Treasury Wine Estates Ltd. (TWE) Valuation Report - FIN2SEV

This report provides a detailed analysis of Treasury Wine Estates Ltd (TWE), a major player in the global wine industry. It begins with an introduction and industry overview, examining external factors and competitive positioning. The report delves into the financial analysis of TWE, including ratio analysis and projections based on historical data. Valuation is assessed using P/E and EV/EBITDA ratios. The report also addresses investment risks and concludes with a summary of findings and recommendations. The analysis incorporates data from 2018 and 2019, projecting future performance based on various assumptions. The report provides a comprehensive assessment of TWE's financial health and investment potential, covering aspects such as political, economic, social, and technological factors impacting the company.

INVESTMENT SECURITIES

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Contents
Introduction...........................................................................................................................................2
Industry overview..................................................................................................................................2
Analysis of external factors...................................................................................................................3
Competitive analysis.............................................................................................................................5
Financial analysis..................................................................................................................................7
Valuation...............................................................................................................................................8
Investment risk......................................................................................................................................9
Conclusion.............................................................................................................................................9
References...........................................................................................................................................11
Appendix.............................................................................................................................................13

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Introduction
Treasury wine estates is the largest wine corporation as listed on ASX enabled with global
distribution headquartered in Australia founded in 2011 with the revenue of 2.5 billion dollars
in 2017 and $2.3 billion of net income in 2016. The company is formerly as wine division of
brewing organisation as “Foster`s Group”. The company operates in 70 countries in four
main regions including Europe, Asia, New Zealand, and Australia (Treasury wine estates
limited, 2017). The company employs more than 3400 people with 13000-planted hectares of
vineyards in the wine making regions. The report brings out a discussion on treasury wine
estates and its financial analysis Creditriskmonitor, 2019). This analysis includes dividend
discount model, P/E ratio, external situational factors, ratio analysis based on its historical
data for 2018 and 2019. Further, there is a projection made which is based on certain
assumption and appropriate to the data of the annual reports of 2019. To analyse the valuation
of company, the report has used P/E ratio and EV/EBITDA ratio (Chua, DE Lisle, Feng, &
Lee, 2015).
Industry overview
Domestic consumption of wine keeps increasing with the increase in the Australian per capita
income that shows upside in the current consumption level. Exports have become important
for critically increasing the Australian wine industry (macquarie.com, 2015). For the last 25
years of growth in the Australian wine industry, it is seen that it is directly related to the
demand of the export. The exports has been increased from 16 percent to 60 percent of total
wine sales of Australians (macquarie.com, 2015). The global industry of wine was primarily
engaged in the manufacturing wines, and brandy spirits that has crossed 300 USD millions
until 2017. Asian markets have been fighting to catch up to market leader “North America” in
terms of market share and regional markets. It is seen that demand for wine continues to

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increase due to changing lifestyles and flavour of wine as availed as alcoholic beverages
(Creditriskmonitor, 2019).
(Source: Macquarie, 2015)
Analysis of external factors
Political factors-
There is high political stable and friendly environment with expected market growth trends.
Treasury Wine Estate limited is present in different countries where it possess political
tensions. Increasing tensions and the instabilities in global environment can affect the
industrial limitations. Frequent changes can affect business performance with increase in
environmental uncertainties. This will study current trends in political scenario because
change in government will alter government priorities in the development of different
industries. Further, bureaucracy can affect the business environment (Market watch, 2019).
While operating with high level of corruption and weak law enforcement creating the
business environment by increasing risk for treasury Wine estate limited. Due to clashing
public trust in regards to the economic and political restructuring, corruption can affect
business operations, fraud dealings, licensing, and contracting leads to continuous lawsuits.
The company`s operations are threatened by the instability of rule of law, and harming of the
justice system.
Economic factors-

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Increasing economic and growth opportunities to Treasury Wine estate limited can affect
opportunities to Treasury Wine estate limited. Entering in mature industry can become more
challenging because of market saturation at the growth stage. The performance of Treasury
Wine estate limited is affected to extent where government of host country spent time on the
development of core infrastructure. GDP will decide the ability of treasury Wine estate
limited to pursue the long-term enhancement strategies. High GDP signals customer`s ability
to spend more on the offered products. High GDP indicates that there is the availability of
customers to consume more products. Higher employment rate signals the availability of the
surplus workforce at lower wages. The company will have to bear lower production cost,
interest rate, impact on the borrowing attitude in regards to investment. High rate of interest
will further encourage attitude to investment and it will increase the growth opportunities for
the company. The exchange fluctuation rate can affect the profitability of international trade.
The business actions can be affected by prevailing economic structure. The regulatory and
economic environment differs in different market such as oligopolistic and monopolistic
structure.
Social factors
The company is affected by the demographic trends, gender roles, equality, and power
distance, pattern of spending, online shopping, class distribution, and societal norms.
Dynamic situation such as patterns in the ageing population, social, and economic variables,
which have paramount significant for international companies. Marketing strategy is
influenced through migration. Further, it is quite important to perceive the people`s attitude
when it can affect organisation`s ability to bring the international managers to the host
country. Power distance shows the acceptance of the income inequality. The company will
have to adjust the business management practises when entering market with low and high
power distance. According to the cultural context, the company develops local partnership to

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understand societal attitude to construct the marketing strategies. Treasury wine estates offer
luxury items at the premium prices to the market where high ending market is smaller and
needs the company to adopt the niche marketing strategies. The advent of electronic media
has permitted online shopping to consider the differences as their young consumers who are
more inclined to grab older customers. The company should invest on the understanding of
the consumption motivation that has been defining consumption behaviour. The company
will have to attempt to grab the extent of the consumer`s interest to check customers prefer
experimental offerings over traditional offerings (Sim, & Wright, 2017).
Technological factors-
Some of the important inducing factors affecting the technological factors are social media
marketing, innovation in technological development, research, development affect the value
chain, cost structure and the shortened life cycles of products. Treasury Wine estate limited
will have to consider investments as made by the competitors at both micro and macro level
when understanding how technology transform organisation’s value chain (Mugoša, &
Popović, 2015). The adoption of effective technology can reduce the lifecycle of new product
development. It pressurises the company to develop and create new products by increasing
diversity of product range, developing healthy relationships between integrating flexibility in
the value chain, enabled with partners. The company has to invest in creative disruption
where it can maximise the profitability and finally reinvest profits for the future disruption
(Mugoša, & Popović, 2015).
Competitive analysis
Threat of new entrants-
The economies of scale is difficult to achieve such an industry where treasury Wine Estates
operate. This does it in the easier way for those producing greater capacities so that they can

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have higher cost advantage. This can create it easy for the producing greater capacities in
order to have cost advantage (Houmes, R., & Chira, 2015).
Bargaining power of the suppliers-
The number of the suppliers operates more as compared to the number of organisation’s
producing products. This results into few organisations to choose from which do not control
the prices (Houmes, R., & Chira, 2015).
Bargaining power of the customers-
The buying behaviour of the people is determined by their income level. The quality of
products is quite important to make people in such a way that they can make frequent
purchases. Although, there is not significant threat of customers to integrate it backwards.
The company can emphasis on differentiation and innovation to induce the buyers. The
company can build larger customer base, as the power of customers is quite weak. The
company can take advantage of the economies of scale in order to develop cost advantage
and sell it at lower price to the buyers who earn less. This will lead to induce large number of
customers.
Threat of substitution-
There are many other substitution availed as their products where Treasury Wine estates
operate. There is no other ceiling on the maximum profit to be earned where the company
operates. Threat of substitution is a weaker force in the industry. Few substitutes’ availability
are of high quality but at the same time, it is expensive too. Treasury wine estates operate
selling lower price as compared to the substitutes. It is seen that buyers are less likely to
switch to the substitute products.

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In order to tackle threat of substitution, the company has to focus on availing greater quality
in their products. Customers choose from the products that can avail high quality to the
products. The company has to focus on differentiating the products. This will ensure buyer’s
overview the products as unique and it do not shift to substitute products leading it to avail
unique benefits. It can avail unique benefits to the customers with better understanding the
need through research and availing what actually a customer needs.
Rivalry among the competitors
Some of the important competitors include constellation brands, Wine group, E & J. Gallo.
The competitors operating in this industry are very few and they are large. This results into
weaker force in the rivalry among the existing organisations, which stimulates companies to
become stronger and become market leaders. Treasury wine estates operate with fixed costs
to push it to full extent. Treasury wine estate offers highly differentiated products. It is
difficult to compete to the organisations to win maximum customers as every organisation
produces differentiated products. In order to handle the rivalry between the existing
companies, it is seen that there is a need to create market research so that it can understand
the demand and supply in the industry. As there is, rivalry among the existing companies is
intense, which will drive prices down and reduce the overall profitability of industry
(Edwards, Schwab, & Shevlin, 2015).
Financial analysis
The projection statements of the company for the upcoming three years 2020, 2021, and 2022
are based on major Assumptions-
As far as sales is considered, it has been assumed that sales of company in 2019 is $2883000
and it is estimated that it will increase by 10 percent in 2020. Further, for the upcoming years
2021 and 2022, the revenue will increase by 20 percent.

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The cost of sales is assumed as constant as 2019 because the fluctuations will take place for
other operating expenses
For the purpose of estimation, the cost of labour is estimated to increase by 5 to 10 percent
each year for 2020, 2021, and 2022.
The depreciation is estimated to remain fixed for all the years as depreciation is based on
straight-line method.
Interest rate for borrowings is assumed to be 5% per annum.
Tax rate 30%, it has been assumed to be constant for all the years.
Valuation
market capitalization 13. 229
- 2%
Add: preferred shares -
1.1651
0.4018
13.9923
Price 18.38
earnings 0.58
31.68966
EV/EBITDA ratio
P/E model
Valuation method
EV (entreprise value)
Add: minority
Add: Debt
Subtract: total cash
Total EV

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Investment risk
Particulars 2018 2019
AUD$ '000 AUD$ '000
Total Revenue 24,29,000 28,83,000
COGS 1435600 1660800
Gross profit 993400 1222200
Net profit 360300.0 419500
EBITDA 537100.0 690400
Current Assets 1741800.0 21,68,600
Inventory 1012300.0 1024000.0
Average inventory 506150.0 1530150.0
Trade receivables/Debtors 469200.0 545800.0
Total Assets 5445700.0 60,00,200
Current Liabilities 809400.0 885000.0
Trade Payables/Creditors 702900.0 7,24,700
Total Liabilities 1949400.0 2294100
Capital Employed 4636300.0 5115200.0
Long term loans 875300.0 11,47,700
Shareholders' Equity 3492000.0 3702000
Liquidity ratio Formula 2018 2019
Current ratio current assets/current liabilties 2.15 2.45
Profitability Ratios 2018 2019
Net Profit Margin net profit/ revenue sales 0.15 0.15
Return on Equity net profit/ equity 0.10 0.11
Solvency Ratios
Capital structure ratio 2018 2019
Debt- equity debt/equity 0.25 0.31
Activity ratio
Efficiency ratio 2018 2019
Inventory turnover ratio Total Revenue/ average inventory 4.80 1.88
Treasury wine estates
Computation of ratio analyis
(Treasury wine estates limited, 2018-2019)
Conclusion
From the discussion given above, it is seen that the company has been performing great in
terms of profitability as the company generates 15 percent of the net profit margin in 2018
and 2019. The company relies more on equity funds. The liquidity position of the company is
quite good as the company has 2.15 times of current assets to one time of current liability in
2018 and 2.45 times in 2019. The financial projections are based on industry increment of
nearly 5 to 20 percent for three upcoming years. The valuation for dividend discount presents
that in respect to the intrinsic value, the share price is overvalued. This represents that the

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company enjoys goodwill but investors can have two perspective. First can be the share price
will keep increasing whereas, on the other hand, an investor may wait to decrease the market
price so that they can purchase it at the appropriate price.

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References
Chua, A., DeLisle, R. J., Feng, S. S., & Lee, B. S. (2015). Price‐to‐Earnings Ratios and
Option Prices. Journal of Futures Markets, 35(8), 738-752.
Creditriskmonitor, (2019). Treasury Wine Estates Ltd. Retrieved from:
https://info.creditriskmonitor.com/Report/ReportPreview.aspx?BusinessId=17985390
Edwards, A., Schwab, C., & Shevlin, T. (2015). Financial constraints and cash tax
savings. The Accounting Review, 91(3), 859-881.
Guru focus, (2019b). Economic indicators (Long-Term Government Bond Yields: 10-year:
Main (Including Benchmark) for Australia). Retrieved from:
https://www.gurufocus.com/economic_indicators/118/10year-treasury-constant-
maturity-rate
Gurufocus, (2019a). WACC. Retrieved from:
https://www.gurufocus.com/term/wacc/TSRYY/WACC-/Treasury-Wine-Estates-Ltd
Houmes, R., & Chira, I. (2015). The effect of ownership structure on the price earnings ratio
—returns anomaly. International Review of Financial Analysis, 37, 140-147.
macquarie.com, (2015). Retail newsletter 2015. Retrieved from:
https://www.macquarie.com.au/dafiles/Internet/mgl/au/apps/retail-newsletter/docs/
2015-04/TWE150415e.pdf
Market watch, (2019). Treasury Wine Estates Ltd. Retrieved from:
https://www.marketwatch.com/investing/stock/twe?countrycode=au
Mugoša, A., & Popović, S. (2015). Towards and Effective Financial Management: Relevance
of Dividend Discount Model in Stock Price Valuation. Economic analysis, 48(1-2),
39-53.