ANALYST: This Year's Penfolds Won't Be Very Good, And That's Terrible News For Struggling Treasury Wine Estates

Wine

This week Treasury Wine Estates, the world’s largest wine maker, reported a huge pre-tax earnings dive and almost-flat revenue growth.

The company has been under pressure after the shock ejection of its chief executive last year, and a huge write-down following the destruction of a cache of budget wine in the United States that no one wanted.

Penfolds (the company’s well-known top-shelf label) is one of two things TWE will be relying upon to do better in the second half, according to a recent Deutsche Bank analyst report that cast doubt on the viability of this year’s release.

Here’s the problem: TWE needs Penfolds, as well as high-end sales in the US to make sure its second-half results are more positive. But this year’s Penfolds, according to DB, will rely on a 2012 crop that was “problematic”.

“This has two implications,” Deutsche Bank’s Michael Simotas wrote. “firstly the group is able to produce less volume of the wine and secondly, consumer demand is likely to be weak given the negative sentiment towards the vintage.”

Luxury wine buyers could be especially disappointed. Last year’s Penfolds was heavily-reliant on a 2010 crop that was good, so a follow up that leaves something to be desired will be bad news for the company.

To put this into perspective, the bank estimates Penfolds is as much as 50% of second-half EBITS in a good year. Management, according to the report, would not be drawn on whether the current guidance requires larger Penfolds earnings this year than in 2013.

Deutsche Bank says management will likely increase volume across its stable of brands to compensate. But this will mean less gross profit:

“The lower priced wines obviously generate less revenue per case but TWE also earns much lower margins on the lower priced wines. We suspect there will be very large volumes of Bin 128 and Bin 138 produced.”

This week, the company reported a $106.2 million net profit (but that included a $80.5 million tax benefit) as well as flat revenue, and a 36.7% fall in before-tax earnings.

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