In early trade the Treasury Wine Estates Ltd (ASX: TWE) share price sank 3% before recovering to be 1% higher following the release of the wine company's full-year results.
Here are key highlights from the release:
- Net sales revenue up 7.6% to $2,401.7 million. Up 11.3% in constant currency.
- Earnings before interest, tax, SGARA, and material items (EBITS) of $455.1 million, up 36% on a reported currency basis.
- Reported net profit after tax up 55% to $269.1 million.
- Earnings per share up 50% to 36.5 cents per share.
- Outlook: Targeting EBITS growth and EBITS margin accretion in FY 2018.
While I felt this was yet another solid result from this high quality company, its guidance for FY 2018 was a touch vague and could be the reason for its share price decline first thing this morning.
One of the biggest drivers of the explosive profit growth was Treasury Wine's continued success in the Asia market.
A 48.7% increase in volume in the region ultimately led to a 34.5% increase in net sales revenue (NSR) to $394.3 million.
Although NSR per case fell from $123.48 to $111.70, this was the result of changes in product mix due to its portfolio expansion in the market.
Despite the drop in NSR per case, the region is still by far the most profitable one it operates in, commanding an EBITS margin of 38.1%. I believe this bodes well for the future given the insatiable demand for wine in China.
Elsewhere the Americas segment continues to be the company's biggest contributor of sales, delivering a 7.2% increase in NSR to $1,062 million. During the year the Americas segment saw its NSR per case rise 4% to $68.72 and its EBITS margin expand to a healthy 17.8%.
Finally, both the Australian/New Zealand and European segments saw their NSR mostly flat year-on-year, but pleasingly made up for it through EBITS margin expansion.
Should you invest?
Based on its current share price and its full-year earnings per share of 36.5 cents, Treasury Wine's shares are changing hands at 34x earnings prior to today's decline.
Which is undoubtedly a significant premium to the market average and needs bumper profit growth to justify.
However, according to today's release, management is targeting EBITS growth and EBITS margin accretion in FY 2018.
The vagueness of this guidance doesn't fill me with a lot of confidence that the company will be able to deliver profit growth that justifies the premium its shares trade at.
In light of this, I would suggest investors hold off an investment until management adds a bit of colour to its guidance.
In the meantime I would suggest investors consider other growth shares with exposure to China such as a2 Milk Company Ltd (Australia) (ASX: A2M) and BWX Ltd (ASX: BWX).
