Treasury Wine: Result 2012

Treasury Wine Estates continues to blossom after splitting from Foster’s Group last year, though you wouldn’t know it from the top line result. For the year ended 30 June 2012, volume fell 4.4% to 32m 9-litre cases. All of this fall was from the UK and Ireland operations, where the company has been deliberately exiting unprofitable lines. Volume there fell 31%, while sales elsewhere in the world actually rose very slightly.

Sales revenue fell 5.6% in raw terms, or 2.9% on a constant currency basis, to $1,641m. Showing the benefit of cutting unprofitable lines, though, earnings before interest, tax and SGARA adjustments was $210m, up 7.7% or 18.6% in constant currency terms. The continued strong Australian dollar is partly disguising a substantial turnaround at Treasury Wine.

Directors declared a 50% franked final dividend of 7 cents (ex date 28 Aug) bringing the yearly total to 13 cents. As the stock wasn’t listed for the full 2011 period, comparison with last year’s dividend is meaningless.

The result was partly the reflection of better trading conditions and partly a demonstration of the power of focus (compared with Foster’s ill-conceived multi-beverage strategy). We’d guess there’s quite a bit more ‘turning around’ to come over the next few years as management overhauls the operation. And if the Australian dollar ever falls sharply, as much of our analytical team thinks is a distinct possibility, it will rapidly boost the company’s profitability. But one of these two factors does need to come into play—the stock is trading at nearly 23 times underlying earnings per share of 20.9 cents and further earning growth is required to justify the current stock price.

The stock is up 22% since 1 Mar 12 (Hold – $3.89) and we’re getting closer to taking our profits and running. But there are enough reasons to think this turnaround has more in it yet. HOLD.