The top 200 benchmark dipped 0.3% while shares in the alcoholic drink supplier slumped 4% to $10.52 after one of its biggest supporters downgraded the stock.
UBS cut its recommendation on Treasury Wines to “neutral” from “buy” on the back of management’s dismal trading update.
Downgrades come in threes
The company expects FY20 EBITS (earnings before interest, tax, the agricultural accounting standard SGARA and material items) to range between $530 million and $540 million. This is around 6% below consensus forecasts.
That doesn’t sound like much, but the broker believes there is a chance of a further profit warning for its Americas business.
The broker believes about 60% of the weakness in sales in that region is driven by the COVID-19 pandemic. But Treasury Wine is also losing market share and the industry is in oversupply.
While UBS still believes the stock represents a longer-term opportunity, it acknowledges the lack of near-term catalysts for the stock. The broker’s price target on TWE is cut to $11.80 from $14.80 a share.
The fact that the electric utility isn’t falling harder may be due to the perceived defensiveness of its business during these highly volatile times.
But AGL may be proving a false sense of security as Macquarie believes its earnings are at risk of falling when customer contracts come up for renewal.
Spot electricity prices are significantly lower than the contracted price due to weakening demand from ongoing recession (short-term impact) and the growth of renewables and battery storage (longer-term).
AGL’s expiring contract with Alcoa only adds to its woes. The broker estimates that Alcoa is paying around $55 to $60 per megawatt hour under the contract and this could drop to circa $40/MWh when it resigns.
That equates to an up to $80 million earnings hit for AGL in FY22 if AGL resigns the aluminium producer as a client.
Macquarie’s 12-month price target on the stock is $15.91 a share.
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Returns as of 6th October 2020
Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited 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 Scott Phillips.
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