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Treasury Wine Estates & Magnis Energy Technologies in our investor webinar on 1 November 2023

November 1, 2023

Magnis Energy Technologies, MNS, Treasury Wine Estates, TWE

Treasury Wine Estates & Magnis Energy Technologies


This week in our Investor Webinar we discuss TWE and MNS:


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Marc: Good morning. It’s the 1st of November, and it’s time for our weekly investor webinar. Morning, Stuart.

Stuart: Good morning.

Marc: It’s November already. It’s a sprint through the finish line now, right?

Stuart: Right. But the markets are still open, so there’s plenty to talk about.

Marc: Oh, definitely. Actually, it looks like the market might be turning just a little bit now. But might be too early to call that at the moment, but… In any case, we’ve got two companies to talk about, Magnis, and I think they changed their name. It’s now Magnis Energy Technologies and Treasury Wine. So, let’s kick it off, Stuart with Magnis.

Stuart: So salutary warning here for investors, don’t get too excited about concept stocks. A few years ago anything that was gonna make or develop lithium-ion batteries was all the rage. You had companies like Navionics from Canada, and Magnis were really running hard. So Magnis has started life just as one other Tanzanian Graphite project developer. It put that to one side and then started getting involved in technologies to actually make lithium-ion batteries. They had a Nobel laureate on their board because of the technology that they had. But at the moment, no one wants to touch this stock. Marc, if you click to the next slide, we’ll see how bad things are. I suspect people who bought back in March are not happy. What do you think, Marc?

Marc: Yeah, that’s an understatement, a euphemism, I think. I think they’re at the rope store at the moment if you look at this.

Stuart: Right. Right. So, basically, this is a story of what can go wrong if you invest in the concept stock related to the energy transition. I don’t care whether it’s solar panels, or wind farms, or new kinds of lithium-ion batteries. If there’s not enough capital to get the technology or the project to the stage where it’s in a reasonably good position, you’re in trouble in 2023. Because the capital markets are not willing to fund really heavy-duty capital spending on projects like this. So, folks who’ve followed the story for a while would know the name Imperial. Upstate New York it’s a factory that got a fair bit of New York State funding and other funding elsewhere to be one of the many gigafactories that would serve the automotive industry. But the trouble is, the reason for that curve there is the company’s running out of money.

If you flip to the next slide. The stock got suspended in early October having spent about $60 million in FY23. The ASX was concerned about this company’s liquidity going forward. And it’s only got $22 million in cash, and it’s gotta repay a lot of that in the next 12 months. So, this company is gonna have to go out and raise capital. With no sign that Imperium3 is set to deliver the kinda largest that people were talking about a few years ago. Another warning sign is it had a couple of politicians on the board. Always be wary of ex-politicians serving on the boards of companies, they really work out well. Politicians don’t really have a good eye for creating shareholder value. There is one exception to that, Marc, you recall last week we talked about Whitehaven Coal whose stock is headed in the right direction now. The chairman of that company is Mark Vaile, who used to lead the National Party.

Marc: It’s in the name, Stuart.

Stuart: Sorry?

Marc: It’s in the name.

Stuart: He spells his with a K.

Marc: Ah.

Stuart: So leaving office, he’s gone onto the board of a company whose product he can really believe in as one of the more conservative former members of the House of Representatives. And it’s fair to say that on his watch, Whitehaven has added a fair bit of shareholder value and has grown more. The politicians who are on this one probably haven’t done that. So you can google those names up, and find out who they are. I’m not saying they’re responsible for the disaster that’s here, it’s always a warning sign. If there’s someone with the honorable in front of their name, and spend some time in either the state or the federal parliament, then watch it out.

Marc: So Stuart, just looking at the development of that cash position, have they made any changes in the last couple of months in terms of cash outflow?

Stuart: I think they’re trying to batten down the hatches. But, look, the energy transition is real. And this venture will be valuable to someone because the demand for lithium-ion batteries is quite strong. It just depends, will it go with MNS, or with someone else? I’m not really seeing this company in a position where it’s able to respond to the fact that there ain’t much capital around. So always be careful, not every energy transition concept company will work out. Go for those companies that are capital-light, because there isn’t as much capital around. And look for what I’ve called a step pathway to growth.

Marc, we talk a lot about Weebit Nano, which is a stock we both own. What I like about Weebit is there’s a step path to growth. You find one fab, they adopt Weebit’s technology, and then start to sell it in a small way. You find another fab, you go the same way. It’s the same with the technology as well, you’re gradually working down the scale at which this thing worked from 120 nanometers on down. So there’s always the careful steps that aren’t gonna cost the Earth to go from one stage of shareholder value to the next. Do you think that’s a good assessment?

Marc: Definitely, definitely. And so specifically in those situations where you’ve got a certain technology that’s new, it always takes time, right? So in the case of Weebit, it’s taken about nine years, I think, from the moment it was conceived in the university lab to where we are now. But I agree with you, Stuart. If you can sort of build-up, you know, in this case, one fab at a time, and within those fabs, expand one process node at a time, give it five years and you’ll be included in the 500 products, right? So, for these guys I guess in terms of the technological development, it will have been similar. But yeah, if you run out of capital, especially in these markets where capital comes at a premium these days for high-risk ventures, then you’ve got a big problem, right? So you need to look at the funding structure from a couple of years back to see which companies will survive. And because, you know, if you just rely on the markets, missed the market basically, and what it’s willing to give you, that’s really tricky.

And again, coming back to Weebit, in addition to capital raising, they also had a good structure with options. So once the stock started to perform, all these options got converted, which led to more cash inflow, right? So, I’m not sure how these guys are structured, but that’s something to look at as well.

Stuart: Right. So that’s Magnis. Now, let’s talk about something a little more pleasant in terms of Treasury Wine Estates.

Marc: Can we crack open a bottle already, Stuart, or is it too early for that?

Stuart: It’s just after 9 a.m. here in Sydney, Marc. But it would be…

Marc: Let’s wait till 10: 00 then.

Stuart: It’s dark in California, I suspect.

Marc: Right. It’s 7 p.m. somewhere, right? So…

Stuart: Yeah, sure. So Treasury Wine Estates. This company was the old Foster’s, if you go way back. So Foster’s was a major brewer in Australia. Started investing heavily in wine, and has over the years built out a reasonably strong portfolio of wine brands. Best known for Penfolds. So anytime you’re drinking some Grange to celebrate something important in life, or a good business deal, or Weebit Nano going to $9 a share. There’s a chance that you could be drinking one of Treasury Wine Estates’ products. I’ve really liked this company for the last few years.

Who is Treasury Wine Estates? It’s one of the world’s largest publicly traded wine companies. Owner of Penfolds. But name any other iconic brand in Australia, it’s probably got that in its portfolio. Sells in 70 countries, and sells a couple of billion dollars worth of product. EBITDA is… Marc, you know, a bit about the agriculture industry. The is is CAGR, self-generating and regenerating assets. It’s the funny accounting you have for things like vineyards and so forth. And it’s a bit complicated. But the true way to account for Treasury Wine Estates is to not include CAGR in the mix in order to get that EBITDA number. So $731 million in EBITDA, off $2.4 billion in revenue is not bad. Now at the moment, they’re raising $825 million at $10.80 a share. And the reason is they’ve got a big acquisition they’re making in California. And I’m quite excited about this particular deal they’ve just come across, which we’ll talk about in a moment.

So, what’s to like about Treasury? Well, I first started paying attention in late 2020. You recall that China and Australia started to have a deteriorating relationship at that time. Because of criticisms that our government had made towards the Chinese government. China retaliated by whacking heavy tariffs on Chinese wine. And it turned out that that was one of the biggest markets for Treasury at the time. So the stock crashed. Now, my prediction was that Treasury could recover from this. And the reason is, wine is drunk everywhere in the world, either licitly or illicitly. So there are multiple markets that were willing to take the product that had ordinarily gone to China. So all that was needed here was to divert the product from one place to another. That’s pretty much what Treasury was doing from late 2020.

But there’s an additional factor that’s made this company work even well. They realized their supply chains weren’t the greatest, they’d invested in too many of the lower-grade, not-so-good margin kind of brands. So the China issue was catalyst to do a major shakeup of this whole operation. And interestingly, this was a tariff on imported wine from Australia. Treasury actually was able to grow wine in China or import it from other places. So it wasn’t too badly impacted by China once things recovered. And in the meantime, if you’ve been watching the news China and Australia had been working towards better relations in 2023. So there is some speculation that possibly China will play Mr. Nice Guy and take those tariffs back on again, or at the very least reduce them. So I’m expecting good things from China.

But what’s interesting about Treasury is what they’re doing in the rest of the world. And that brings us to what’s just happened now. They’ve bought a vineyard in California called Daou, a Lebanese name. But one of the more successful vineyards in the Central Coast area of California. And very much at the luxury end, where Treasury is pivoting and being quite successful on that pivot. So let’s talk about that now.

Marc: So it is Lebanese, not Chinese. It looks Chinese, but…

Stuart: The name looks Chinese, but, yeah… The brothers who owned the Daou Vineyard, their parents came from Wharton, Lebanon back in the ’80s and moved to California. So, you Google up this particular vineyard, and one of the first articles that comes up is an article from Forbes saying that this particular vineyard has a cult following in California. Now, as you know, California is a great wine-producing region. And Marc, you’ve been close to where these guys are, San Luis Obispo, the town on the Central Coast of California. Drive about 30 miles north of them, and you come to this idyllic little scene that I put the picture there on the left.

Marc: I probably passed it on the way to [inaudible 00:11:53.778], which is also based in San Luis Obispo. So it’s a very nice area, great weather. So I can see, yeah, that there’s plenty of scope for good vineyards there.

Stuart: Right. So if you’ve gotta live in the People’s Republic of California, you can’t do much better than this one. So, everyone who knows this vineyard loves it. They love the Cabernet Sauvs, the Pinots, and the Chardonnays they grow there. It’s a relatively new winery, but such is the popularity that Treasury Wine was prepared to pay $900 million to get hold of it. And that’s what this current capital raising is all about. Now, it turns out that if you look in the U.S. portfolio, there’s a gap that Treasury has in the 20 to $40 price range, which these guys would help to fill. Times may be a little bit tough in terms of the economy, not doing as well as it might do in the U.S. and elsewhere. But one thing that hasn’t slowed down is the luxury part of the market.

And so that’s where Treasury’s able to pivot here. Not only that, but this vineyard almost sells exclusively to the U.S. domestic market. So there’s a chance to take it global with a global company like Treasury, so potentially it fits quite well. Longstanding observers of this company believe that the company hasn’t executed well in the U.S. company itself says. Just look at several years ago they bought a wine business called Frank. And that one has been doing quite well under Treasury’s ownership. A lot of the critics are talking about an acquisition they made 20 years ago called Beringer, which is widely regarded as not a great deal for Treasury. The company basically overpaid for that one. I think 20 years is a long time to be criticizing a company that in recent years has executed a lot better. So I think this acquisition is gonna be a good one for Treasury from what I’ve learned.

Now there’s the stock, didn’t have a good 2023 so far. I don’t think the market liked the results too much. But, I mean, the actual numbers weren’t too bad. That’s the sell-down you can see there about the middle of that chart. Basically is the market’s turning sour in the middle of the year. You’ll notice that since the result time, the stock’s been doing reasonably well. And I think there’s some reasons to pay attention to this one going forward. So put it on your radar screen.

Marc: All right, good stuff. And the cap raise is done at, you said $10.80 cents?

Stuart: Ten dollars and eighty, so it’s slightly below. The stock was kicking around $12 just before this transaction.

Marc: All right, so that’s a reasonable discount. So, yeah, and I’m assuming this acquisition is immediately accretive to 2.1?

Stuart: Yeah. So they’re paying about 12 times for it, EV-to-EBITDA does. But that’s because it’s got a reasonably good growth profile to it. Once you’ve built out a wine brand with a certain amount of popularity, it’s hard to lose that. This is not like clothing, where fashion’s changed from season to season. Wine tends to have a long-term following. Our parents and our grandparents liked Penfolds, and we like it now. That’s what you’re investing in here is brands with a lot of shelf life.

Now, the other interesting I would add too, is what I like about Treasury is that they may be a wine company and they may be going after luxury, but they’re not state. They recently invested in a wine brand called 19 Crimes. And their joint venture partner on that was a man whose name you’ll know, his name is Snoop Dogg. So, one of Snoop’s interests is wine, and they’ve teamed up to create a brand called 19 Crimes.

Marc: It’s actually a pretty good wine. I’ve had it a couple of times. It’s pretty good.

Stuart: So that’s how wine can be a little bit edgy if you put it in the right hands. They named it 19 Crimes because there were 19 crimes that you could get transported to in Australia back in the convict era.

Marc: Had nothing to do with Snoop Dogg?

Stuart: Snoop back in the day had a very strong interest in crime. I think since he’s gone legit, he expects to get all richer than he made as a rapper.

Marc: Or die trying, yeah. All righty. Well, good stuff. So, we’ll drink to that one. In the meantime, happy investing and we’ll see you all next week.

Stuart: See you soon.