16 July 2013 Asia Pacific/Australia Equity Research Beer & Alcoholic Beverages (Food & Beverage (AU)) Treasury Wine (TWE.AX / TWE AU) Rating UNDERPERFORM* COMPANY UPDATE Price (16 Jul 13, A$) 4.73 Target price (A$) 4.10¹ Market cap. (A$mn) 3,061.38 Executive remuneration may contribute to Yr avg. mthly trading (A$mn) 455 Last month's trading (A$mn) 469 share price overhang Projected return: Capital gain (%) -13.3 ■ Increasingly asset consultants are scrutinising fund manager Dividend yield (net %) 3.6 Total return (%) -9.7 portfolios. If a fund manager cannot give testimony that the companies 52-week price range 6.4 - 4.3 within its portfolio practice sound corporate governance then the investment * Stock ratings are relative to the relevant country benchmark. must carry additional justification. If no such alternative justification exists, then ¹Target price is for 12 months. a company may become, in funds management vernacular, “uninvestible.” Research Analysts This characterisation can become a stock overhang for many years. Larry Gandler 61 3 9280 1855 ■ TWE makes short-term incentive payments on global Group EBIT. [email protected] TWE announced that Group FY13 EBITS will be about A$216mn unadjusted Benjamin Levin for provisions made to relieve distributors of surplus stock. We argue that 61 3 9280 1766 [email protected] EBITS should be adjusted downward rather than treat costs that were within management’s control ‘below-the-line'. This would result in no FY13 ESG analyst payments of short-term incentives. Equally, the long-term incentive plan needs to include such adjustments. Sandra McCullagh 61 2 8205 4729 ■ TWE has the opportunity as a nascent ASX-listed company to establish [email protected] a reputation for sound governance. If TWE’s Board does not adjust its FY13 EBITS calculation to include provisions for distributor discounts it will be in effect, condoning management practices that has led to poor operating performance. Moreover, TWE’s Board needs to improve its oversight of distributor inventories. In the absence of such actions, investors and asset consultants may lose confidence in the company’s Board thereby inhibiting share price appreciation. ■ Our DCF-based valuation is A$4.10. Total return forecast in perspective Financial and valuation metrics 120% Year 06/12A 06/13E 06/14E 06/15E 100% Revenue (A$mn) 1,640.8 1,663.7 1,740.9 1,890.3 80% EBITDA (A$mn) 277.2 285.9 328.6 412.9 60% EBIT (A$mn) 209.5 212.9 243.1 321.4 40% Net income (A$mn) 136.5 134.1 156.4 207.1 20% Mean^ EPS (CS adj.) (Ac) 20.97 20.51 23.92 31.66 0% Sh Prc CS tgt^ -20% Change from previous EPS (%) n.a. — — — -40% Consensus EPS (Ac) n.a. 21.10 27.10 30.30 12mth Volatility* 52wk Hi-Lo IBES Consensus EPS growth (%) -35.9 -2.2 16.6 32.4 target return^ P/E (x) 22.6 23.1 19.8 14.9 Dividend (Ac) 13.00 14.00 17.00 22.00 Performance over 1M 3M 12M Dividend yield (%) 2.7 3.0 3.6 4.7 Absolute (%) -20.2 -20.1 5.3 P/B (x) 1.0 1.0 1.0 1.0 Relative (%) -24.2 -19.6 -16.0 Net debt/equity (%) 1.3 0.2 2.4 1.9 Relative performance versus S&P ASX 200.See Reference Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against Appendix for a description of the chart. Source: Credit Suisse ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency estimates, * Consensus, mean range from Thomson Reuters DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 16 July 2013 Figure 1: Financial summary Treasury Wine (TWE) 2011 2012 2013 Year2014 ending 302015 Jun 2011 2012 In AUDmn,2013 unless otherwise2014 stated2015 Profit & Loss 06/11A 06/12A 06/13E 06/14E 06/15E Share Price: A$4.80 16/07/2013 17:50 Sales revenue 1,737.5 1,640.8 1,663.7 1,740.9 1,890.3 RATINGRating UNDERPERFORM EBITDA(s) Pre-SGARA 266.0 277.2 285.9 328.6 412.9 TARGETTarget Price A$ 4.10 Depr. & Amort. 71.9 67.7 73.0 85.5 91.5 TP_UPSIDE*100vs Share price % -14.58 EBIT(s) Pre-SGARA 194.1 209.5 212.9 243.1 321.4 VALUATIONDCF A$ 4.30 SGARA adjustment pre-tax 24.1 23.4 0.0 0.0 0.0 Treasury Wine Estates Ltd.Its engaged in international wine business with a portfolio of wines. EBIT 170.0 186.1 212.9 243.1 321.4 Its business is structured into four regions: Australia and New Zealand (ANZ); Americas; Net interest 53.3 6.3 11.2 6.2 7.6 Europe, Middle East and Africa (EMEA), and Asia Pacific. Reported PBT 116.7 179.8 201.8 236.9 313.8 Income tax 20.4 60.7 68.6 80.6 106.7 Earnings 06/11A 06/12A 06/13E 06/14E 06/15E Profit after tax 96.3 119.1 133.2 156.4 207.1 c_EPS_SHARESEquiv. FPO (period avg.) mn 348.2 650.7 653.6 653.9 654.2 Associates 1.1 0.8 1.0 0.0 0.0 c_EPS*100EPS (Normalised) c 32.7 21.0 20.5 23.9 31.7 Minorities 0.3 -0.2 0.1 0.0 0.0 EPS_GROWTH*100EPS Growth % -35.9 -2.2 16.6 32.4 Unusual item after tax -33.0 -30.1 6.3 0.0 0.0 IBES_EPS_MEAN*100Consensus EPS c 20.8 21.0 25.8 29.0 Reported NPAT 64.1 90.0 140.4 156.4 207.1 IBES_EBT_MEANConsensus EBITDA mn 277.9 290.6 340.9 380.0 SGARA adjustment after tax 16.9 16.4 0.0 0.0 0.0 c_DPS*100DPS c 6.0 13.0 14.0 17.0 22.0 Unusual item after tax 33.0 30.1 -6.3 0.0 0.0 c_PAYOUT*100Dividend Payout % 18.3 62.0 68.3 71.1 69.5 Normalised NPAT 114.0 136.5 134.1 156.4 207.1 c_FCF_PS*100Free CFPS c 31.0 23.3 14.6 30.2 33.5 Balance Sheet 06/11A 06/12A 06/13E 06/14E 06/15E Valuation Cash & equivalents 64.8 28.6 29.3 18.0 17.0 c_PEP/E x 14.7 22.9 23.4 20.1 15.2 Inventories 768.5 711.5 751.4 786.3 788.8 c_EBIT_MULTIPLE_CURREV/EBIT x 16.4 15.0 14.6 13.1 9.9 Receivables 451.6 445.2 454.4 468.1 489.7 c_EBITDA_MULTIPLE_CUEV/EBITDA x 12.0 11.3 10.9 9.7 7.7 Other current assets 13.1 15.0 14.8 14.7 16.3 c_DIV_YIELD*100Dividend Yield % 1.3 2.7 2.9 3.5 4.6 Current assets 1,298.0 1,200.3 1,249.9 1,287.1 1,311.8 c_FCF_YIELD*100FCF Yield % 6.5 4.9 3.0 6.3 7.0 Property, plant & equip. 1,093.2 1,126.7 1,184.4 1,247.5 1,305.0 c_PBPrice to Book x 1.1 1.1 1.0 1.0 1.0 Intangibles 927.1 932.6 926.6 917.6 908.6 Returns Other non-current assets 385.4 561.2 588.3 544.6 569.5 c_ROE*100Return on Equity % 4.0 4.6 4.3 5.0 6.5 Non-current assets 2,405.7 2,620.5 2,699.3 2,709.7 2,783.1 c_I_NPAT/c_I_SALES*100Profit Margin % 6.6 8.3 8.1 9.0 11.0 Total assets 3,703.7 3,820.8 3,949.1 3,996.8 4,094.8 c_I_SALES/c_B_TOT_ASSAsset Turnover x 0.5 0.4 0.4 0.4 0.5 Payables 369.2 464.0 454.2 435.6 455.9 c_ASSETS/c_EQ_COMMONEquity Multiplier x 1.3 1.3 1.3 1.3 1.3 Interest bearing debt 137.1 65.7 36.1 92.3 77.7 c_ROA*100Return on Assets % 3.1 3.6 3.4 3.9 5.1 Other liabilities 320.6 351.8 350.6 350.7 357.3 c_ROIC*100Return on Invested Cap. % 5.4 4.7 4.5 5.0 6.5 Total liabilities 826.9 881.5 840.9 878.6 890.9 Gearing Net assets 2,876.8 2,939.3 3,108.2 3,118.2 3,204.0 c_GEARING*100Net Debt to Net debt + Equity% 2.5 1.2 0.2 2.3 1.9 Ordinary equity 2,872.5 2,935.5 3,104.3 3,114.3 3,200.1 c_NET_DEBT/c_I_EBITDANet Debt to EBITDA x 0.3 0.1 0.0 0.2 0.1 Minority interests 4.3 3.8 3.9 3.9 3.9 c_I_EBITDA/Int Cover c_I_NET_INTEREST(EBITDA/Net Int.) x 5.0 44.0 25.6 53.3 54.2 Preferred capital 0.0 0.0 0.0 0.0 0.0 c_I_EBIT/Int Cover c_I_NET_INTEREST (EBIT/Net Int.) x 3.6 33.3 19.1 39.4 42.2 Total shareholder funds 2,876.8 2,939.3 3,108.2 3,118.2 3,204.0 (c_C_CAPEX/c_I_SALES)*-100Capex to Sales % 4.3 4.3 4.5 8.0 7.4 Net debt 72.3 37.1 6.8 74.3 60.7 (c_C_CAPEX/c_I_DEPR)*-100Capex to Depreciation % 103.6 105.6 111.6 182.6 169.6 Cashflow 06/11A 06/12A 06/13E 06/14E 06/15E Segmentals EBIT 194.1 209.5 212.9 243.1 321.4 EBIT (S) Pre SGARA Net interest -24.4 -6.8 -11.2 -6.2 -7.6 c_I_EBIT_AUSAustralia Wine 95.2 108.2 106.8 126.4 131.6 Depr & Amort 71.9 67.7 73.0 85.5 91.5 % chg 13.7% -1.3% 18.3% 4.1% Tax paid -4.7 -59.9 -48.8 -60.6 -86.7 c_I_SALES_AUS % sales 16.5% 18.8% 18.2% 20.3% 20.6% Working capital 9.5 -9.8 -101.1 5.8 -45.0 c_I_EBIT_NORTH_AMERNorth America 92.2 79.1 73.5 37.1 92.0 Other -108.8 -21.1 0.3 -14.2 1.3 % chg -14.3% -7.1% -49.5% 147.9% Operating cashflow 137.6 179.6 125.1 253.5 274.9 c_I_SALES_NORTH_AMER % sales 11.9% 11.2% 10.6% 5.7% 12.4% Capex -74.3 -69.8 -74.7 -139.6 -139.9 c_I_EBIT_EUROPEEurope 6.5 5.7 14.4 42.5 48.8 Capex - expansionary -44.6 -41.9 -44.8 -83.8 -83.9 % chg -11.8% 152.8% 195.1% 14.8% Capex - maintenance -29.7 -27.9 -29.9 -55.9 -56.0 c_I_SALES_EUROPE % sales 2.1% 2.3% 5.9% 14.6% 15.8% Acquisitions & Invest 0.0 -14.7 -48.7 0.0 0.0 c_I_EBIT_ASIAAsia 27.4 41.2 54.9 78.6 90.9 Asset sale proceeds 13.7 6.6 -1.2 0.0 0.0 % chg 50.4% 33.2% 43.2% 15.6% Other 0.8 31.2 1.1 0.0 0.0 c_I_SALES_ASIA % sales 33.5% 38.8% 40.6% 45.2% 45.5% Investing cashflow -59.8 -46.7 -123.5 -139.6 -139.9 c_I_EBIT_OTHERCorporate -27.2 -24.7 -36.7 -41.6 -41.9 Dividends paid 0.0 -77.7 -84.1 -116.5 -116.6 c_I_EBITTotal EBIT(S) 194.1 209.5 212.9 243.1 321.4 Equity raised -2.5 -2.8 0.9 1.7 1.7 Net borrowings -62.5 -90.4 82.4 -10.3 -21.1 c_PUB_DRIVER_AUDUSDAUDUSD 0.9876 1.0317 1.0308 0.8982 0.8764 Other 0.0 -0.3 0.0 0.0 0.0 c_PUB_DRIVER_AUDGBPAUDGBP 0.6205 0.6511 0.6519 0.5817 0.5685 Financing cashflow -65.0 -171.2 -0.9 -125.1 -136.0 Total cashflow 12.8 -38.3 0.7 -11.3 -1.0 Adjustments -5.4 2.1 0.0 0.0 0.0 Source: Company data, Credit Suisse estimates Treasury Wine (TWE.AX / TWE AU) 2 16 July 2013 Management FY13 EBITS does not represent true underlying performance On Monday, TWE announced it would take a provision against goods sold to wholesalers that have become surplus stock and now need to be destroyed.