Can Treasury Wine Estates Ltd be the punchbowl of Asia?

Credit: Penfolds

There’s been a lot of talk recently about the best investments currently being in the agricultural sector due to Australia’s ability to act as the food bowl of Asia.

Well, Treasury Wine Estates Ltd (ASX: TWE) has potential to act as the punchbowl of Asia with its stable of premium wine brands selling in Asia and especially China to a fast-growing middle class and urban elite. Those brands include Lindeman’s, Wolf Blass, Rosemount Estate and the high-margin Penfolds.

The potential has not escaped the attention of overseas investors, with private equity group Kohlberg, Kravis, Roberts (KKR), recently making a $4.70 per share takeover proposal.

However, that offer was rejected as not representing the fundamental value of the company, with it intending to address the cost base itself. The intention is to spend some of the anticipated cost savings on more marketing to improve sales. If successful this should support bottom-line growth, which has suffered from a series of mishaps recently.

Indeed legal eagles Bentham IMF Ltd (ASX: IMF) are currently chasing TWE for compensation for shareholders over its alleged misleading conduct in disclosing just how bad the issues were with its U.S. operations during most of FY 2013.

Whatever the result of the legal action TWE says U.S. operational issues are now behind it, with chief executive Michael Clarke christening FY 2015 a reset year, in which TWE realises the benefits of sweeping changes.

As the world’s second-largest listed wine company with $1.7 billion in revenues, TWE does appear to have turnaround potential. Although wine businesses do remain risky investments as they suffer from the known unknowns like the weather, quality of wine produced and changing consumer fashions.

However, the growing Asian and Chinese demand is a large positive alongside the relative strength of Australian viticulture, compared to reported declines across the U.S., Europe and South America.

TWE currently sells for $5.10 on a price-earnings around 20 based on analysts’ forecast for earnings per share in FY 2015. The prospect of an improved takeover offer from KKR or another investor also remains a real possibility.

If the group can deliver on its turnaround strategy, or an improved takeover offer materialises, today’s buyers may be sitting on healthy profits in the near or long term.

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Motley Fool contributor Tom Richardson has no financial interest in any company mentioned. You can find him on Twitter @tommyr345

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