Have ASX shares in the Australian wine sector bottomed?

ASX shares in the Australian wine sector may be close to finding a bottom as China resumes operartions and local demand surges.

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ASX shares in the Australian wine sector have had a tough time of late. Following 2 years of severe drought, bushfires that ravaged the country last summer decimated some of the remaining wineries.

The coronavirus pandemic has been the recent headwind that has hit the industry, sapping demand from China and bringing supply chains to a halt. However, with the Chinese economy getting ready to recover and surging consumer demand at bottle shops, ASX shares in the wine sector may have bottomed.

So with that in mind, here are 2 winemakers on the ASX to keep an eye on.

Treasury Wine Estates Ltd (ASX: TWE)

The Treasury Wine share price has struggled in 2020, down around 40% for the year, and is currently trading at multi-year lows. The company recently made headlines with rumours that Treasury was considering a demerger of its flagship Penfolds business into a separate company listed on the ASX.

Treasury is also facing a potential class action from shareholders, who allege that the company breached continuous disclosure law when it revealed an unexpected decline in profits from its US operations earlier this year. China remains the most profitable market for Treasury, with sales mainly driven by demand for its luxury and prestige brands, such as Penfold.

Recently, the winemaker announced it had collaborated with prominent US rapper Snoop Dogg. The multi-year partnership will see the entertainment icon launch a personalised brand in collaboration with Treasury’s ’19 Crimes’ segment. The marketing venture is designed to reignite demand in the US for Treasury’s commercial products.  

In addition, Treasury Wine provided an update earlier this month reassuring investors that supply chain operations continue to function. The company also noted that operations in China have resumed and cited the strong retail demand as consumers stock products for in-home consumption during the government shutdown periods.

Australian Vintage Limited (ASX: AVG)

Last week, Australian Vintage reported a 22% increase in grape crushing volume, despite the impact of drought and bushfires. The company also reported that grape yields from owned and leased vineyards increased 29% from the previous year. As a result, Australian Vintage lifted its full-year guidance for FY20 net profit after tax growth to a range of 25% to 30%, in comparison to previous forecasts of growth between 20% to 25%.

Australian Vintage is one of Australia’s largest vertically integrated producers and distributors of wine. The company’s affordable McGuigan brand has seen increased consumer demand in Australia and the UK recently, due to changed buying habits amid the coronavirus pandemic. The recent update from Australian Vintage points to a solid performance and reflects strong growth of its core brands.

Should you buy?

In my opinion, ASX shares in the Australian wine sector will continue to face headwinds in the short term. However, as macro and micro economic factors improve post-coronavirus, I think these shares could offer great long-term value and growth prospects.

A prudent strategy would be to keep an eye on shares in the wine sector and wait for positive price action before making an investment decision.   

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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 Scott Phillips.

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