Pernod Ricard

Stock price: €62.5
Conclusion: Trading update leads us to confirm both our estimates for F10 and our valuation range for Pernod Ricard (€65-€67 per share). We think the stock remains fairly valued.

F10 (ended June) trading update: sales down 2% reported (up 2% organic). EBIT growth between 3% and 4% vs 3% previously estimated.

We confirm our €3.90 EPS estimate for the year (-9%)
EBIT growth will be held back by negative forex impact and changes in scope.We expect reported EBIT to retreat 2% to €1810m.
In addition EPS will be diluted by a higher number of shares.

We look for €4.51 in F11, up 15%
We think organic growth could reach 4%, compared with 2% last year and 3% in Q4. H1 will benefit from easy comps (down 3% last year). According to management, Asia and Latam remained buoyant while the US improved. Europe remains the weak spot.
Forex could add 6% partly offset by -1% impact from changes in scope.
We expect margin progression to resume despite further increase in marketing spending, helped by positive leverage and forex.

Pernod Ricard trades at 14.9x and 13.3x P/E and 12.5xEV/EBITDA based on calendar 2010 and 2011 estimates. We think Pernod Ricard looks fairly valued.

Pernod Ricard

Stock price: €64.1
Conclusion: Q3 confirms a rebound in sales. We slightly upgrade our valuation range up to €65-€67 per share, mostly due to improved currency . We reconfirm that Pernod looks fairly priced.

Q3 sales up 14% to €1.5bn (down 4% 9m), +16% organic (+2% 9m). Guidance F10 raised to 3% organic growth in EBIT from +1-3% previously.

Q3 growth was stronger but also boosted by “technical effects”.
-More than 2/3 of growth came from the conjunction of destocking in Q3 last year, earlier Easter and later Chinese New year.
-Sales momentum remains highly contrasted. Emerging markets grew 31% driven by India, China (+40%) and Vietnam. Western Europe continued to decline, impacted by Spain, the UK and Ireland while the US were only slightly up.
-Overall price/mix effect improved in Q3 mainly due to Martell. However, 6 strategic brands reported a lower YTD price/mix impact vs H1, notably Absolut and Chivas but also Ricard, Malibu, Beefeater and Havana Club.

As expected Fiscal 2010 will be a year of consolidation (EPS expected to go down 9%).
-Organic EBIT growth (+5%) could slightly exceed guidance, despite higher marketing expenses.
-Reported growth will be held back by negative forex impact (- 4% estimated, less than management forecast) and changes in scope (-3%).
-In addition, EPS will be diluted by the recent share issue.

Fiscal 2011 could return to double digit growth (EPS est €4.45)
-Organic growth (+4%) should benefit from easy comps in H1.
-Growth in emerging markets looks sustainable based on economic forecasts. We think sales could expand 8%, accounting for 2/3 of consolidated growth. The rest, around 1/3, would come from +1.5% growth in Europe and +3% growth in Americas.
-It remains to be seen whether Absolut will return to growth in the US where the industry has engaged in heavy discounting.
-Forex impact could turn positive (almost 4%) based on current exchange rates.
-Gross margin should benefit from positive leverage combined with the benefits of a weaker €. Although management did not comment on marketing spending for next year, we think they might continue to rise in Asia where competition is tougher, but also in Europe where Pernod Ricard has underinvested over the recent period.
-Conversely, a stronger dollar will impact financial expenses derived from US debt.

Pernod Ricard trades at 15.4xP/E and 12.7xEV/EBITDA (8% premium to Diageo) based on calendar 2010 estimates. Our DCF suggests a slightly higher value. We think that brewers look cheaper and continue to offer a better return.

Pernod Ricard

Stock Price: €59,9
Conclusion: Trading statement confirms a slow start. Pernod Ricard looks fairly priced in light of our valuation range of €59-€62.

H1 Trading statement: Sales down 3% like for like (-4% Q1-2% Q2). Management confirmed +1% to +3% EBIT organic growth

We expect 2010 to be a year of consolidation for Pernod Ricard
-Notwithstanding a return to growth in Q3 (+8%) helped by much easier comparison, we think that exceeding 1% organic growth this year will be very challenging.
-Currencies should impact reported revenue growth by -1 to -2%.
-Management made it clear, that marketing expenses will increase relative to sales.
-Pernod Ricard’s trading statement confirms that Asian sales continued to perform well but that key markets such as Europe and the US keep struggling.

Pernod Ricard trades at 14.3xP/E and 13xEV/EBITDA based on calendar 2010 estimates . Our DCF suggests little upside (€62 per share). We think that brewers (ABInbev and Heineken) offer better upside in the coming months.

Pernod Ricard

Stock price: €56.1
Conclusion: The stock further re-rated since September (up 9%) reaching our valuation range of €55-58. We expect it to consolidate around this level. Although we expect like for like growth to accelerate in H2, we think that EPS growth will be held back by negative forex and higher marketing spending.

Q1 sales down 6% reported, down 4% like for like. Guidance will be given at the AGM on November 2.

Q1 sales could have been worse considering the tough comparison base (sales up 7% in Q109), and the timing of US distributors orders for Christmas and the New Year. Diageo sales declined by 6% during the corresponding period.
We think that Pernod Ricard could end the year with net positive organic growth between +1-2% thanks to : return to positive growth for Absolut in the US ( +1% in consumer off take in Q1), the end of destocking from wholesalers, continuing positive price and mix impact, strong momentum in emerging markets (+15% sales in emerging Asia in Q1, Martell gaining share), higher marketing support.

EPS growth momentum will be held back by four factors:
-weak organic growth in H1 which accounts for more than 2/3 of the full year earnings. Altough we expect Q2 to improve, this should not be enough to compensate for the slow start in Q1. The second half of the year should benefit from positive operating leverage, but the contribution is smaller.
-Higher marketing expenses. We understood already in September that management would raise expenses, that has been confirmed last week. We expect spending to amount to 18% of sales against 17.2% last year (-€50m impact).
-We estimate the negative impact of the dollar on operating earnings at around €85m, only partly offset by reduced financial expenses (€21m).
-higher number of shares
As a result, profit from recurring operations could be down 5%, while adjusted earnings could remain flat helped by lower financial expenses. EPS could fall by 8.4% to €3.91.

The stock trades at moderate 13.7x and 13.5x P/E based on our calendarised estimates for 2009 and 2010 vs 15 and 14x respectively for Diageo. Based on EV/EBITDA, Pernod Ricard looks more expensive than Diageo (12.5x 2010 vs 10.6x for Diageo).
The stock price reached the middle of our valuation range, which suggests that it is fairly priced for the coming months.

Pernod Ricard

Stock price: €51.4
Conclusion: 10%+discount to Diageo, further upside based on €53-58 valuation range.

FY2009: Sales up 9% reported, flat like for like, EPS up 10%. FY10 guidance given on November 2.

Looking at FY2009, we would like to highlight:
-Solid pricing (around +4%) which helped to maintain sales of the top 15 brands stable in a recessionary environment.
-lower marketing expenses (-7%) in line with the industry trend.
-Excellent numbers in Asia and the ROW, partly helped by forex and surprisingly good resistance of the French market.
-a tough year in America that was saved by the consolidation of Absolut, mainly responsible for a 50% increase in current earnings.
-Disappointing earnings in Europe, the weak spot, with flat sales and lower margins.
-Overall, EBIT grew 21%, 3.5% like for like (vs flat sales), 13% thanks to Absolut, 4.5% thanks to Forex.
-Strong growth in Free Cash Flow (€1276m) helped by lower working capital and capex.

In the absence of guidance for FY 2010 we look for:
-3% decline in sales, driven by -1% organic, -2% in forex and disposals. Although Q1 should be tough (4-5% down), the rest of the year will benefit from easier comparison. In addition, Asia could perform better than last year.
-As to margins, management made it clear that marketing expenses will increase this year. We factored a 70bp increase to 17.9% of sales. EBIT margin will depend on Pernod Ricard’s ability to contain the COGS and the structural costs. The good resistance of premium drinks, coupled with lower inflation in raw material costs, make us believe that COGS can go down. We see less room for manoeuvre regarding structural costs, which could be slightly reduced (helped by synergies with Absolut of €40m) but could remain stable relative to sales. Consequently, margin could remain unchanged this year (25.6% of sales).
-EPS could retreat 7% from €4.27 to €3.96, impacted by higher number of shares. EPS in fiscal 2011 could rebound by 13%+ helped by a return to 4-5% growth in sales and positive operating leverage.

We know that Q1 won’t be great, but this does not prevent us from expecting further rerating. We confirm our valuation range of €53-58 per share. Pernod trades at 12.5x and 12.2x 2009 and 2010 P/E, 11% discount to Diageo based on calendarised estimates.

Pernod Ricard

Stock price: €48
Conclusion: Attractive Risk Reward, looking for 15%+rerating.

Trading update on 2009 year (end of June): sales up 9% reported, 0% organic. Management confirmed the low end of +3-5% organic profit growth guidance and around +10% net profit.

Notwithstanding some improvement in Q4, with sales down only 3% versus 12% in Q3, we expect revenue growth in financial 2010 to remain held back by poor on-trade traffic and continued destocking from wines and spirits distributors.

However, we find Pernod Ricard attractive for three reasons:
-First, we feel that there is a huge upside potential for Absolut (acquired in August 2008) outside the US, thanks to the existing distribution network of Pernod Ricard. In addition, the network is in place and the integration should be executed at a marginal cost.
-Second, cost control looks even more critical when top line growth slows down. Management’s track record following the acquisition of Allied Domecq leads us to believe that SGA should remain under control and help to preserve the bottom line. Last year for instance, Pernod Ricard managed to increase organic profit by 3% despite flat underlying sales growth.
-Thirdly, the recent right issue coupled with the disposal of Wild Turkey should be sufficient to reduce the refinancing risks. We expect Pernod Ricard to generate €1bn of free cash flow in 2010.

Pernod Ricard looks cheap trading at 11.3x 2009 versus 12.8x for Diageo and 18x for Remy Cointreau. The stock is down 13% in a year, the worst performance in the sector.
We think Pernod Ricard should trade within a €53-58 range, in line with our DCF valuation, which should provide around 15% return in 12 months.