“Wine not?” Why Macquarie sees upside to Treasury Wine Estates’ share price

Macquarie’s most recent research note on Treasury Wine Estates (ASX:TWE), released Friday, whacks a new $15.50 price target on the stock on the back of strong global wine demand.

At the time of the note’s publication, TWE shares were worth $14.52, implying 9.5% upside on a twelve-month basis.

Macquarie expects TWE’s 1H23 result to report $1.4bn of revenue.

Why is Macquarie bullish?

Global demand is the name of the game, and that impressive 1H23 result.

But it isn’t all positive signs for the winemaker.

The bank did note off-premise consumption (read: drinking at home) is starting to soften as on-premise consumption becomes favoured by consumers once again.

Pub returns and higher trucking costs

“We are seeing a shift towards On Premise consumption where TWE relatively under-indexes,” Macquarie Research analysts wrote.

Also of concern is TWE’s earlier forecast for cost inflation through FY23. This could rise by as much as $25m.

The price of glass for bottle-making, in particular, remains a pressure.

“Commentary from global peers suggests glass costs are up double digit,” analysts wrote.

However, shipping and trucking costs—while still high compared to an increasingly distant pre-COVID past—are easing from peak levels.

The China question

The biggest thing to highlight, however, is the China question.

China effectively banned imports of Australian wine when the former Morrison government regurgitated Trump-era claims that COVID-19 may have been manufactured deliberately in a shadowy Chinese laboratory.

China lashed out at a few luxury favourite exports in retaliation, including crayfish.

“China remains effectively closed to TWE’s high margin wine business,” analysts wrote.

“However, we note that export restrictions to China appear to softening more broadly…the company has maintained its management team in China and remains visible in market.”

The bank foresees a bettering of geopolitical relations directly benefiting TWE.

Higher US prices 

Macquarie also highlighted that prices of TWE’s luxury wines have increased by 5% over the last year in the US.

However, off-premise consumption in the US particularly has been softer relative to the last 4 years, but, value has been above pre-COVID levels in turn.

The largest jump in luxury wine took place in October 2022.

A look at TWE's three month charts