The Treasury Wine Estates Ltd (ASX: TWE) share price could be great value at current levels.
That's the view of analysts at Goldman Sachs, which have just upgraded the wine giant's shares.
What is Goldman Sachs saying about the Treasury Wine share price?
According to the note, the broker has upgraded the company's shares from neutral to a buy rating with an improved price target of $14.70.
Based on the current Treasury Wine share price of $12.64, this implies potential upside of 16% for investors over the next 12 months.
The broker is also expecting a 3% dividend yield in FY 2023, bringing the total potential return on offer to approximately 19%.
Why is Goldman bullish on this ASX 200 share?
Goldman has been looking at just how sustainable the growth of Penfolds is in Asia-ex-Mainland China.
The good news is that the broker believes its growth is sustainable with a high earnings margin. It explained:
Whilst our analysis are directional estimates only, we expect sufficient premium market demand to support a revenue range of A$380mn-A$450mn (TWE FY22 A$385mn) with a relatively high quality distribution model focused on modern trade and on-premise key accounts. This revenue range implies ~21% market share of the premium import market and ~6% total wine market across these 7 Asia Focus Markets. As a result, we now have higher confidence of sustainable revenue growth at ~42.5% EBITS margin (vs prior ~40%) for Penfolds.
The broker has also been looking at the recently acquired Frank's Family Vineyards (FFV) business and highlights that the latest US data supports a more sizeable distribution opportunity at accretive margins. As a result, it now expects "FFV to contribute >20% of Americas sales and >40% of EBITS by 2030."
All in all, this has led to the broker bumping its earnings forecasts higher for the coming years. Which it believes makes the Treasury Wine share price great value based on current multiples. It concludes:
With proven redirection of Penfolds China volumes as well as refocusing Treasury Americas on premium/luxury, TWE is now re-entering a growth phase with a more diverse and defensive business. We have increased our FY23-25e sales and NPAT by 1%-5% and 5%-13% and now expect the company to deliver ~16% NPAT 2022-25e CAGR. The company is trading at a 12m forward P/E of 22.6x, vs our TP implied P/E of 26.3x. Upgrade to Buy (from Neutral), A$14.7/sh TP (previous A$12.0) implying 19% TSR.
