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Oversupply Issues Are Behind Inghams, but Mix Shift to Drag in the Near Term

competition in poultry is intense. Poultry is largely commoditised, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a sustainable competitive advantage required to award an economic moat. Further, Inghams’ customer base is highly concentrated, with the majority of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. Population growth, relative affordability, and changes in consumer preferences have driven chicken consumption to all-time highs in Australia and New Zealand. 

Per capita chicken meat consumption in both Australia and New Zealand has steadily grown at a low-single-digit CAGR over the last decade. Chicken remains the cheapest meat by a significant margin, with the per-kilo retail price of chicken less than half that of pork, lamb, and beef. This price advantage is supported by favourable production dynamics, notably chicken’s superior food conversion ratio, or FCR. The chicken industry remains highly efficient in translating feed into live weight for production, with producers able to convert feed at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef. The chicken FCR, measured by kilograms of feed required to produce one kilogram of meat, has fallen from over 2.5 in 1975 to less than 1.8 today.

Financial Strength 

Given relatively high lease-adjusted leverage, and slim operating margins, we rate Inghams’ balance sheet as weak–stronger than poor as we do not see risk of a dilutive capital raising. Net debt/EBITDA improved in fiscal 2020 to 1.2 at June 30, 2021, due principally to earnings recovery and tighter capital expenditure amid COVID-19 uncertainty over the year. This is down from 1.8 in fiscal 2020 and 1.3 in fiscal 2019 following the capital return and share buyback over fiscal 2019. Given heavy investment into automation and operational efficiency, capital expenditure requirements have been elevated, peaking at AUD 106 million during fiscal 2019 at 4% of revenue. 

Our fair value estimate for Inghams to AUD 3.70 from AUD 3.60 due to the time value of money boost to our financial model. Inghams’ fiscal 2021 underlying net profit of AUD 87 million matched our estimates and was at the top end of management’s guidance range. Inghams declared a fully franked final dividend of AUD 9 cents, bringing the full-year distribution to AUD 16.5 cents per share, implying a payout ratio of 71% of underlying EPS. Government-imposed shutdowns shift poultry demand from restaurants to retail, creating inefficiencies as Inghams is forced to adjust production lines. 

Poultry producers struggled to keep up with pantry-stocking and panic buying in March and April 2020, but this sales momentum was not maintained, and the poultry industry entered fiscal 2021 in oversupply. The chicken industry remains highly efficient in translating feed into live weight for production, with producers able to convert feed at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef–leading to cost-efficient processing and a smaller environmental footprint. We expect low-single-digit growth in annual per capita chicken meat consumption to 53kg by fiscal 2026, before moderating as chicken consumption approaches saturation.

Bulls Say’s 

  • Inghams benefits from a consumer trend toward protein-rich, fresh, easy-to-prepare meals.
  • Per-capita chicken meat consumption continues to rise as chicken enjoys a relative affordability advantage compared with other meats, such as beef.
  • A shift in Inghams’ sales mix to value-added products could enhance margins.

Company Profile 

Inghams is the largest vertically integrated poultry producer in Australia and New Zealand. The firm enjoys a number-one position in Australia with approximately 40% market share and a number-two position in New Zealand with around 35% share. Inghams supplies poultry products, notably to major Australian supermarkets Woolworths and Coles, and quick-service restaurants McDonalds and KFC. Sales are heavily skewed toward poultry, which includes the production and sale of chicken and turkey products.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights

Sydney Airport Flight Delayed to Fiscal 2022; FVE Maintained

Long distances between major cities in Australasia means flying is a preferred mode of travel. Despite a rival airport scheduled to open in 2026, we expect Sydney Airport to remain the favoured terminal for business and long-haul leisure travellers for the next decade. Revenue is about evenly sourced from aeronautical and other operations. Aeronautical fees are mostly on a per-passenger basis, with base charges negotiated with airlines every five years. Retail is the largest non-aeronautical contributor, accounting for about 23% of pre-COVID-19 revenue.

Duty-free and luxury shopping has threats, given the ability for e-commerce sites to offer lower prices than duty-free, and ESG risks given the reliance on tobacco and alcohol sales. However, in the long run, risks materialising in any particular sub-category should be offset by passenger growth boosting defensive categories such as food, car-rental, parking, souvenirs, and holiday items. Population and passenger growth should aid Sydney Airport as it can increasingly allocate slots away from domestic and toward international flights. International flights account for about 40% of passengers, but about 70% of passenger revenue. 

Financial Strength

Sydney Airport’s financial health is fair, with relatively defensive income offset by high debt. Net debt/EBITDA was a high 14 times in fiscal 2021, up from 7.2 in 2019. Our base case is that by fiscal 2023 debt/EBITDA will be back to a more sustainable level below 8 times, and declining, but under our bear scenario this would not occur until 2025 and would remain elevated over our 10-year discrete forecast period. Management acknowledged the high debt and took appropriate actions to reduce leverage, including cancelling distributions in 2020, delaying capital expenditure, securing additional bank facilities, and raising AUD 2 billion in equity in the September quarter of 2020.

Narrow-moat Sydney Airport’s half-year result showed potential, with domestic traffic recovering to 65% of April 2019 levels. This is negligible for our unchanged fair value estimate of AUD 7.85 per share. The key driver is our unchanged post-virus recovery and passenger growth estimates. An acquisition proposal from IFM was this week increased to AUD 8.45, up from 8.25, but was immediately rejected by Sydney Airport. The consortium’s valuation assumptions are unknown. Bulls on Sydney Airport appear to expect Chinese travellers, about 8% of Australia’s arrivals in 2019, will resume rapid growth as borders reopen.

While the long term is the key driver, the near term is relevant given Sydney Airport’s high debt load. Domestic travel volumes through Sydney Airport in the first half of fiscal 2021 improved on the coronavirus-impacted volumes of the second half of fiscal 2020, but domestic border restrictions have resulted in volumes falling significantly in July. A net debt to EBITDA ratio of 14 times is extreme and will be problematic if Australian international borders remain closed for years into the future. Further, the weighted average maturity of Sydney Airport’s portfolio of debt is about five years, and the group has AUD 500 million in cash and AUD 2.4 billion in undrawn banking facilities, more than enough to cover debt expiries in the next two years.

Bulls Say’s 

  • Sydney Airport’s convenience to the business district and coastal suburbs of Australia’s largest city makes it near impossible to replicate. Rising incomes in nearby nations, and Australia’s growing population bodes well for long-term passenger numbers.
  • A light regulatory regime is unlikely to become significantly more onerous.
  • Sydney Airport has spare landing slots, plus the ability to reallocate slots away from domestic and toward more lucrative long-haul international flights, as passenger traffic grows.

Company Profile 

Sydney Airport has a lease to operate the facility until 2097. As Australia’s busiest airport, it connects close to 100 international and domestic destinations, and handled more than 40 million passenger movements annually until COVID-19 border restrictions in 2020. Regulation is light, with airports setting charges and terms with airlines, and the regulator monitoring the aeronautical and car park operations to ensure reasonable pricing and service. Retail and property operations are free from regulatory oversight, though political and commercial pressure limits Sydney Airport from overly flexing its pricing muscle, particularly as the government owns the rival Western Sydney Airport, set to open in 2026.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Raising Tesla’s FVE to $600 on Improved Long-Term Outlook for AV Software

the company went from a startup to a globally recognized luxury automaker with its Model S and Model X vehicles. In addition to luxury autos, the company also competes in the mid-size car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. Tesla also invests around 6% of its sales into R&D, focusing on improving its market-leading technology and reducing its manufacturing costs. The company will also move upstream into battery production, with a goal to reduce costs by over 50%. 

Tesla’s extended range EVs are already at range parity with ICE vehicles, which should improve further with plans for its batteries to improve energy density. Tesla also continues to increase its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow in this market. 

Financial Strength 

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of June 30, 2021. Total debt was roughly $9.4 billion, however, total debt excluding vehicle and energy product financing (non-recourse debt) was around $4 billion. Cash and cash equivalents stood at $16.2 billion as of June 30, 2021.To fund its growth plans, Tesla has used credit lines, convertible debt financing as well as equity offerings and credit lines to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. 

We are raising our fair value estimate to $600 per share from $570 for narrow-moat Tesla following AI day. Our largest key takeaway from Tesla’s AI day was the progress that the company is making on its Level 3 autonomous vehicle software known as full self driving. The biggest change to our forecast is our long-term outlook for Tesla’s Level 3 autonomous vehicle software. The software, which is currently still in beta testing mode, appears to be closer to a rollout than we had expected. 

Dojo is the supercomputer that Tesla is using to train its AV software. However, over the next several years, the company plans to begin selling AI training to other companies using extra processing space. This should generate operating profits in line with software companies. Finally, Tesla plans to develop humanoid robots that can be used to perform dangerous or repetitive tasks, by creating a repurposed version of the same camera-based autonomous software that it is developing for cars in the humanoid robots, which will be programmed to perform simple tasks.

Bulls Say’s 

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
  • Tesla will see higher profit margins as the company achieves its plan to reduce battery costs by 56% over the next several years.
  • Through the combination of its industry-leading technology and unique Supercharger network, Tesla offers the best function of any EV on the market, which will result in the company maintaining its market leader status as EV adoption increases.

Company Profile 

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and mid-size sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light-truck, semi-truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Philosophy Technical Picks Technology Stocks

Super Retail’s FVE Increases to an Expected Sales Uplift from Network Optimisation

The company’s fiscal 2021 sales of AUD 3,453 million and underlying earnings of AUD 307 million were broadly in line with our estimates. The trading update provided for the first seven weeks of fiscal 2022 is broadly tracking with full fiscal year estimate. Trading conditions in fiscal 2022 are likely to be more challenging than we anticipated just a few months ago with lockdowns heavily impacting retailing businesses in affected states. While the near-term trading outlook is similarly opaque as during Australia’s first COVID wave, we base our longer-term sales levels on historical growth trends. 

EBIT margins sharply increased in fiscal 2021, mostly due to less discounting because of greater consumer demand and relatively inelastic supply, as well as remarkable sales growth of 22% driving just as exceptional operating leverage. EBIT margins expanded some 450 basis points to almost 13%, after adjusting for lease accounting Standard AASB 16. In the five years to fiscal 2020, adjusted EBIT margins averaged just over 8%. Super Retail’s online sales increased by 43% in fiscal 2021, similar to the 44% achieved in fiscal 2020. E-commerce accounted for 12% of group sales in fiscal 2021, with outdoor specialist Macpac and sporting goods retailer Rebel leading with online penetration of 21% and 16%, respectively. The board declared a fully franked dividend of AUD 88 cents per share for fiscal 2021.    

Company’s Future Outlook 

We continue to expect consumer spending on auto parts, sporting goods, and outdoor gear to normalize by fiscal 2023 and with it currently elevated profit margins. In contrast, to match our intrinsic valuation with current share prices, we would have to assume increased spending levels on discretionary goods and higher profit margins to persist for much longer. We expect operating margins to weaken against a backdrop of replenished inventories, more discounting, and declining sales. we estimate a 9% drop in group revenue for fiscal 2022. The dividend was ahead of our AUD 84 cents forecast on a slightly higher than expected 65% payout ratio. While we maintain our 65% payout ratio forecast, we expect declining earnings to result in a lower dividend of AUD 64 cents in fiscal 2022, representing a 5% yield at current share prices

Company Profile 

Super Retail operates in Australia and New Zealand selling auto parts, sporting goods, and camping, fishing, and boating equipment. The group generates revenue of about AUD 2.5 billion. There are generally two to four larger players in each category in which the firm operates, with Super Retail the market leader in all three categories. The firm has been corporately active historically, adding to the sporting goods category in fiscal 2012 and acquiring Macpac of New Zealand in 2018.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Tapestry Closed F.Y.21 on Good Note with Attractive Shares

Handbags and some types of apparel have been selling well as economies in the U.S. and greater China have recovered. Tapestry has good momentum as it enters fiscal 2022, so it is expected to lift share fair value estimate of $43.50 by a mid-single-digit percentage. Tapestry is one of the few firms in the apparel and accessories space that is currently undervalued, especially after its share price slid 3% after the earnings report.

Against an easy comparison, Tapestry reported constant currency sales growth of 122% in the quarter, eclipsing 118% estimate. More importantly, its sales rose 7% as compared with 2019, with most of the growth attributable to Coach. As targeted by the Acceleration Program, the firm achieved the $200 million in gross expense savings in fiscal 2021 and expects to achieve $300 million in additional savings this year. 

Tapestry has reinstated its dividend as its business has rebounded nicely from the pandemic, and plans to resume share repurchases. It intends to pay a dividend of $1 per share in fiscal 2022. Capital allocation rating on Tapestry is Standard.

Company’s Future Outlook

Tapestry’s quarterly adjusted operating margin of 16.9% came in 40 basis points above 16.5% forecast. Tapestry guided to fiscal 2022 EPS of $3.30-$3.35 on $6.4 billion in sales. Tapestry’s outlook is achievable based on current momentum in the business. It is believed that Coach has the brand strength to hold recent pricing gains; this may be more difficult for Kate Spade and Stuart Weitzman. It also guided to $500 million in repurchases in fiscal 2022, which would be its most since before the 2017 Kate Spade deal. Tapestry may look for another large acquisition in the future. The firm’s new CEO, Scott Roe, has considerable experience with acquisitions. 

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry INC (NYSE:TPR). The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colorful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry’s sales in fiscal 2020. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Estee Lauder’s Currency Sales Grew to $16.2 Billion

missing $16.5 billion estimate, as an increasing number of COVID-19 cases resulted in another round of store closures across Europe, Latin America, and Asia (excluding China). Even so, fiscal 2021 sales are 6% above fiscal 2019 revenue (adjusted for acquisitions), supported by Estee’s ability to pivot to ecommerce, which increased to 28% of fiscal 2021 sales, compared with 15% in 2019.

 The travel retail channel has remained surprisingly resilient, which increased to 29% of fiscal 2021 sales, versus 23% in 2019. While international travel is largely curtailed, domestic trips have been strong, particularly in China’s Hainan province. 

Other factors that helped the firm return to prepandemic sales levels despite continued store closures are Estee’s strong brands (which underpins its wide moat rating) and the firm’s expertise in developing compelling new products, with innovations representing 30% of fiscal 2021 sales, well above the 15% targeted by many consumer products companies. Skin care is well above prepandemic levels, but makeup continues to lag, as mask mandates curb demand. But the firm has promising innovations and marketing programs lined up that it will rollout as mandates relax.

Company’s Future Outlook

Fiscal 2021’s adjusted operating margin increased 420 basis points to 18.9%, given tight expense controls. This margin upside should continue into fiscal 2022, as management’s guidance for adjusted earnings per share of $7.23-$7.38 is above our $7.06 estimate, although sales growth guidance of 13%-16% brackets 15% estimate. No change is expected in $249 fair value estimate, as modestly higher operating margins should be offset by a higher tax rate, 

Company Profile

Estee Lauder Inc (NYSE: EL) is the world leader in the global prestige beauty market, participating across skincare (52% of 2020 sales), makeup (33%), fragrance (11%), and hair care (4%) categories, with popular brands such as Estee Lauder, Clinique, MAC, La Mer, Jo Malone, Aveda, Bobbi Brown, Too Faced, and Origins. The firm operates in 150 countries, with 26% of revenue stemming from the Americas, 44% from Europe, the Middle East and Africa, and 30% from Asia-Pacific. The company sells its products through department stores, travel retail, multi brand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Hanesbrands’ Investment Key Brands Under Its Full Potential Plan Support

While the COVID-19 crisis adversely affected 2020 results, we think Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors. Hanes’ management forecasts Champion will reach $3 billion in global sales in 2024, up from about $2 billion this year, which we see as an achievable goal. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past three years. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. 

Financial Strength 

Hanes is saddled with heavy debt from its acquisition spree in 2013-18 and closed June 2021 with $3.7 billion in debt. However, the firm also had nearly $700 million in cash and no borrowings under its revolving credit facilities of just over $1 billion. Moreover, we estimate Hanes will receive about $400 million in cash after it sells its European innerwear operations (expected in 2021). Hanes has a stated goal of bringing debt/EBITDA below 3 times by 2024, which we forecast may happen as early as the end of 2022.Hanes has suspended its share buybacks due to the pandemic, but we expect it will resume repurchases on a large scale in 2022. 

The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. Its annual dividend has been set at $0.60 per share since 2017, but we forecast it will raise in 2022 and in subsequent years. We estimate an average annual dividend payout ratio of 38% in 2022-30.Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. 

Our 2024 sales estimates for innerwear and activewear are $3.0 billion and $1.9 billion, respectively, up from $2.7 billion and $1.7 billion this year. In the long term, we model annual organic innerwear growth rates of 2%-3%. Although long-term growth in domestic innerwear (45% of 2020 sales) is low, Hanes has been gaining share in some basics categories. Our fair value estimate assumes moderate inflation in wage and cotton prices, resulting in a gross margin that stabilizes at 40%.

Bulls Say’s 

  • Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets.
  • Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel.
  • After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Profile 

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Philosophy Technical Picks

ASX Interest Rate Pressures to Abate From Economic 2023

with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. The ASX has long been protected by two significant barriers to competition through regulation and network effects. 

The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strength 

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and we forecast an average EBIT margin of around 70% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. 

ASX lacks an appetite for acquisitions, which is not a bad thing in our opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. Our fair value estimate excludes the value of ASX’s franking credits, which are received by Australian resident taxpayers. However, as discussed in our recent special report, “10 Franked Income Stock Ideas for Australian Investors,” franking credits can effectively boost the fair value estimate for investors that receive them. 

Revenue was 4% above our forecast due to stronger than expected performances from the cash equities, listings, and information services divisions, but a weaker-than-expected performance from the derivatives and OTC division. Our fiscal 2022 expenses growth forecast of 5% is at the lower end of management’s guidance range of 5% to 7%, and lower than the 8% reported for fiscal 2021. Our fiscal 2022 capital expenditure forecast of AUD 114 million is at the top end of the AUD 105 million to AUD 115 million guidance range, and lower than the AUD 125 million in fiscal 2021.

Bulls Say’s 

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis.
  • ASX has a wide economic moat underpinned by network effects and regulation. We expect this competitive advantage to protect EBIT margins of around 70% over the next decade and a low-single digit EPS CAGR.
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Profile 

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualised and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Treasury Lacks an Economic Moat Amid the Highly Competitive and Volatile

particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 70% in fiscal 2021 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. We expect continued end-market premiumisation to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020

However, Treasury will face an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations. Treasury also faces risks from unfavourable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. But the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns.

The reason why Treasury lacks an economic moat:

  • Treasury Wine Estates has not carved out an economic moat, in our opinion. Although we expect the firm’s strategic shift to focus on high-end wines and its increased geographic diversification to benefit both long-term top-line growth and profitability, the wine industry’s high degree of competition, and volatile annual demand will likely limit Treasury’s ability to generate sustainable excess economic profits. These concerns are further exacerbated by persistent industry oversupply and specific taxation rules in Australia that award excise tax exemptions against the first AUD 350,000 in direct-to-consumer sales, a barrier to industry consolidation. Furthermore there is also continued pressure from powerful retailers in Australia, where liquor stores owned by grocery giants Woolworths and Coles account for over 50% of total wine sales and
  • We don’t believe owning a portfolio of wine brands builds a moat worthy intangible asset because wine brands are stand-alone assets and therefore consumer awareness of Treasury’s ownership in both Stags’ Leap and Berringer in the U.S., or Penfolds and St Huberts in Australia, leads to improved pricing for the respective brands versus peers, or if such awareness even materially exists. There are some cost benefits to running a portfolio of wine brands, as Treasury can optimise its grape sourcing and production within its many geographies. But we expect premium wines will likely continue to see fluctuations in supply and fruit cost year to year.
  • In all, despite the positives of premiumisation in recent years, ROICs considerably trailed WACC until fiscal 2019. This is due to the substantial inventory requirements of wine-making, the high cost of land ownership, difficult price competition in a very fragmented market, and Treasury’s lack of scale economies and brand intangible assets versus larger peers.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine.
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands.
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilisation, improving margins, and higher ROICs.

Company Profile

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Coles display strong FY21 results benefitting from pandemic

  • Increasing the penetration of private labels – COL just reaffirmed its objective of 40% penetration.
  • Earnings that are relatively safe (food tends to be largely non-discretionary).
  • In comparison to key domestic competition Woolworths, the valuation is undemanding.
  • Now that the company has been demerged, it has improved its focus and capital allocation.
  • Automation and enhancements in the supply chain should result in increased efficiency.
  • The deal with Ocado, in our opinion, positions Coles as a leader in online delivery.
  • Flybuys is a highly appealing asset that may be profited from.

Key Risks

  • Margins could be eroded by significant competitive pressures (including the introduction of new companies).
  • At the forthcoming Strategy update in June 2019, management will reset the earnings base.
  • Disruption on the internet (full online offering).
  • Upgrades to automation and supply chains will necessitate major capital investment, the cost of which has yet to be determined.
  • After accounting for leases, the balance sheet could be extended.
  • Cost inflation is outpacing revenue growth.

FY21 Results Highlights

Strategic sourcing and Smarter Selling benefits drove a 35-basis-point increase in gross margin in the top supermarkets. Since the Company introduced Coles Plus in February 21, the number of paid members has climbed by 6 times. Coles’ market share recovered to pre-Covid-19 levels in the fourth quarter of 2011, with a 4Q21 exit market share of 27.1 percent. This is higher than the 26.4 percent recorded in 2Q20. 

Management attributed this to the relaxation of limitations, which resulted in increased shopping centre performance and a slowing of the local shopping trend. The Ocado Customer Fulfilment Centres (CFC) will open in Melbourne in FY23 and Sydney in FY24, according to management.  In the fourth quarter, omnichannel customers spent 2.2 times more than in-store only shoppers, according to the findings. Coles now offers sale-day home delivery in over 300 stores, as well as Click & Collect at over 500 locations. 

Management did not disclose any earnings guidance in terms of dollars. However, sales growth in the crucial Supermarkets business was muted in the first seven weeks of 1Q22 trading, with sales up 1% on a headline basis and up 12% on a two-year basis.

Company Description  

Coles Group Ltd (COL) is an Australian retailer (supermarket and liquor) that was spun off from Wesfarmers (WES) in 2007. Coles handled more than 21 million customer transactions on average each week as of 30 June 2018, employing over 112,000 team members and operating 2,507 retail stores across the country. Supermarkets, Liquor, and Convenience are the company’s three primary operating segments. The company will also keep a 50 percent share in the flybuys loyalty programme.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.