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What’s the outlook following a potential Treasury Wine Estates demerger?

We examine the implications of Treasury Wine's proposed Penfolds demerger.

TWE Source: Bloomberg

Investors are often accused of being overly preoccupied with the short-term; while at the same time expecting businesses to focus on the long-term. On the other hand, businesses are often accused of trying to please the market too much and not focusing on the future enough.

Ideally you could have both – but the world is made of few ideals.

Proportionality in focus

In the name of long-term value creation and following a strategic review of the company’s portfolio, Treasury Wine Estates (TWE) yesterday announced it was considering a demerger of its all-important Penfolds brand.

Overall, while Penfolds accounts for only a fraction of TWE’s overall volumes, it accounts for more than half of the company’s earnings.

In light of that – Treasury’s CEO, Michael Clark – yesterday argued that: 'A potential demerger would enhance New TWE's and Penfold's ability to pursue their own strategic priorities and deliver a stronger long-term growth profile under separate teams and ownership structures.'

Chairman Paul Rayner also sought to remind investors that 'Penfolds is an icon of Australian luxury, with impressive margins and significant growth runway in Asia and globally.'

Looking at what this could all mean for current shareholders, the company reassured investors that if the demerger were to go ahead, ‘shareholders would own a share in Penfolds and in New TWE proportional to their existing TWE holdings.'

Of course, before any such demerger would go ahead, the company said the plan would first be subject to a detailed cost and benefits evaluation; as well as require approval from shareholders, the Board and a variety of regulatory bodies.

If all goes to plan, Treasury expects the potential demerger to be completed by the end of CY21.

Treasury Wine Estates share price: the valuation game

Though Treasury’s management team is understandably optimistic about the prospect of ‘long-term’ value creation at the hands of this ambitious spin-off, analysts from Citibank are a shade more sceptical.

Here, the investment bank bluntly points out that:

‘While attention is likely to focus on Penfolds as the growth engine, without a decent valuation for New TWE (the masstige/commercial wine business), it will not be rewarding for shareholders, in our view.’

More importantly, according to Citi, at current price levels both businesses are already fairly valued and thus, a potential demerger is ‘unlikely to create immediate synergies.’

All up, following a potential TWE spinoff, Citibank estimates Penfolds standalone enterprise value at $6,460 million against a share price estimate of $7.82 per share.

As a corollary of this, the investment bank notes that in a Penfolds-less world, the New Treasury Wine Estates entity has an estimated enterprise value of $2,871 million against a share price estimate of $3.24 per share.

Possible worlds aside, in its current form, Citi has a Neutral rating and a 12-month price target of $11.05 on TWE.

How to trade Treasury Wine: long or short

What do you make of this potential demerger: will it foster long-term value or destroy it? Whatever your view, you can trade indices, currencies and equities like Treasury Wine Estates – both up and down – through IG’s world-class trading platform now

For example, to buy (long) or sell (short) Treasury Wine Estates using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘TWE’ or ‘Treasury Wine Estates’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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