Why the Treasury Wine (ASX:TWE) share price is surging higher today

The embattled Treasury Wine Estates Ltd (ASX: TWE) share price is finally catching a break!

The TWE share price surged 8% to $8.60 during lunch time trade to become the third best performer on the S&P/ASX 200 Index (Index:^AXJO).

Only the Tabcorp Holdings Limited (ASX: TAH) share price and News Corporation Class B Voting CDI (ASX: NWS) share price are doing better. The former due to takeover rumours while the latter just posted its quarterly result.

TWE share price jumps on broker upgrade

In TWE’s case though, the stock’s big bounce coincides with Citigroup upgrading the alcoholic beverages company to “buy” from “neutral”.

However, the broker also slapped a “high risk” warning on the stock as China’s import ban looms large.

The Asian giant is ratcheting up its punishment on Australia by imposing import restrictions on a wide range of Australian goods. The not only includes Aussie wine but also beef, barley, timber and copper.

Turning wine to water

Chinese authorities have launched an investigation on alleged wine dumping by Aussie vineyards, and is using this as a reason to impose import restrictions.

The news caused the Treasury Wine share price to collapse to a near five-year low of $7.96 yesterday.

“Given the recent share price fall, the upside risk is now appealing,” said Citi.

“While the situation is political, we believe there is no evidence of dumping in China of premium wines.

“Treasury may be in a better position than most if tariffs are targeted towards lower priced wines.”

Don’t depend on logic

But evidence is an optional ingredient to a conviction in the Chinese enforcement machinery. The next few weeks will be a nail-biter for TWE shareholders.

The country may halt imports of all Aussie wine for up to six weeks as its Commerce Ministry collates the questionnaires that Aussie wine makers have to fill in as part of the investigation.

What is TWE worth without China?

However, even with the loss of the Chinese market, the TWE share price may still look good value. Citi estimates a 30 to 38 cents a share hit to group earnings if TWE was locked out of China.

“With this EPS range and a P/E ratio of 22x, the share price would be between $6.70 and $8.40,” added Citi.

“The share price is mostly factoring in the loss of China already in our view.”

Valuation support for TWE share price growing

Citi isn’t alone in coming to that view. Morgan Stanley reiterated its “overweight” recommendation on the TWE share price as it believes too much China bad news is priced into the stock.

Citi’s 12-month price target on the TWE share price is $10.40 a share, while Morgan Stanley’s target stands at $11 a share.

More reading

• Tabcorp (ASX:TAH) share price rallies 16% on takeover rumours
• OFX (ASX:OFX) and WiseTech (ASX:WTC) share prices rally on new partnership
• Why the News Corp (ASX:NWS) share price has jumped 8%
• 5 things to watch on the ASX 200 on Friday
• ASX 200 shoots 1.3% higher on Thursday

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

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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