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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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TEV/EBITDA Total enterprise value/earnings before taxes, depreciation, and amortization (TEV/EBITDA) is a further valuation metric often used in conjunction with other metrics to evaluate a company’s financial standing and value. While incorporating companies assessed worth (EV) and their overall financial performance and profitability (EBITDA) allows investors to compare companies’ worth within the same industry. A lower ratio often suggests the company is undervalued, whilst a higher one indicates the company is overvalued. Typically, a ratio below 10 is ideal; however, it is essential to consider other ratios within the industry before concluding (Maverick. JB, 2022). At an average ratio of 14.335, TWE’s TEV/EBITDA ratio is comparatively low compared to its sub-industry competitors. For instance, RI and STZ have ratios of 22.5 and 16.5, respectively. Whilst TWE’s ratio could be lower to compete with the AVG’s average ratio of 6.77, TWE has been able to generate strong cash flows – with a strong cash conversion rate of 104.3% - in relation to its enterprise value and performs better than some of its competitors (TWE Annual report, 2022). This suggests that TWE can maintain a strong financial position and value despite not having the lowest ratio amongst its biggest competitors. TEV/Total Revenue Used in conjunction with previous valuation metrics, TEV/revenue compares a company's enterprise value with its revenue, which is especially useful in the context of acquisitions to determine a fair value for stock (Hargrave. M, 2021). Analysts generally consider a lower TEV/Total revenue more promising as it often suggests an undervalued firm in the industry. TWE's ratio of 4.08 is just below two of its biggest competitors, STZ and RI, which have ratios of 5.5 and 5.3, respectively. Additionally, TWE's ratio is dramatically higher than AVG's, suggesting that TWE's stock and two of its other biggest competitors may be overvalued. Investors may consider a more cautious approach before investing in TWE's stock in light of other competitors delivering much lower ratios. Year 2022 2023 2024 2025 Last close TEV 11,126.14 11,124.54 11,124.54 11,124.54 Total revenue 2531.8 2621.76 2813.19 2952.5 TEV/revenue value 4.39 4.24 3.95 3.77 Arithmetic mean 4.0875 Year 2022 2023 2024 2025 Last close TEV 11,126.14 11,124.54 11,124.54 11,124.54 EBITDA 647.9 757.91 843.26 904.48 TEV/EBITDA value 17.17 14.68 13.19 12.3 TEV/EBITDA values compared amongst competitors Business Average TEV/EBITDA value between 2022 - 2025 Treasury wine estate (TWE) 14.335 Constellation Brand Inc (STZ) 22.5025 Australian Vintage Ltd (AVG) 6.765 Pernod Ricard (RI) 16.505 Arithmetic mean 14.335 TEV/Revenue values compared amongst competitors Business Average TEV/ Revenue value between 2022 - 2025 Treasury wine estate (TWE) 4.0875 Constellation Brand Inc (STZ) 5.5675 Australian Vintage Ltd (AVG) 0.9425 Pernod Ricard (RI) 5.3575
Overall, TWE’s valuation multiples are on par with the industry averages, suggesting that while it may not be the most competitive or financially healthy firm, it still presents a good investment opportunity with relatively stable value multiples. Comparison of DDM valuation and Value Multiples The DDM and value multiples approach gave different recommendations for TWE stock. The DDM valuation suggested that TWE's stock is overvalued by 84%. In comparison, the metric value analysis suggested that TWE's valuation multiples are either on par with or below the industry average, implying that TWE is a good investment opportunity as its stock is currently undervalued. A potential reason that this analysis' yielded different results is that the DDM and value multiples consider separate measures. The DDM is a more specific valuation model considering the company's expected future cash flows and DPS. The value multiples approach takes a more holistic view of the company's financial performance, considering specific variables such as revenue, enterprise value, and EBITDA. It is recommended that the DDM valuation approach be used instead of the value multiples approach. This is because dividends indicate the true value of the firm's stock as they represent cash flows to the shareholder and can provide a reasonable estimate for TWE as it has had consistent and stable dividend payments for the last five years (Nguyen. J, 2022). Additionally, a reasonable estimate was able to be made on the firm's intrinsic stock value and terminal value using DDM valuation as it lacks the uncertainty often present in measures involving revenue due to revenue easily being affected by external factors. Whilst the value multiples provide helpful analysis of the firm's value, investors believe DDM to be a much more accurate measure as it lacks subjectivity and does not simplify complex information to a single value, like value multiples (Corporate Finance Institute, 2022). Dividend pay-out ratio – 10% Increase If TWE’s dividend pay outs per share were to increase by 10%, this would likely, at first glance, make the stock more attractive to income seeking investors. However, it is important to consider how this 10% increase will affect TWE’s ability to retain earnings, which could impact the company’s ability to fund future growth opportunities. It is possible that this increase in dividend payout ratio would come at the expense of reinvestment and long-term growth, and thus would not be sustainable (Hayes. A, 2023). Additionally, the DDM valuation suggested that TWE’s stock was over-valued by 84%. If TWE increased its payout ratio by 10%, the growth rate of DPS would remain constant, however, the intrinsic value would increase from 2.08 to 2.29. Whilst this is an increase in intrinsic value, it still suggests that the stock is over valued by 83% respectively. Thus, it is still recommended that investors refrain from purchasing TWE’s stock.
Reference List Bromels, J. (2020, December 9).  Using the Price-to-Book Ratio to Analyze Stocks . The Motley Fool. https://www.fool.com/investing/how-to-invest/stocks/price-to-book- ratio/ Capital IQ. (2023). Australian Vintage Limited (ASX:AVG). S&P Global Market Intelligence, S&P Global Inc. https://www.capitaliq.com/CIQDotNet/company.aspx? companyId=879165 Capital IQ. (2023). Constellation Brand Inc (ASX:STZ). S&P Global Market Intelligence, S&P Global Inc. https://www.capitaliq.com/CIQDotNet/company.aspx? companyId=258589&fromSearchProfiles=True Capital IQ. (2023). Distillers and Vintners (Sector). S&P Global Market Intelligence, S&P Global Inc. https://www.capitaliq.com/CIQDotNet/Lists/KeyStats.aspx? listObjectId=100886238 Capital IQ. (2023). Pernod Ricard (ASX:AI). S&P Global Market Intelligence, S&P Global Inc. https://www.capitaliq.com/CIQDotNet/company.aspx?companyId=874314 Capital IQ. (2023). Treasury Wine Estates (ASX:TWE). S&P Global Market Intelligence, S&P Global Inc. https://www.capitaliq.com/CIQDotNet/company.aspx? companyId=128792870 Corporate Finance Institute. (2022, December 11).  How to Choose the Best Stock Valuation Method . Investopedia. https://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuation- methods.asp#:~:text=The%20justification%20for%20using%20dividends Hargrave, M. (2021, February 21).  When You Should Use the EV/R Multiple When Valuing a Company . Investopedia. https://www.investopedia.com/terms/e/ev-revenue- multiple.asp#:~:text=The%20enterprise%20value%2Dto%2Drevenue%20(EV%2FR) Hayes, A. (2023, February 6).  Dividend Payout Ratio Definition, Formula, and Calculation . Investopedia.
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https://www.investopedia.com/terms/d/dividendpayoutratio.asp#:~:text=If%20the %20result%20is%20too Maverick, J. B. (2022, April 10).  What Is Considered a Healthy EV/EBITDA ?  Investopedia. https://www.investopedia.com/ask/answers/072715/what-considered-healthy- evebitda.asp#:~:text=The%20EV%2FEBITDA%20ratio%20is Nguyen, J. (2022, February 19).  How to Choose the Best Stock Valuation Method . Investopedia. https://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuation- methods.asp#:~:text=The%20justification%20for%20using%20dividends Treasury Wine Estates. (2010).  About - Treasury Wine Estates . Tweglobal.com. https://www.tweglobal.com/about Treasury Wine Estates. (2022, July 18).  TWE 2022Annual Report . LISTCORP. https://www.listcorp.com/asx/twe/treasury-wine-estates-limited/news/2022-annual- report-2748939.html Treasury Wine Estates - Overview, News & Competitors | ZoomInfo.com . (2023). ZoomInfo. https://www.zoominfo.com/c/treasury-wine-estates/346517805