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Treasury Wine Estates Ltd hits record high but UBS is tipping more gains

The share price of Treasury Wine Estates Ltd (ASX: TWE) surged 4% to an all time high of $16.57 yesterday after UBS upgraded the stock to “buy” from “neutral” on the belief that exports to China is set to accelerate further.

It is hard to believe the stock had been under duress three-odd years ago as a glut in grapes nearly brought winemakers to its knees.

But the stock has been on a one-way winning streak since and is up nearly 50% over the past 12-months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up around 7%.

Treasury Wine is the second best large cap performer and is only a fraction behind gaming machine maker Aristocrat Leisure Limited (ASX: ALL), which surged 53.5%. Third and fourth on the ladder includes miner South32 Ltd (ASX: S32) and sleep disorder treatment device company ResMed Inc. (CHESS) (ASX: RMD).

There is more room for the Treasury Wine to climb, according to UBS. The broker undertook a survey in China and has concluded that there is “material opportunity” for the company to growth both value and volume share over the next three to five years, and believes that Asia will be the biggest earnings contributor for the group by FY19.

UBS surveyed close to 2,000 Chinese wine consumers and have uncovered three trends that will drive Treasury Wine’s growth in that country.

The first is the “wealth effect” with growing household affluence prompting consumers to drink more wine.

Secondly, status-conscious Chinese are also moving more towards imported wine and UBS believes that US and Australian wines are still materially underrepresented in that market, even though they are well regarded.

What’s more, the broker found that Treasury Wine’s brands have a minute market share but rate highly as wine that consumers would like to try. This means the company has a large opportunity to grow in that market.

“We believe, while the opportunity is understood, the scope for EBITS upgrades, particularly with respect to profitability (EBITS margin) is not factored into the price,” said the broker.

“We believe TWE is well positioned to upgrade margin targets in FY19, via strong pricing, operating leverage and US channel clarity.”

EBITS is earnings before interest, tax, SGARA and material items. SGARA refers to self-generating and regenerating assets, an accounting definition that is applied to agricultural businesses.

UBS has upped its price target on the stock to $17.30 from $13.00 and is forecasting a dividend of 39.8 cents a share for FY19.

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Motley Fool contributor Brendon Lau owns shares of South32 Ltd. The Motley Fool Australia has recommended ResMed Inc. and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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