Is the Treasury Wine share price a buy?

Unlike a large proportion of shares on the ASX, the Treasury Wine Estates Ltd (ASX: TWE) share price has failed to bounce substantially from its post-pandemic lows. However, a recent deal negotiated by the federal government could turn the fortunes for Australian wine companies and the industry.

Why has the Treasury share price failed to bounce?

The Treasury Wine share price has only managed to bounce around 30% from its mid-March lows and is currently trading down more than 28% for 2020. This recovery dulls in comparison with the double and triple-digit recovery we have seen in other shares on the ASX.

Earlier this year, Treasury materially reduced market expectations citing an unexpected decline in profits from its US operations. The owner of famous brands like Wolf Blass, Lindemans and Penfolds was not spared during the COVID-19 pandemic, with Treasury acknowledging a decline in demand from China for its luxury wines.

In the company’s most recent trading update, Treasury informed investors that the COVID-19 pandemic and global lockdowns in major markets has reduced on-premise and cellar door sales. The company now expects earnings before interest, tax and accounting in FY20 to be between $530 million and $540 million. This compares to management’s guidance of $716–750 million at the interim result, which was then withdrawn on 25 February.

What deal has the federal government made?

According to a recent article in the Australian Financial Review, the federal government recently negotiated a deal that has lifted Canadian restrictions on Australian imports. Previous restrictions on Australian imports included a variety of taxes, markups and sales requirements. The new deal will lift these restrictions, allowing Australian wine producers and exporters like Treasury to take advantage of a market worth approximately $200 million per year.

Should you invest?

In my opinion, although the federal governments deal is a great win, I think that Treasury and the Australian wine sector in general faces multiple headwinds in the short term. Earlier this year, Treasury announced that it was considering a demerger of its flagship Penfolds business into a separate company listed on the ASX, which has further clouded the outlook for the company.

Despite the uncertainty, Treasury has reported positive signs of recovery in its major markets, which could see the company’s share price recover in the longer term. Instead of jumping the gun and buying shares in the company, I think a prudent strategy would be to wait until Treasury releases its full-year report in the August reporting season to get a better idea before investing.

In addition to Treasury, another listed wine company you might want to keep an eye on is Australian Vintage Limited (ASX: AVG).

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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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