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Reporting Wrap: Treasury Wines & Transurban
No problem too great for Treasury Wines
For the majority of companies, the biggest challenge over the past two years has been managing the impacts of COVID-19. Yet Penfolds owner Treasury Wine Estates has had to navigate not only the global pandemic but also losing its highest growth and most profitable market.
China represented 30 per cent of Treasury Wines total profit in FY20. However, after the nation’s Ministry of Commerce accused Australian producers of dumping wine and subsequently introduced a 169 per cent import tariff, domestic producers were effectively rendered uncompetitive and forced to abandon the once lucrative market.
It’s then no mean feat that in the first financial year without a material contribution from China Treasury Wines surpassed its FY20 earnings. The company’s preferred profit measure – earnings before interest, tax, materials items and SGARA (EBITS) – increased 2.6 per cent to $523.7 million.
With the pandemic and China largely in the rear mirror, Treasury’s next challenge stems from rising inflation. The company expected to realise $65 million in supply chain efficiencies during FY23, however, analysts at JP Morgan and UBS expect this will be largely offset by inflation. Positively, margins are expected to be maintained via price increases in the luxury portfolio.
The bigger issue facing Australia’s largest wine producer is a weakening consumer. Sentiment has sunk on the back of aggressive interest rate increases leading to a reduction in purchasing power. While it’s an open debate whether wine should be considered discretionary or a staple, there’s the possibility customers trade down to cheaper alternatives or forego purchases altogether.
The positive news is that Treasury should somewhat be protected. Its purposeful decision to adopt a ‘premiumisation’ strategy means its customer base is typically more affluent and less susceptible to pricing pressure. Results for peers have confirmed this, with profit from LVMH’s (owner of Moet, Veuve and Cloudy Bay) wine and champagne division increasing by 15.6 per cent in the first half of 2022.
Notwithstanding the difficult outlook, Treasury expects to “deliver strong growth” in FY23. The average price target of analysts is $13.41, compared to the current Treasury Wines share price of $13.14.
Traffic exceeds pre-pandemic levels: Transurban
Fourth quarter traffic average daily traffic (ADT) on Transurban’s toll road network exceeded pre-pandemic levels as a result of improved airport, CBD and leisure activity. However, over the course of FY22, traffic volumes fell by 0.5 per cent with Sydney, Melbourne and North America taking time to fully recover.
Proportional earnings before interest, tax, depreciation and amortisation (EBITDA), which measure the earnings from toll operations, increased 4.9 per cent to $1.9 billion, largely stemming from full-year contributions from M8/M5 East and NorthConnex in addition to annual price escalations.
It’s worth noting that 68 per cent of tolls are indexed to inflation, with a further 28 per cent increasing by 4.25 per cent until 2029. This means the company should prove defensive in a high inflation environment, with costs passed through to vehicle owners.
The emergence of work from home was originally thought to be a headwind for Transurban. However, an external survey of more than 5,000 participants reported an increasing number of commuters opting for public transport. In Australia, just 30 per cent of commuters used private transport pre-pandemic. That number has now jumped to 56 per cent. Flexible work arrangements are also leading to further uptake of private transport, as more commuters can now choose what time and days they drive into the office.
Despite the positive tailwinds, analysts remain cautious about Transurban’s outlook. Macquarie pointed to the delayed traffic rebound, while JP Morgan pointed to increased corporate and assets costs weighing on profitability. Similar to Treasury Wines, the Transurban share price implies only a small upside of just 3 per cent against current consensus price targets.
Transurban excepts to pay a distribution of 53 cents per share in FY23, which at the current share price of $14.16 represents a 3.7 per cent partially franked dividend yield. The forecast was below expectations, but was likely a conservative estimate and takes away from Transurban’s long growth runway. Morningstar expects Transurban will be able to grow the dividend by 7 per cent annually until 2027.
