Treasury Wines reported FY24 EBITS of $658 million with organic growth of only 4% adjusted for acquisitions and currency. The result showed the importance of the DAOU acquisition to earnings and its increasing focus on the luxury wine segment. Earnings growth in FY25e will half come from the growth of DAOU and a further quarter from Penfolds price rises. The underlying business is likely to have limited growth outside these factors given pressure on wine demand under $15 per bottle.

Treasury Wines update on its Penfolds division highlights the confidence the company has in the long-term global demand for its luxury wines. The company has lifted key product prices by 6% and will have more luxury wines to sell by FY26e under Penfolds Bin & Icon labels. The biggest swing factor for long-term earnings growth in this business will be the momentum in the global luxury wine market.

The removal of Chinese tariffs on Australian wine exports is positive for Treasury Wines. However, the company’s emphasis of a “modest” impact initially reinforces to us that the tariffs were a catalyst to diversify Treasury’s market exposure. As a result, China will be an incremental market, which means incremental costs (we estimate $30 million in next 12 months) as well as a three-year wait for meaningful incremental China earnings. Sales into China will be smaller in quantity, but higher priced than historically.

Treasury hosted a meeting with Penfolds MD, Tom King. The discussion clarified Penfolds emphasis on luxury wines and efforts to lift its distribution reach across key markets. The next 12 months will be about the globalisation of the brand with French and Californian product released. The company is holding firm to its target of 40%-45% EBITS margins. We see 40% as more plausible as marketing investment is required to build the brand in key markets.

Treasury Wines reported FY21 EBITS of $510 million, with 2H21 EBITS up 45%. While China earnings were down given tariffs, the company successfully reallocated wine to the rest of Asia and this will continue in FY22e. Grape costs have been a headwind for two years. However, price growth was ahead of COGS growth in 2H21 and lower grape costs will boost EBITS from late FY22e onwards. Penfolds contributed 68% to group EBITS in FY21 despite the loss of China.

We initiate coverage of Treasury Wine Estates. After a tough 18 months, we expect stabilisation in earnings the shift to a “divisional” model that separates Penfolds will put the spotlight on that segment. The loss of earnings from China is painful, but the reallocation to other markets is likely. The company has scaled back its Americas business to focus on premium wines. The simplification of Treasury and focus on its core brands should support both sales and margins.