By Nikhil Nainan
(Reuters) - Treasury Wine Estates (AX:TWE) rejected on Thursday a research report that alleged the Australian firm may have improperly inflated its pretax profits by as much as 50% over the past two years, or by about A$300 million ($203 million) cumulatively.
Hong Kong-based GMT Research said in an Aug. 7 report that profits at the world's largest standalone winemaker were inflated following its purchase of most of Diageo's (L:DGE) wine business in 2016.
The report alleged that the maker of Penfolds, Wolf Blass and Lindemans wines wrote down the acquired inventory from the Diageo deal to inflate future profits. Treasury Wine bought the British company's local and U.S. wine units.
It also went on to engage in "channel-stuffing", a tactic used by firms where they box up more products for retailers to sell than they are able to, and accordingly boost their sales and earnings, the report said.
Treasury Wine said in a statement to the Australian Securities Exchange the report was "false and misleading", and that it would respond specifically to the claims when it announced its preliminary annual results on August 15.
It did not respond to separate questions from Reuters about the specific allegations made in the report.
Treasury shares recovered from a 7.7% drop in morning trade after the company's rejection of the claims, climbing as much as 1.8% to A$16.85. The benchmark Australian stock index (AXJO) was up 0.5%.
GMT said that Treasury bundled its less popular wines with their more popular ones, like Penfolds, although it added that verifying these claims were "difficult".
"It seems likely that TWE has taken advantage of acquisition accounting with the purchase of Diageo Wine to inflate profits... although the benefits are now likely winding down," GMT wrote.
It also noted a recent short call by a U.S.-based hedge fund manager in May, who told a popular conference that her call was based on the company indulging in channel stuffing and bundled distribution.
Treasury Wine shares came under pressure following that short call, and the declines were exacerbated by a company filing that revealed its Chief Executive Officer had sold some of his shares just a week before the comments.
In Thursday's ASX release, Treasury Wine also reaffirmed its guidance for the year.
GMT Research said investors should avoid the stock, and that it sees a 35% downside to the winemaker's share price at A$10.6 based on the findings of its report.
GMT, which says it does not trade in the stocks it writes about, has previously issued reports questioning accounting practices of companies including Malaysia's AirAsia Bhd (KL:AIRA) and China's Xinyi Glass Holdings (HK:0868).
"We note Treasury Wine's response to our report but do not intend to comment further at this time," it told Reuters.