Investor sentiment towards Treasury Wine Estates (ASX:TWE) over the last 12-18 months has been impacted by several factors. These include: i) Weak premium wine demand in China, ii) Challenges in the US business, and iii) Inventory write-downs and restructuring.

We recently researched the Company in The Dynamic Investor after the Company provided additional detail around its new strategy. With the shares continuing to trade at a discount, we consider whether current levels present value.

About Treasury Wine Estates

Treasury Wine Estates is one of the world’s largest vertically integrated wine companies. The Company has a strong global presence. Operations span across Australia and New Zealand (ANZ), Asia, the Americas and Europe, Middle East and Africa (EMEA).

TWE operates three business segments: Penfolds, Treasury Americas and Treasury Collective. TWE has over 70 brands in its portfolio with its key brands including Penfolds (most profitable), DAOU, Frank Family Vineyards, Beringer, Wolf Blass, Lindeman’s, 19 Crimes, Chateau Ste Jean, Beaulieu Vineyard and Sterling Vineyards.

Key Fundamental Drivers

Brand Segmentation to Support Revenue Growth

Revenue growth is expected to decline in FY27 because of rebalancing customer inventory, with Penfolds reducing ~150,000 cases in FY26. The rebalancing of Penfolds inventory will complete in FY27 and as such, revenue growth is expected to resume from FY28 onwards given rebalanced customer inventory. For the Treasury Americas segment, elevated levels of luxury wine from recent vintages, which are currently held on TWE’s balance sheet, will now be sold over a longer period than previously expected. This implies slower revenue realisation from those wines.

To support revenue growth over the medium term, the Company has identified 10 focus brands, segmented into three ‘Power Brands’ (Penfolds, DAOU & Matua) and seven ‘Regional Heroes’. These focus brands contribute significantly to group gross profits, through its positioning as premium and luxury wines. TWE is targeting these 10 brands to grow from 68% to 90% of Net Sales Revenue (NSR) over the next five years.

To support brand equity and NSR growth, TWE is increasing the portion of advertising & promotion spend, to ~10% of FY28 NSR. The increased allocation is expected to drive higher NSR/case due to TWE progressively redirecting spend away from non-priority brands.

However, the increase advertising & promotion spend adds a reinvestment cost while TWE is concurrently managing lower volumes for non-core brands and inventory rebalancing. In addition, non-core brands are not being exited immediately, as they still provide volume and production scale. As such, the rate of exit needs to align with the pace of supply chain rationalisation.

Cost Savings and Inventory Control Expected to Drive Margin Expansion

TWE’s cost savings program (Project Ascent) includes operating model simplification, portfolio rationalisation and removing duplicate roles. The Company has a $100m cost savings target for FY27-29. A key contributor to the cost savings target is the shift to a regional operating model from a hybrid regional/brand model, with the new structure to enable faster decision making & cost reduction.

As part of Ascent, management has identified supply chain initiatives in Australia & NZ and the US. This is expected to right-size its cost base as the Company transitions further into the luxury segment and looks to reduce fixed-cost exposure (i.e. exit of owned and leased vineyards). Already, the Company has made strong progress on reducing excess customer inventory levels in China and the US.

From an estimated EBITS margin of ~19% in FY26, the Company aims to expand the EBITS margin towards 25%. The expansion is expected to be driven by improved product mix as well as cost savings from the Ascent Program. By way of background, the decline in EBITS margin from ~26% in FY25 to around 19% expected in FY26 is primarily a result of: i) Deliberately lower shipments, ii) Inventory rebalancing, and iii) Operating deleverage (from a high fixed cost base.

We consider that the EBITS margin of more than 25% is ambitious, considering TWE has not been able to grow the revenue in the past decade, even with accretion from acquisitions. Further, non-core brands amount to three-quarters of the TWE’s volumes and almost one-third of sales revenue. This makes EBITS margin growth difficult without a commensurate reduction in the cost base.

Gearing Position Remains Challenged

Gearing (on a net debt to EBITDAS basis) was 2.4x as at 31 December 2025 and is expected to peak at 2.9x in FY26. The Company is targeting a reduction in gearing to <2.0x by FY28, which is at the upper end of the target range of 1.5x-2.0x.

The reduction in gearing is expected to be to be achieved via: i) Increased EBITS from FY28 onwards, ii) Proceeds from brand & supply asset rationalisation, iii) Lower capital expenditure and iv) The continued suspension of dividends – which will continue with the Board to consider resumption as gearing trends toward the upper end of the target range.

Fundamental View

We highlight several factors warranting a caution view on the shares:

i. FY27 remains a transition year. TWE continues to rebalance inventory in China and the US, reduce non-core brands and right-size its production footprint. At the same time, several factors (i.e. lower production volumes, higher advertising & promotion investment) are likely to weigh on the pace of recovery on EBITS margin towards the 25% target.

ii. The initiatives referred to above are largely execution-dependant. If volumes decline faster than the fixed cost base can be re-sized, stranded costs across wineries, bottling, storage and logistics will weigh on EBITS margin through the transition.

iii. Given the medium-term nature of the gearing target (<2.0x by FY28), evidence of progress in reducing the gearing target is needed. To this end, the elevated gearing position is likely to remain an overhang on the shares.

Charting View

TWE remains in a long-term downtrend. However, in the short term it has bounced well and is knocking on the door of a resistance line. If it can push beyond this line then we may see a rally up towards the next level of resistance which is near $5.50. However, if that were to occur then we would expect to see some strong selling pressure at that point. Nearby support from here is near $4.

 

Michael Gable is managing director of Fairmont Equities.

 

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