Burberry

Stock price: 573p

Conclusion: Despite a negative geographic mix, Burberry is resisting quite well. We expect a return to low double digit growth in EPS in F11. Burberry trades at 17.2x cal P/E, based on 2010 estimates, in line with the sector. Our DCF suggests some upside, but we see more interesting opportunities elsewhere, notably PPR.

H1 results: Sales up 6% reported to £572m, down 5% like for like. EBIT down 12%, down 19% underlying. EPS down 11% to 13.6p

A business mix exposed to the crisis.
Geographically, Burberry remains heavily exposed to developed markets, which represent 90% of its sales. In addition, Spain was still accounting for 9% of the total revenue, despite collapsing sales in H1 (-37%). Asia Pacific excluding Japan is taking off (less than 15% of the total). Burberry is struggling in the US, but outperforming peers in department stores.
From a distribution channel standpoint, although Burberry is switching to retail, less cyclical, wholesale was still making 38% of group sales in H1.
Forex is helping bottom line in licencing, given the absence of operating expenses. Its impact on wholesale and retail is positive on top line, but more than offset by higher reported operating expenses. Forex impact should decrease next year, with still some benefits expect from a stronger yen.
Burberry can rely on a solid balance sheet with a net cash position of £56m (end of Sept) vs £114m net debt last year. the improvement results primarily from lower inventories, down 40% at constant exchange rates.

High single digit growth platform for the medium term
Management is looking for sustained retail expansion (424 DOS end of September), driven by the addition of 10% more space per annum (+8-10% forecast for F10). Wholesale could double in Americas to £80m, while the network in China could reach 100 franchised stores.
Management is also projecting strong growth for non apparel, only a third of the business, and childrenswear (5%). All in all, we expect Burberry to offer a medium term platform of high single digit growth in sales, driven by double digit growth in retail and mid single digit growth in wholesale. We expect the revenues from licencing in Japan (ending in 2015) to remain fairly stable in the coming years.

Upside potential on the margin front.
We expect margin to reach 15% this year, helped by the profits generated from licencing. Adjusted from licencing, Burberry’s margin achieved only 10% last year, as Burberry’s expansion into retail leads to increased operating expenses. We expect a return to positive leverage next year, but it should be gradual as management keeps opening new stores at a rapid pace. We project a 50bp gain pa between fiscal 2011 and 2013, which could lead to mid teens growth in EPS.

Burberry trades at 17.2x P/E based on cal 2010 estimates, in line with peers. Our DCF suggests sligtly less than 10% upside based on our fairly optimistic assumptions (€624). Our valuation range (€570-€624) indicates that the stock looks reasonably priced, even based on long term assumptions.
The upside risk might come from its unique British positioning, which makes it an attractive take-over target.

Performance Recap

We provide a recap of our key recommendations and performance on a bi- monthly basis.

Based on today’s price, we think that the brewers ABInbev and Heineken, the luxury and lifestyle players PPR and Puma and Nestle offer interesting upside. Pernod Ricard, Reckitt and Richemont are close to our valuation estimates.

	Date	Price	Price11/27	Perf %	Valuation	Upside %
ABInbev	5/9/09	24,8	32,7	27.4	39-41	25.3
Heineken	6/11/09	24,9	30,9	24.0	35-40	29.4
Nestle	4/22/09	37,5	47,6	26.6	48-52	9.2
Pernod	7/19/09	48,0	56,9	18.5	55-58	1.9
Reckitt	4/28/09	26,4	31,0	17.8	32-33	6.4
PPR	11/18/09	82,0	80,5	-1.8	92-95	18.0
Puma	11/10/09	231,0	226,5	-1.3	260-275	21.4
Richemont	5/14/09	21,0	32,2	54.7	31-33	2.4

Tiffany

Stock price: $43.9

Conclusion: Tiffany has been more resilient than we thought thanks to efficient cost control, tight cash management and improved forex. The stock trades at a premium to the sector, which seems justified by its long term growth potential. Despite low visibility in the US and in Japan, we raise our valuation range to $45-47 per share.

Sales down this year but outperforming peers in the jewelry industry
We expect Tiffany to end the year with sales down 9% like for like (-13% first 9months), implying stable revenues in Q4. Comparison base should help, as sales declined by 31% in the US in the last two months of 2008. In addition, sales in Asia Pacific and in Europe could grow double digit in Q4. Japan is the only region where Tiffany does not expect any recovery.
9% decline looks remarkable considering the geographic exposure of Tiffany ( 70% of sales in the US and in Japan) and the cyclicality of the jewelry segment. Why ? Tiffany positioning was probably more adapted to the downturn: 40% of sales consist of products sold at an average price between $200-$700. In addition, the group is growing double digit in Asia Pacific and in Europe where it just started to develop a network.

EBIT expected to decrease by 18%, could have been worse…
Gross margin could decrease by slightly more than 100bp and EBIT margin erode by 200bp to 15% of sales.Tiffany managed to reduce Selling, General and Administrative expenses by 11% in the first nine months, which again looks great considering that only one fifth of SGA is variable. In addition, marketing spending should have fallen double digit, helped by lower media rates.
Adjusted net earnings should decrease by 22%, while reported earnings could increase by 12% due to the impact of one off last year combined with a tax benefit this year.
Cash earnings look better thanks to sharply reduced Capex (€85m) and lower trade account and inventories. Net debt was down to $380m versus $660m a year ago.

Looking for +6+7% growth in sales and low double digit growth in earnings next year.
Notwithstanding reduced visibility in the US, we expect Tiffany to resume growth next year. US retailers are starting to see more stability compared to six months ago in areas such as jewelry or accessories (cf Saks statements) which is encouraging. In addition, Asia Pacific and Europe offer double digit growth prospects owing to the expansion of the store network. Increased square foot could add a couple of points combined with +2% positive forex impact.
Given the high proportion of fixed costs, we expect Tiffany to benefit from positive leverage and EBIT to increase by 12%.

Tiffany trades at 20x P/E based on 2010 forecasts, which is not cheap but justified by its long term growth potential. The group offers long term double digit growth prospects driven by the international expansion of its network in Asia (less than 50 stores excluding Japan) and in Europe (25 stores, half in the UK) coupled with margin enhancement (+500bp upside potential) thanks to increased store productivity and SGA leverage. Our DCF suggests a valuation range between $45-$47 per share.

Remy Cointreau

Stock price: €34

Conclusion: Reported results better than cash earnings. Remy cointreau looks fully valued trading at a 20% premium to Diageo and Pernod Ricard.

H1 results: sales down 1% reported to €362m , down 7% organic. Adjusted EBIT up 4.8% reported, 2% organic. Guidance: slight organic growth in operating profit for the full year.

Surprisingly good numbers at first sight.
Adjusted Earnings before tax increased by 18% to €54.5m, owing to +100bp gain in EBIT margin (18.1%) and lower “other financial costs”.
Margins improved thanks to the liqueurs division and the swing to profit generated by the partner brands.

Negative volume impact on cognac and champagne margin.
In spite of its “ambitious pricing policy”, Remy Cointreau was not able to offset the negative volume/mix impact in cognac (-€25m in H1).
The decline in champagne was even sharper (-46% H1) leaving no room for price increases. As a result, Remy Cointreau lost €38m in H1 due to lower volume and gained only €23m through pricing.
H2 should benefit from an easy comparison base as sales were down 25% last year. We expect a return to high single digit growth in sales while margin could slightly increase owing to higher volume combined with savings in general and administrative expenses and lower media costs.

Cash management under pressure.
Operating cash flow decreased by 17% to €16.5m. In addition “other cash expenses including Capex” doubled to €25m, resulting in a cash outflow (-€8.2m vs +8m free cash last year). Average debt went up in H1 (€647m vs €477m last year) and borrowing costs increased.

Remy Cointreau trades at 17.4xP/E, implying a 20% premium to peers. Our DCF suggests a valuation closer to €30-32 per share. However, we think that Remy will find it hard to achieve peers margins given its lack of scale, which might continue to fuel speculation around future partnership.

SAB Miller

Stock price: p1786

Conclusion: We think that SAB Miller’s exposure to emerging markets and a possible deal with Femsa are largely priced in. We revise our valuation range to p1800-p1900 following the announcement of a new restructuring programme .

H1 results: sales down 6% reported (+3.1% organic), EBITA down 2% reported (+10.7% organic), EPS up 6% reported.

Comparing apples with apples.
SAB Miller reported 3.1% organic growth (mostly pricing) in H1, which is much better than the flattish numbers published by peers. Mature markets account for only 44% of SAB volume versus 50-70% for peers. We expect SAB to continue to outperform the category thanks to continuing growth in Latin America, Africa, notably South Africa and Asia.
Notwithstanding superior revenue growth, SAB is expanding operating profit , excluding currency impact, at a slower pace than competitors. This is partly due to the impact of supplier contracts and hedging programme which are limiting the benefits of lower spot commodity prices. Input costs should start to ease in H2 and next year. In addition, SAB suffers from margin erosion in South Africa owing to intense competition and increased marketing spending. Last, competitors reap the fruits of massive cost cutting programmes.

H2 growth will largely depend on forex.
Management warned that both pricing and margin will face a tougher comparison base in the last six months of F10. The good news should come from forex, based on current exchange rate. We estimate that H2 could be boosted by the strength of the ZAR , COP and EUR versus USD. In H1, negative currency impacted sales by 9.5% and EBIT by 12%. As a result, reported EPS excluding exceptionals could increase by 19% in Fiscal 10. Forex should again positively impact H1 F11 results.

The announcement of a new restructuring programme ($800m cost between F10-F13) in addition to the MillerCoors costs savings is good news. According to management, this business capability programme will help to streamline procurement, finance and HR functions and install regional platforms to run sales, distribution and supply chain. Management expects to save $300m by 2014 and deliver $350m of working capital release between F10 and F12, while the synergies related to MillerCoors will achieve $700m by F12 ($365m left for F11 and F12).
For the next two years, the impact on margins will depend on the retention rate of these savings. Assuming 50% rate, we estimate the impact on group margins at around 50bp and 70 bp respectively.

SAB Miller trades at 16.5x P/E and 10x EV/EBITDA based on cal F10. Our DCF confirms a valuation range of p1800-p1900. Upside risks would come from the acquisition of Femsa, which looks feasible given SAB Miller’s financial flexibility.

Cadbury

Stock price: p800.5

Conclusion: We think a potential Hershey bid or a Hershey-Ferrero alliance might prompt Kraft to increase its offer but it is unlikely to exceed p860 per share or $20bn ( the top end of our estimated valuation range).

Hershey and Ferrero confirmed that they are reviewing their options regarding Cadbury.

-We envisaged in a previous comment (Sept 7th) that Hershey might accept to be diluted to 51% and join in a JV in order to get a better access to international markets.
According to the FT, Hershey would pursue a $17bn bid for Cadbury topping Kraft’s $16.2bn offer.
Assuming 4x leverage and the issuance of class B stocks, we estimate that Hershey ($5bn sales) could fund $4.5bn. More funding would require the issuance of non voting shares which might be more difficult to get and the contribution of external investors.

-As to Ferrero ($9bn sales) we estimate the borrowing capacity at $6-$7bn based on zero existing debt and EBITDA margin of 19%. Our assumptions remain to be confirmed as we do not have access to financial statements. According to the FT, net debt was $3bn, which would reduce the borrowing capacity to $4bn.

-Last Cadbury balance sheet could handle $4-$5bn debt.

Consequently, we estimate total funding between $14bn and $17bn, while Kraft could afford a revised offer estimated close to $20bn.
Matching a revised offer from Kraft would probably require the financial backing of a private equity firm.
In addition, the amount of synergies should be much lower than Kraft’s estimates, given the geographic exposure of both groups.
As a result, we feel that the likelihood of offering more than 860p is low.

Based on the current stock price and assuming that Kraft would raise its offer to 860p, Cadbury offers less than 10% upside potential. Based on the low end of our range (790p), the stock looks fully priced.

Danone

Stock price: €42.5

Conclusion: Sharp downgrade of medium term annual sales growth target. We stick to our valuation range of €40-43 per share. Stock seems fully priced

We felt that the objectives of +8-10% growth that where annonced in 2008 following the acquisition of Numico to justify the premium paid were not sustainable. We were expecting the group to cut its medium target, but we are surprised by the magnitude of this downgrade. +5% growth corresponds more or less to the objectives of Danone peers in the food sector. The new objectives for the medium term is even below the former target including the slow growing biscuit business, which looks clearly disappointing for a group supposed to be smaller, leaner and more focused on the fastest growth segments in the food industry (dairy, baby food and water). Danone is acknowledging that new consumer behavior might prevent it from boosting revenues and margins through highly priced innovative blockbusters. As a result, Danone is moving from a value to a volume driven strategy.

The objectives of €2bn of free cash flow by 2012 implies a 2010-2012 CAGR of 17% which looks ambitious compared with the revised expectations for top line growth.
The absence of guidance on the margin front is reducing bottom line visibility. We believe that management will more focus on capex and working capital release than margin improvement to get there.

The good news is it will be easier for management to meet sales growth expectations in the future. Nevertheless, Danone trades at 15.5x P/E and 11x EV/EBITDA, which implies more than 10% premium to peers, more difficult to justify today. We continue to prefer to buy Nestle which offers compararable growth and margin improvement at a discount vs Danone.

PPR

Stock price: €82.2
Conclusion: Recent stock weakness offers a good entry point. The discount to luxury peers has widened to 30%. Notwithstanding the dilution related to CFAO listing, we expect further portfolio restructuring.

CFAO launches its IPO- Entreprise value range €1750-2050m

CFAO valued between 7x and 8.1x EBITDA estimates for 2009.
PPR is selling 31m shares representing 50.39% of the capital of CFAO.
The price range (€24.8-€29 per share) implies an equity value of €1.5bn-€1.8bn and an entreprise value of €1750-2050m, including $250m of net debt.
CFAO management is looking for €210-220m EBIT this year, which implies around €250m EBITDA.
We think that management has been conservative, as according to forecast EBIT should deteriorate at a much faster rate in H2 (-32%) than in the first six months of the year (-12%).
As to the valuation, we feel that the high end of the range looks probable in light of the strong fundamentals of CFAO and the expected return to double digit growth next year.

Implications for PPR.
Net debt should decrease from €5.4bn in 2009 to around €4.3bn by the end of 2009 (2.2x EBITDA).
We estimate that the listing will dilute PPR’s EPS by around -4.5% in 2010 (based on the high end of the CFAO valuation range).
However, we believe that it should help PPR to regain some room for manoeuvre and possibly take the full control of Puma.

PPR trades at a 30% discount to peers (12.3x 2010) in the luxury sector, based on 2010 estimates (post CFAO IPO), which provides a a good entry point. We raise our valuation range to €92-€95 per share.

Anheuser-Bush Inbev

Stock price: €34
Conclusion: Favorable geographic mix coupled with superior execution. We raise our valuation range to €39-41 per share.

9 months: revenue growth +1.8% organic (+81% reported to $30bn), beer volume down 1.4% , EBITDA growth +18% organic (+67% reported). Guidance: EBITDA growth Q4 in line with Q3 (+12% organic).

Brazil helps.
ABInbev continues to outperform peers with a slight decline in volume compared to an average decline of 5% for peers in the first 9 months. Sales in Latin America North, mainly Brazil, rose by 8% (accelerating in Q3 +11%) helping to offset lower volume in the US, Europe and Asia. Market share in Brazil increased by 218bp in Q3 to 69.4% according to Nielsen. Going forward, Brazil should continue to benefit from positive macro factors such as increased disposable income and improved consumer confidence, while comparison should be easier elsewhere, except Russia.

Superior execution.
-Bottom line is expanding at a much faster rate (+18% EBITDA,+22% EBIT organic growth) driven by the synergies derived from the integration of AB ($1bn for the whole year), procurement and manufacturing best practices and distribution savings in the US. In addition, ABInbev benefited from lower media rates in Europe and in North America.
Savings are ahead of plan and we think that management might soon revise up its guidance of $2.25bn by the end of 2011.
-Cash management to accelerate deleveraging. We estimate FCF at $6.4bn this year, driven by savings, lower Capex ($1bn less from the combined base), $500m working capital release in the US.

Asset disposal done.
ABInbev overachieved its target with $9.4bn of asset disposal (stake in Tsingtao, Oriental Brewery, Metal packaging, Central European operations, Theme Parks) of which $7.4bn are cash proceeds at closing. We expect net debt to decrease to $49bn in 2009 (3.8x EBITDA), $39bn in 2010 (2.9x) and $31bn in 2011 (2.1x).

ABInbev trades at 15.3x and 12.7x P/E based on 2010 and 2011 estimates, which we feel looks reasonable in light of our estimated 2010-2012 CAGR in EPS (20%+). The stock offers almost 18% upside based on DCF.

Long ABI at time of writing.

Bulgari

Stock price: €6.25
Conclusion: We think that the stock looks fully priced against peers and close to the high end of its valuation range, based on our revised DCF (€6.7 per share).

Q3: sales down 9% reported to €233m, down 14% like for like. EBIT down 36%, net profit down 69%..but returning to €7m profit. 9months down 17% reported to €629m, €33m losses vs €77m profit last year.

Two good news:
-the decline in top line is decelerating (-31% Q1, -28% Q2 and -14% Q3). DOS retail sales decreased by only 4% in jewelry and 6% in watches in Q3, with accessories up 10% in dedicated stores. According to management, Q4 should benefit from the end of destocking in perfumes and in accessories, while visibility remains limited in watches and in jewelry.
Although 2010 will benefit from an easy comparison base, notably in H1, management does not expect a strong rebound in wholesale (around 50% of sales), as retailers are now used to work with low inventory.

-Operating costs have started to come down, by 10% in Q3. Importantly, the decrease was not purely driven by communication expenses (-9%) but broad based with savings in personnel costs, variable selling expenses and other administratives. The retail network (up by 5 stores to 169 units) is expected to remain fairly stable in the next 12 months as store openings in Asia should be offset by closures of non profitable units. On the balance sheet front, net debt remained unchanged at €330m, helped by lower capex and working capital inflow.
We expect Bulgari to end the year at break-even excluding restructuring charges. We forecast mid single digit growth in sales next year and around €60m profits.

Bulgari strongly rerated since March and is now trading 14xEV/EBITDA based on 2010 estimates, implying little upside potential.