The Treasury Wine Estates Ltd (ASX: TWE) share price was well and truly out of form in 2020.
Over the 12 months the wine company’s shares lost approximately 43% of their value.
Why did the Treasury Wine share price crash lower in 2020?
There was one major catalyst for the company’s bitterly disappointing share price performance over the last 12 months.
It started in August when reports first emerged suggesting that China was preparing to put import duties on Australian wine exports amid allegations of wine dumping.
This then became a reality in November when the Chinese Ministry of Commerce (MOFCOM) officially announced tariffs on Australian wine exports.
Treasury Wine was hit particularly hard and revealed that the MOFCOM had applied a deposit rate of 169.3% to the imported value of its wine in containers of two litres or less.
This provisional measure is in place until 28 August 2021 at the latest. Though, the company advised that the final determination of the anti-dumping investigation will determine if the measure will be maintained, adjusted, or removed beyond that date.
What impact does this have?
Unfortunately for Treasury Wine, it has been generating a significant amount of revenue in the China market.
In FY 2020, China represented approximately two-thirds of the total Asia region earnings or 30% of its overall group earnings. This is predominantly from its luxury and masstige wine, which can ill-afford to have prices increased by ~169%.
In light of this, management has warned that while the provisional measure remains in place, demand for its portfolio in China is expected to be extremely limited.
Will 2021 be better for Treasury Wine?
Management has been busy developing a detailed response plan which aims to reduce the impact on its earnings and maintain the long-term diversification and strength of its business model and brands.
However, it notes that the benefits are likely to be limited in FY 2021 and will progressively reach their full potential over a two to three-year period.
As a result, 2021 looks set to be a tough year for the wine company. But with its share price losing half of its value in 2020, it’s probably fair to say that this is already reflected in its valuation.
Though, one broker that is still sitting on the fence is Goldman Sachs. It has a neutral rating and $8.60 price target on its shares.
Goldman is forecasting earnings per share of 31 cents, 46 cents, and 53 cents, respectively, over the next three years. This means its shares are changing hands for 31x estimated FY 2021 earnings at present.
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Returns as of 6th October 2020
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. 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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