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Apr 3, 2024

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Treasury Wine Estates (TWE) Treasury wine estates (ASX: TWE) is one of the world's largest wine companies. In their aspiration to be the world's most admired wine company, their winemaking and brand marketing are centred around sustainable growth and meeting the evolving interests of their customers. They strive to be known for the unique experiences they create for their customers, suppliers, and partners. Currently, TWE has reached over 70 countries, have 11,300 hectares of vineyards and wine-making facilities and consists of 2,500 dedicated team members, which they claim to be "the heart and soul of the business" (Treasury Wine Estates, 2010) TWE competes in the highly competitive distillers and vintners’ market and operates in the food, beverage, and tobacco industry. Thanks to Australia's ideal winemaking climate, TWE is competing against many big businesses, with some of the biggest competitors including Australian Vintage Ltd (ASX: AVG), Constellation Brands Inc (ASX: STZ) and Pernod Ricard (ASX: RI) (Treasury Wine Estates - Overview, News & Competitors, 2023). TWE has remained committed to its core qualities, focusing on sustainable shareholder return. Despite facing ongoing pandemic-related restrictions that have affected its global operations, TWE has proven resilience, with its sales and E-commerce channels operating above pre-pandemic levels. Notably, earnings per share increased by 4.1% at the end of the 2022 financial year, and the business has a projected growth rate of 4.93%. These positive indicators make TWE a low-risk and attractive investment opportunity (TWE Annual Report, 2022 ). Dividend Discount Model Valuation Equity Cost Of Capital The capital asset pricing model (CAPM) was utilized to determine the aggregate equity cost of capital, which provides investors with a means of assessing the potential risks and rewards associated with investing in particular stock. To obtain the CAPM, a risk-free rate of 3.85%, a market portfolio returns of 8.5%, and TWE’s beta 5Y of 0.44 was used (Capital IQ, 2023). The resulting CAPM value was 5.98%. The CAPM model used can be seen below. CAPM = E [ R ] = R f + β × ( E [ R mkt ] R f ) E [ R ] = 5.98% Given that the discount rate derived from the CAPM model is higher than the risk-free rate of 3.85% and lower than the market portfolio return rate of 8.5%, it is suggested that although there is certainly some risk involved with investment, there is potential to earn a return rate higher than the risk-free rate. Moreover, with a discount rate of 5.98%, when compared to other companies in the market, TWE investments are somewhat risk associated but relatively safer. Growth Rate Estimation A growth rate estimation was conducted using net income to determine the potential short-term growth rate of TWE. Financial variables such as EBIT and revenue were ignored as EBIT includes tax and interest, and revenue is too easily affected by outside variables, hence would not determine a reasonable estimated growth rate regarding the dividend discount model. To gain a broad perspective of the firm's movement across different periods, six years were analyzed between 2017- 2022.
To estimate the potential growth rates, the percent in which net income increased each year was found. The arithmetic mean was found by averaging these values whilst the geometric mean was determined as seen below. geometric mean = [ ( 1 + G 1 ) ( 1 + G 2 ) ( 1 + G n ) ] 1 / n 1 ¿ 4.93% The geometric mean of 4.93% was the most reasonable estimate of short-term growth for TWE. The geometric mean was used rather than arithmetic, as the geometric mean considers compounding, and investors believe it to be a more representative measure of return compared to the arithmetic mean. Many qualitative factors may affect the accuracy of the estimated growth rate. Despite the pervasive impact of the pandemic on various industries and businesses, the food, beverage, and tobacco industry – TWE included – exhibited remarkable resilience, maintaining a solid growth rate throughout the pandemic period. However, the 2018 growth rate suggests the pandemic may have constrained its growth potential. TWE's growth rate increased drastically in 2022, suggesting that, for long-term investors, earnings growth is likely to reach pre-pandemic rates (2018) in 8-10 years. In the interim, TWE stock presents a compelling investment opportunity with growth potential and a dividend yield of 2.27% (Capital IQ, 2023). TWE growth rate using net income year 2017 2018 2019 2020 2021 2022 net income 269.1 408.5 245.4 250 263.2 342.3 Growth rate of net income - 51.80% -39.93% 1.87% 5.28% 30.05% 1 + g 100% 151.80% 60.07% 101.87% 105.28% 130.05% Arithmetic Mean 9.82% Geometric Mean 4.93% The industry growth rates were determined using net income to analyse further TWE’s growth rate and position within the market. The geometric mean for the industry growth rate was 2.98%, while the compounded annual growth rate over the last 3 years for the sub-industry is 9.4% (Capital IQ, 2023). Compared to the industry growth rate, TWE is operating above the industry average for food, beverage, and tobacco, suggesting that it is expanding faster than its rivals in the industry. Moreover, TWE’s compounded annual growth rate over the last 3 years (11.73%), exceeds the sub- industry growth rate. TWE is performing well, indicating TWE’s ability to outperform other competitors in this industry niche. Overall, TWE is well-positioned within the industry, and is an attractive investment for investors. Industry growth rate using net income year 2017 2018 2019 2020 2021 2022 net income 50.60 52.10 43.60 50.00 55.10 58.60 Growth rate of net income - 2.96% -16.31% 14.68% 10.20% 6.35% 1 + g 100% 102.96% 83.69% 114.68% 110.20% 106.35% Arithmetic Mean 3.58% Geometric Mean 2.98% DDM Valuation A DDM valuation was carried out to calculate an estimated intrinsic value of Treasury Wine Estates (TWE), over ten years, from 2017 to 2027. The growth rate from dividends per share from 2017 to 2022 was calculated using exact data. Future expected dividends (2023 to 2027) were determined using the 10.71%, derived from the growth rate calculated between 2021 and 2022 DPS (Capital IQ, 2023). Example 2023 equation seen below. Estimated DPS = Previous year DPS X ( 1 + estimated growth rate )
¿ 0.31 X ( 1 + 10.71% ) ¿ 0.38 Applying this growth rate across the five years allowed for determining the stock's current value each year, which produced an intrinsic value of 2.08. Example calculations seen below. Determining stocks current value 2025: Current value = DPS /( ( discount rate + 1 ) n ) ¿ 0.42 /( ( 5.98% + 1 ) 4 ) ¿ 0.33 Intrinsic value: Intrinsic value = DPS ( discount rate + 1 ) 1 + DPS ( discount rate + 1 ) 2 + DPS ( discount rate + 1 ) n Intrinsic value = 0.31 ( 5.98% + 1 ) 1 + 0.34 ( 5.98% + 1 ) 2 + 0.52 ( 5.98% + 1 ) 6 ¿ 2.08 TWE's current share price of 13.68 suggests that the stock is overvalued by 84% in the market, and it is suggested that investors refrain from purchasing TWE stocks. DDM Future expected Dividends year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 DPS 0.26 0.32 0.38 0.28 0.28 0.31 0.34 0.38 0.42 0.47 0.52 Growth rate - 23.08% 18.75% - 26.32% 0.00% 10.71% 10.71 % 10.71 % 10.71 % 10.71 % 10.71% 1 + g 100 % 123.08 % 118.75 % 73.68% 100.00 % 110.71 % Current value 0.29 0.31 0.32 0.33 0.47 0.36 Terminal value 51.51 Value Multiples P/BV The price-to-book (P/BV) ratio is a key valuation metric often used to assess the investment potential of a company’s stock by comparing its market price per share with its book value per share. Generally, a P/BV below 1 indicates undervalued stock, meaning it trades for less than the value of its assets, whereas a P/BV above three is seen as overvalued (Bromels. J, 2020). In the case of Treasury Wines Estates, its average P/BV value is 2.47 (Capital IQ, 2023), indicating the current market price of TWE’s stock is 2.47 times the book value of the company’s assets and that TWE’s stock is currently trading at a premium. When compared to its biggest competitors, such as STZ and RI, TWE’s P/BV is lower, suggesting that its stock is not nearly as overvalued as two of its largest competitors. However, when compared to AVG, TWE’s P/BV suggests that it is far from the most undervalued stock in the market, and there are competitors which would provide a larger margin of safety for investors. Arithmetic mean 2.475 5.98% Arithmetic mean 7.98% Intrinsic value 2.08 Current price 13.68 difference 84.79% P/BV values compared amongst competitors Business Average P/BV value between 2022 - 2025 Treasury wine estate (TWE) 2.475 Constellation Brand Inc (STZ) 4.0725 Australian Vintage Ltd (AVG) 0.4 Pernod Ricard (RI) 3.25 Year 2022 2023 2024 2025 closing share price 13.68 13.68 13.68 13.68 book value per shar 5.24 5.43 5.63 5.85 P/BV Value 2.61 2.52 2.43 2.34
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