Task Description:
Based on the same company( Treasury Wine Estates ,TWE) chosen in the group report, analyse the financial and non-financial performance of the company, and perform prospective analysis as if you were a business analyst. Specifically, reformat the company’s financial statements for the past five years; analyse key financial and non-financial ratios and data to evaluate current and past performance of the company; forecast future financial performance of the company for the next three years and beyond; apply valuation models to estimate the company’s intrinsic value; perform sensitivity analysis on key forecasting assumptions, and discuss potential opportunities and challenges for the company
to improve value.
The report should be readily comprehensible, condensed and within the word limit. Information should
be collected from various reliable sources to inform analysis and references are properly cited. Tables and graphs should be used to effectively present information.
- Reformatting (4 marks)
- Financial and Non-financial analysis (8 marks)
- Forecasting (8 marks)
- Valuation (4 marks)
- Sensitivity Analysis (4 marks)
Overall Report Quality:(allocated 2 marks) The report should be readily comprehensible,
condensed and within the word limit. Information should be collected from various reliable sources to
inform analysis and references are properly cited. Tables and graphs should be used to effectively
present information.
Length: Individual Assignment – Written Report: maximum 4000 words (exclusive of references and
appendices). Appendices are limited to a maximum of 10 pages. Please use a font size of 11, 2.5cm
page margins and a line spacing of 1.5.
SOLUTION:
TREASURY WINE ESTATES LIMITED
Introduction
The primary markets for Treasury Wine Estates Limited’s wine products include the Americas, the Middle East, Africa, Asia, Australia, New Zealand, and Europe. The company grows grapes, produces wine, and distributes, advertises, and sells it. These wines are made to suit a broad spectrum of customer tastes, ranging from premium collector’s goods to daily table wines.
Treasury Wine Estates Limited is a major participant in the worldwide wine market, having a significant presence in many different parts of the world. The firm can reach a broad spectrum of clients in many areas because to its robust distribution network and extensive product.
Treasury Wine Estates Limited prioritizes marketing and advertising its products in addition to wine production and distribution to guarantee maximum visibility and sales. Through the utilization of its robust brands and extensive geographic reach, the firm sustains a competitive advantage in the fiercely competitive wine industry.
In addition, the business offers third-party companies contract bottling services and bulk wine and grapes. It owns or leases vineyards on 1,75 planted hectares in the Bordeaux region of France; 2,393 planted hectares in California, encompassing the Napa Valley, Sonoma County, Lake County, and Central Coast; and 7,364 planted hectares in Australia and New Zealand. The company advertises and distributes its products via wholesalers, distributors, independent retailers, retail chains, and on-premise stores in addition to selling directly to consumers. The corporation is headquartered in Melbourne, Australia. It started operating in 1843.
Let us dive deep into the research and analyse the TWE limited from financial as well as non financial aspects and determine valuation of the company and ayalyse its overall business position.
Reformatting:
Reformatted Financials are included in Appendix to the report.
Financial Analysis:
(Fig 3.1 – Key financial Highlights )
Financial analysis is a method of analyzing a company’s performance in connection with its sector and overall economy in order to arrive at a conclusion or suggestion
Financial Analysis can be effectively implemented by using DuPont Analysis as follows
DuPont Analysis:
The DuPont analysis framework, which is used to evaluate fundamental performance, gained popularity thanks to the DuPont Corporation. DuPont analysis is a useful technique for dissecting the several elements that affect return on equity (ROE). The breakdown of ROE allows investors to focus on individual key financial performance metrics to identify strengths and weaknesses.
There are two versions of the tool available: one considers decomposition in three steps, while the other considers it in five.
Three distinct components, namely net profit margin, asset turnover, and financial leverage, make up the return on equity calculation.
ROE is divided into five components in the five factor DuPont analysis, which include: tax burden, interest burden, asset turnover, leverage, and operating margin.
DuPont analysis is an helpful technique for evaluating the components of a company’s return on investment calculation. Analysts, investors, and managers may all benefit from using DuPont analysis to track a company’s financial performance, pinpoint the causes of changes in return on investment, and obtain data for informed decision-making. Just keep in mind that there are limitations on the input quality for this formula.
Return on Equity :
The ratio of net income to shareholders’ equity is known as return on equity. The DuPont analysis is still just a bigger version of the ROE. Merely computing return on equity (ROE) reveals how well a company uses capital provided by shareholders.
Using a DuPont analysis, investors and analysts may look into what factors affect variances in ROE or why a certain ROE is either high or low. Put differently, a DuPont analysis can help identify if debt, profitability, or asset utilization are driving ROE.
As per the ROE calculations, it can be clearly observed that the ROE of TWE Limited has been improving consistently from 6.72% in the year 2020 to 7.13% in the year 2022. ROE implies that With Every AUD 1 invested by the investor, he receives AUD 0.06 as returns. However, a drop in ROE has been observed in 2023 making the ROE fall from 7.13% in 2022 to 6.63% in year 2023.
This may be due to Additional expenditure incurred by the TWE limited and A drop in revenue compared to 2022.
It indicates that TWE Limited’s financial performance may change in 2023. Investors should keep a close eye on the ROE rise in order to assess how well the firm is using shareholders’ equity to generate profits. Stakeholders may be prompted to examine the causes of the lower profitability and evaluate the effect on TWE Limited’s overall financial stability if ROE declines. Thoroughly examining the company’s financial statements, with a particular emphasis on cost structures and revenue sources, can offer valuable insights into the underlying factors contributing to the variations in ROE over time. A thorough analysis of TWE Limited’s operational choices and financial plans might aid in the development of corrective steps that will improve shareholder value and restart ROE growth in the future.
RNOA- Return on Net Operating Assets :
Return on net operating assets (RNOA), a metric used to assess financial performance, is calculated by dividing net profit by the sum of net working capital and fixed assets. Net profit is also known as net income.
A high ratio result indicates that, for every dollar invested in assets, management is keeping more of the earnings. The RNOA ratio evaluates a company’s and its management’s performance in allocating resources in ways that are profitable. A company’s performance is also assessed using RONA in comparison to its counterparts in the industry.
It has been observed that the RNOA has seen a positive shift from 2020 to 2022 , from 5.89 % to 5.92 % respectively. The greater the company’s financial performance, the higher the return on net assets. A greater return on assets (RONA) indicates that the business is making good use of its working capital and assets, however no one statistic can fully capture a company’s success. One of the various statistics used to assess the financial health of a corporation is return on net assets.
RNOA, however, has declined in 2023 which is 5.41 %
PM – Profit Margin :
Profit or Earning Margin is a frequent indicator of a business’s or particular commercial activity’s profitability is profit margin. The portion of sales revenue that remains after all expenses are paid and profits are realized is known as a company’s profit margin.
Analyzing the Profit margins, it has been observed that the profit margin has significantly declined from 15.81 % in year 2019, to 11.49% in 2020. This is due to significant increase in borrowing costs year 2020. However, the company has eventually managed to improve its profitability from 11.23% in 2021, to 12.60 % in year 2022. Overall profitability has been observed to be maintained in year 2023 too, of 12.60%.
ATO- Assets Turnover Ratio :
A company’s asset value is divided by its asset turnover ratio to get its revenue or sales value. How well a business uses its assets to create income is demonstrated by the asset turnover ratio.
The asset turnover ratio of a business reveals how successfully its assets are used to produce income. A greater ratio serves as evidence of this. On the other hand, a low asset turnover ratio suggests that a business might not be making the most of its resources to boost sales.
The ATO has seen a steady decline from 2021 to 2022, From 0.50 to 0.47 and subsequently to 0.43 in the year 2023, which can turn out to be a matter of concern for the management and eventually for the investor. The company needs to improve the operating efficiency of its assets in order to generate maximum output. This can be done through process consultation and improvement , business process automation , etc.
FLEV- Financial Leverage
Financial leverage is the concept of using borrowed money as a funding source. Leverage is a common tool used by businesses when they invest in themselves through expansions, acquisitions, or other growth tactics.
Leverage is another investing strategy that uses borrowed funds to increase the potential return on an investment. Specifically, it involves using various financial instruments or borrowed resources.
While this isn’t necessarily a bad thing, a firm with a debt-to-equity ratio greater than one has typically chosen to fund itself through debt rather than through shareholders; this might put the company at danger due to strict debt requirements. One way to assess a company’s leverage ratio is to look at its previous financial statements or compare it to other companies in the same sector.
The Financial Leverage Shows a change from 43.38% to 47.10 % from 2022 to 2023 Implying Company’s approach to expand business through use of debt has been shifted to the use of debt rather than relying on the equity more.
NBC- Net Borrowing Cost
NBC has been observed to be declined from 3.12% in year 2022 , to 2.82 % in the year 2023. In turn, this demonstrates that TWE Limited is effectively managing its financial resources to generate more income from its investments while simultaneously reducing its interest expenses. It reflects a sound financial strategy that aims to enhance profitability and strengthen the company’s overall financial position. By optimizing the balance between interest income and borrowing costs, TWE Limited is positioning itself for sustainable growth and improved financial performance in the long run.
Non-Financial Analysis:
Qualitative information on a company’s reputation, customer happiness, employee involvement, and environmental effect may be obtained through non-financial analysis. These elements are critical for investors to take into account when assessing the general well-being and potential of an organization since they have a substantial impact on a company’s long-term performance and sustainability. Investors may obtain a more thorough understanding of a company’s performance and future prospects by combining non-financial research with standard financial measures. This allows investors to make better educated investment decisions that include both non-financial and financial risks and possibilities.
Beyond the financial data, these qualitative studies offer significant insights for a thorough knowledge of a firm or industry. SWOT analysis looks at threats, opportunities, weaknesses, and strengths. PESTEL Analysis assesses elements related to politics, economy, society, technology, environment, and law. Porter’s Five Forces research evaluates the danger of new competitors, industry competition, suppliers’ and buyers’ negotiating strength, and alternative goods and services. Making informed strategic decisions can be aided by combining various analytical frameworks.To begin with, a SWOT analysis may give a broad picture of the advantages and disadvantages that Treasury Wine Estate Limited faces.
Non- financial analysis of TWE limited can be undertaken as follows :
1. SWOT Analysis :
Strengths- The main strength of the company lies in the different kinds of products it makes and delivers in the market including brands like Wolf Blass, Penfolds, 19 Crimes, Beringer, etc. (Platform Executive, n.d.). All these brands have performed great in the emerging markets, making the portfolio of Treasury Wine Estates even more effective by providing more variety to the consumers. It shows that how TWE is able to adapt according to the emerging market needs.
Weaknesses- Due to the nature of the products TWE produces, there are a lot of regulatory barriers that they have to face from time to time (Fern Fort University, n.d.). This makes it more difficult for TWE to operate in a smooth manner. The additional rules and regulations creates hindrances in the daily operations of the company.
Opportunities- Given that the market has just reopened, the Chinese economy may offer TWE a steady source of income, according to the most current market news. (India, Investing.com, 2024). This is a fantastic opportunity as it would help the firm grow both its client base and income at the same time.
Threats- Since, TWE operates in various counties, the uncontrolled political noise of any country could tamper with the day-to-day operations of the company.
Moving on to the next analysis that provides a deeper understanding of future growth perspective of the company.
2.PESTEL Analysis:
Political- TWE has a presence in many counties and economies which makes it sensitive to the political interference (Case48, 2018). If the economy is stable and there is no political chaos, the money of the investors and various stakeholder are safe and vice versa.
Economical- The Size of the wine industry has around $235 billion worth (Platform Executive, n.d.). If the variables like currency or interest rates changes by even a small number, it could create a huge difference.
Social- Since, TWE’s forte is the production of alcohol and it is always considered as a controversial product. The consumption of their product could change on the basis of demographics or attitude of the society towards their products.
Technological– In the alcohol and beverages industry, every company is trying to leverage technology to make their product better (EMBA Pro. n.d.). Since TWE is a giant in this industry, it has more economy of scale advantage than other peers, but still there have not been much changes in the technology of making alcohol.
Environmental- Treasury Wine Estate operates in an international economy so it is highly sensitive to the environmental activism, and the rules and laws about the environment.
Legal- Because of the massive size of the company, legal matters like Labor law changes, Beverages/Alcohol industry law changes, safety of people and health regulation changes could affect the company in various ways.
Forecasting:
Businesses may foresee possible risks and opportunities through effective financial forecasting, which helps them make more informed strategic decisions. Organizations may create accurate estimates that inform goal-setting, resource allocation, and budgeting by examining historical financial data and market patterns. In addition to improving flexibility in response to shifting market dynamics and development prospects, this proactive strategy guarantees long-term viability and market competitiveness.
We have undertaken forecasting with reasonable assumptions as follows :
1. We have followed the minimalistic approach for forecasting.
2. We have estimated Constant growth of 1% in revenue throughout the forecasting. This is due to the past trend analysis and industry trend analysis, cluttered market and human behaviour throughout the past history of the organization. The industries, even if in the worst case scenarios, can maintain 1%^ growth. Therefore, we have considered the same in our forecasting.
3. We have assumed the profit margin to be 5% throughout the forecasting.
4. We have also Supposed the Forecast OCI to be zero, Dividend payout to be 50 % and net borrowing cost to be 3% constant throughout.
Forecasted Financials are attached to the annexture of this report.
Valuation:
The method or procedure used to ascertain the fair value of a firm or the actual value of the company’s shares is known as company valuation.
Financial accounts, assets, liabilities, market trends, competitive analysis, and growth potential are a few of the variables taken into account when valuing a firm. A fair value for the firm can be determined using a variety of valuation techniques, such as asset-based valuation, discounted cash flow analysis, and comparative market analysis, depending on the industry and kind of business.
In order for buyers, sellers, and investors to make well-informed judgments about purchasing or disposing of firm shares, valuation is necessary. In addition, it supports fundraising efforts, mergers and acquisitions, strategic planning, and calculating shareholder return on investment.
Overall, company valuation is a crucial aspect of business management as it gives an indication of the entity’s performance, growth prospects, and potential risks. It guides stakeholders in making wise investment decisions and ensuring the smooth functioning of the business.
There are three approaches to the valuation of the Business.
1. Residual income model
Residual income valuation takes into consideration not just the company’s current earnings, but also the excess returns generated beyond the equity charge. This method is used by investors to understand the true economic value of a company’s stock, by looking at how much wealth is being generated beyond what is required to cover the cost of equity. Investors can determine if a firm is adding value or taking it away by concentrating on residual income, which helps them make more educated investment decisions. All things considered, the residual income model offers a more thorough understanding of a business’s performance and may assist investors in figuring out what a reasonable price for its shares is.
Investors analyze the residual income by comparing it to the company’s current stock price. If the residual income is positive, it indicates that the company is generating excess returns that can be used by investors to create additional wealth. On the other hand, if the residual income is negative, it suggests that the company is not generating enough returns to cover the cost of equity and may be destroying value.
By employing this technique, investors may make more educated choices about the purchase, holding, or sale of stocks by gaining a deeper comprehension of a company’s financial performance and health. When assessing a company’s underlying economic worth and choosing investments based on its potential to create wealth above and beyond equity costs, investors can use residual income valuation as a useful tool.
The Valuation of the business as per residual income approach is as follows :
2. Residual Operating Income Model
When determining firm value, this method takes operating earnings into account. Using this method, investors may ascertain the underlying economic value of a company’s shares by looking at the amount of wealth generated over and beyond what is required to cover equity expenses.
The Valuation of the business as per residual operating income approach is as follows :
3. Free Cash Flow Model
The weighted average cost of capital (WACC), which accounts for the firm’s cost of debt and equity, is usually used to calculate the discount rate. It corrects for the time value of money and takes into consideration project risk by discounting future cash flows at this rate.
Analysts may make wise investment judgments by employing this valuation approach to calculate the current value of the cash flows produced by a project or asset. Because it takes into account both the project’s financing expenses and the costs of upkeep of the asset base, this method gives a more realistic picture of an investment’s true value.
In general, the operational cash flow technique of project valuation, which subtracts capital expenditures, offers a thorough evaluation of a company’s or project’s value. Investors may optimize their financial results by taking into account all of these elements, which will help them better comprehend the possible return on investment and help them make smart decisions.
OBSERVING ESTIMATES FROM THE VALUATIONS :
1. Valuation as per the methods :
| Sr. No. | Valuation Method | Price per Share(in AUD ) |
| 1. | Residual Earnings model | 2.15 |
| 2. | Residual Operating Income Model | 4.42 |
| 3. | Free Cash Flow Model | 5.01 |
2. Curremnt Market Price of the Share : AUD 12.02
3. Observation :
The analysis unequivocally shows that the share’s current market price exceeds its intrinsic worth. This indicates that the share is overpriced.
When a stock’s current price exceeds its price-earnings ratio (P/E) or profit estimates—which offer insight into the company’s earnings—it is considered overvalued. Analysts and other experts in the field of economics thus predict a final price reduction.
This frequently happens when investors become too confident in a company’s ability to develop, pushing up the stock price above what basic fundamentals can sustain. This creates a situation where the stock is trading at a premium, based more on speculation and sentiment than on actual financial performance.
Investors who invested into an overpriced stock at inflated prices may suffer substantial losses when the stock ultimately corrects, either through a slow decrease in price or a sharp correction. To avoid purchasing an item that may be overpriced, investors should always perform extensive research and analysis before making an investment in any company.
In some cases, market dynamics can also play a role in driving a stock’s price higher than it should be. This can be seen in situations where a particular stock becomes a favorite among traders, leading to increased demand and driving up the price even further. However, eventually, the market tends to correct these imbalances, bringing the stock price back down to a more reasonable level.
Overall, investing in overvalued stocks can be risky and should be approached with caution. It is important for investors to remain vigilant and not get caught up in the hype surrounding a particular stock, but instead focus on sound analysis and valuation principles to make informed investment decisions.
Sensitivity Analysis:
Sensitivity analysis uses a set of assumptions to determine how changing the values of an independent variable affect a certain dependent variable. Put another way, sensitivity studies look at the relative contributions of various sources of uncertainty inside a mathematical model to the model’s overall level of uncertainty. Using one or more input variables as a basis, predefined parameters are applied to this technique.
It is an effective tool for making decisions in project management, risk management, and financial planning, among other fields. Organizations may better prepare for various scenarios and make educated decisions by looking at the possible effects of numerous variables on the situation’s outcome. Sensitivity analysis is a useful tool in the financial markets for investors to evaluate the possible benefits and drawbacks of various investment possibilities. Sensitivity analysis is, all things considered, an essential technique for comprehending the dynamics of complex systems and for reaching well-informed conclusions based on reliable information and hypotheses.
The sensitivity analysis can be conducted by forecasting the business in two scenarios :
1. Optimistic Forecast :
In this scenario, projections and predictions are made based on the best possible outcomes, maximizing revenue potential and minimizing risks. Assumptions are made with the belief that everything will fall into place smoothly, with no unexpected obstacles or challenges. This idealistic approach allows for the most optimistic outlook on the business’s future success. However, it is important to note that this best case scenario may not always be the most realistic or practical, as unforeseen circumstances can always arise in business operations. Nonetheless, striving for the best case scenario can motivate and drive businesses towards achieving their goals and objectives.
2. Pessimistic Forecast :
In risk management, this scenario is frequently used to estimate prospective losses and worst-case scenarios for a company. Businesses may better prepare for unforeseen obstacles and create risk-reduction plans by imagining the worst-case situation. It entails estimating the worst-case scenarios for a choice, action, or result and making plans appropriately. Even while the worst case scenario might not happen every time, being ready for it can help organizations get through difficult times and make better decisions.
We have already conducted the analysis , forecast and have valued the business as per Pessimistic Approach in the research earlier.
Now, We will conduct the analysis in best case where all situations are assumed to be in favour of the business. Income Approach
3. Valuation – Residual Operating Income Approach
4. Valuation – Free Cash flow Approach
It can be clearly Observed that the Changed Inputs Such as Growth, Profitability, Cost of capital , etc. and have studied the output accordingly. It can be said that the input significantly and sensitively Impact the decision of the Investor. Therefore, sensitivity analysis is important in decision making.
References:
1.Case48. (2018). Treasury Wine Estates Limited PESTEL & Environment Analysis. Retrieved from https://case48.com/pestel/5/3/PESTEL-Analysis-of-Treasury-Wine-Estates-Limited.html Accessed on: 30th March 2024
2.EMBA Pro. (n.d.). Treasury Wine Estates (Australia) PESTEL / PEST / STEP Analysis. Retrieved from https://embapro.com/frontpage/pestelcoanalysis/38-treasury-wine-estates. Accessed on: 1st April 2024
3.Fern Fort University. (n.d.). Treasury Wine Estates Limited SWOT Analysis / Matrix. Retrieved from https://fernfortuniversity.com/term-papers/swot/nyse/2820-treasury-wine-estates-limited.php. Accessed on: 29th March 2024.
4.Investing.com India. (2024). Treasury Wine Estates Ltd Company Profile. Retrieved from https://in.investing.com/equities/treasury-wine-estates-ltd-company-profile. Accessed on: 1st April 2024
5.Platform Executive. (n.d.). Treasury Wine Estates SWOT Analysis. Retrieved from https://www.platformexecutive.com/data/swot-analysis/treasury-wine-estates-swot-analysis/. Accessed on: 29th March 2024
6.TWE Annual Presentation ad key highlights https://a.storyblok.com/f/171317/x/60fce8729f/2023-annual-results-investor-and-analyst-presentation.pdf