The Treasury Wine Estates Ltd (ASX: TWE) share price is down 3.8% to $15.57 in trade today on the back of news reports in The Australian that its CEO of Asia, Peter Dixon, has resigned from the role, although the company itself has not acknowledged the news as accurate.
China is commonly flagged by Treasury’s management and analysts as the wine seller’s great growth market so instability amongst its senior management team in complex Asian markets will be unwelcome for investors.
Largely in response to its Asian growth prospects Treasury is forecasting full year EBITS growth of 25% and fiscal 2020 EBITs growth of 15%-20%.
These are some ambitious and impressive forecasts for a wine retailer and at $15.57 Treasury trades on 25x annualised earnings per share of 61 cents after delivering 30.5 cents in first half 2019 earnings.
It’s an exciting story on paper given the growing discretionary spending power of the Asian middle class, but looking through its interim financials and presentations there are a couple of issues for investors to consider.
Net debt ballooned from $802.3 million at the start of fiscal 2019 to $950.4 million just six months later as at December 31 2018, which represents 2x what the company calls lease adjusted net debt to EBITDAS.
Total debt stood at a significant $1,128 million, with cash on hand of $183 million.
Another issue is cash flow with cash conversion to reported revenue of just 53.5% over the period, or 85% over the “seven months ended January”.
In total the group expects just a 60% to 70% cash conversion over fiscal 2019 and it’s the weak cash conversion that is increasing the debt profile.
Evidently, the complex Asian markets are something of a double edged sword for Treasury with past news reports questioning its management of inventory levels, working capital requirements, and alleging distributors were sitting on large backlogs of wine in China.
The group also lost its chief operating officer in January 2019 for unexplained reasons and took on a new CFO in May 2018.
As such I’m not a buyer of Treasury shares, despite the Asian growth thematic, strong profit growth forecasts, and impressive turnaround story over the last couple of years. Moreover, if the company meets its own forecasts the share price is likely to move higher.
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