June 10, 2010
Stock price: €43.4
Conclusion: Booming sales in China coupled with a strong dollar bode well for 2010. Nevertheless, we feel that good news are largely priced in (19x-15.4xP/E based on calendar 2010 and 2011 estimates).
F10 results: Sales up 13% to €714m. Net earnings €86m (unchanged vs last year). No guidance for F11 but management “very confident”..
Key reasons behind management’s confidence for F11
–Positive outlook in Asia Pacific. Asia Pacific is the number one market , accounting for 35% of group sales and 53% of Remy Martin revenues. China accounts for the bulk of sales (26% of revenue) which bodes well for 2010-2011 given the booming macro environment. China, combined with a return to slight growth in the US should more than offset subdued demand in Europe.
–Investments are paying off. Remy Martin is gaining share in cognac following the recruitment of 400 new sales people and marketing step up (+21% spending last year). According to management Remy Martin has become the second largest brand in value in China behind Hennessy, ahead of Martell.
–Competitive environment structurally favourable in cognac. CEO acknowledged that it is easier to maintain pricing under control in cognac than in vodka, given the limited number of key players.
–Positive swing from the dollar. According to CFO, forex could lift operating earnings by €15m this year, and another €15m next year.
In conclusion we look for €924m sales (+6.5% organic) and €114m net profit (+32%).
Medium term target might be difficult to reach.
Margin was slightly disappointing last year, owing to advertising spending. Nonetheless, management expects to become the most profitable player in the industry within 3-4 years. Operating margin reached 19% adjusted for central costs in F10 (excluding third party distribution), against 26%-28% for peers.
–Gross Margin (58%) looks in line with competitors.
–The difference stems from higher marketing spending and lower economies of scale. Management made it clear that marketing spending will continue to increase, notably in Asia where the group is gaining market share. Consequently, spending level should remain 2-3 percentage points higher than competitors. We were also surprised to hear from management that “distribution costs are globally in line with competitors”. If it is the case, we struggle to explain the gap with Pernod Ricard or Diageo. We think that smaller volume should lead to lower economies of scale and higher distribution costs. As a result, Remy Cointreau might find it difficult to bridge the gap.
–Last, champagne (12% sales) will continue to weigh on margin. Remy Cointreau lost €4m last year and projects to break-even in F11. Management believes a medium target of 15% is reachable. However, Remy Cointreau’s brand equity looks weaker in champagne than in cognac and we wonder whether it can lift pricing in a highly competitive market place.
Remy Cointreau trades at 19xP/E and 14EV/EBITDA based on 2010 estimates, implying 28% premium to peers. Premium remains substantial based on 2012 (15.4xP/E). We think F11-F12 growth prospects are well reflected in the stock price. Our valuation range of €44-€46 per share suggests limited upside potential.