25e, we forecast A$150mn of sales for Penfold China, assuming ~42% EBIT margin and ~18x EV/EBITDA multiple (slightly higher than rest of Penfolds at 16x), which implies a per share value of ~A$1.60/sh. Excluding this, our 12m TP of A$13.40 would imply a share price of A$11.80/sh, which is close to the last close price of TWE, suggesting that very little of China Penfold sales has been factored in.
Should you invest?
Goldman Sachs rates Treasury Wine shares as a buy with a price target of $13.40.
This implies a potential upside of 12% for investors over the next 12 months. In addition, the broker is forecasting dividend yields of 3% in FY 2023 and 3.3% in FY 2024.
