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Figure1:12m’sStockPricePerformanceandTradeVolume

SUMMARYAsthe2ndlargestmanufacturerinthealcoholicbeverageindustrywithfocusonpremiumspiritsandwine,PernodRicardoperateswithitsuniquebrandportfolioof86marketcompaniesworldwide.HIGHLIGHTSWe issue a BUY recommendation with a 12-months target price of 152.00 € per share, whichrepresentsa14.86%upsidebasedonthe15thJanuary2018closingpriceof130.60€.Weused70:30DCFmethodandmultiplevaluation.OurvaluationisbasedontheindustryandGDPgrowthanalysis,takingintoaccountPernodRicard’sspecificstrategyandgrowthdrivers.Weidentifiedthefollowingkeydriverstosupportourrecommendation:• Strongbrandingcontributesstrongbusinessstrategy

Thestrongportfoliomix,basedonlocalandinternationalbrandsoverapremiumtoprestige-range grants the company access to different markets. The high brand awareness attractspotentialcustomersandhelpstodistinguishfromcompetitors.

• PositiveeconomicdevelopmentinemergingmarketsboostsgrowthThestrongengagement inAsia,which ischaracterizedbydynamicdemographics,continuingglobalizationandtravelactivity,andanincreasingwealthofthepopulationisakeyadvantageandisexpectedtoprovideacompoundannualgrowthrate(CAGR)of7.60%until2022,whileoverallCAGRexpectedtoreach5.72%.

• Socialchangesofferpossibilitiestoattractnewcustomers

PernodRicard’sdecentralizedorganizationacceleratestheadaptionofdigitalizationandsocialtrends. Social trendsare seen todecreaseoverall alcoholicbeverage consumptionbutmightalsoshiftdemandtowardspremiumsector.AdverselyimpactsoftheliberalizationofMarijuanaareexpectedtobeminor.

• EfficiencyprogramstrengtheningoperationalexcellencePernodRicard’stargettosave200m€inOperatingWorkingCapital.Further,digitalizationinoperations,marketing,andsaleseasepressureoncosts.Correspondingly,profitabilityislikelytoincrease.

• AdequatefinancialstructurewithroomforimprovementSuccessfuldeleveragingreducedDebt toEquity from0.69in2016 to0.62 in2017. Improve-mentinthecashconversioncycleandliquiditysharpensPernodRicard’sfinancialprofile.

Themainrisksremainthehighsensitivitytounforeseeablechangesintheregulatoryenvironment,substitution due to increasing rivalry and lower product differentiation along with decreasingmargins,adownturnintheeconomicdevelopment,especiallyinemergingmarkets.

MarketProfile

Stockexchange: EuronextParis

Ticker: RIFP

ISIN: FR0000120693

No.ofShares: 265,421,592

ParValueofShares: 1.55€

Marketcap: 34,664m€

52-weeks: low 105.25€

high 133.40€

Volatility: 12.78%

PERNODRICARDSAConsumerGoods|Food,Beverage&Tobacco|Distillers&Vintners

Performance 1m 3m 12m Ratings Long-term Short-term Outlook

Price15/01/2018 130.60€ Pernod 0.69% 12.73% 28.17% Fitch F3 BBB POS

12mTargetPrice 152.00€ CAC40 -1.12% -0.32% 9.26% Moody's P-2 Baa2 STABLE

Upside 14.86% SBF250 -0.72% -0.17% 11.02% Standard&Poor's BBB A-2 POS

Source:TeamAnalysis,Bloomberg

KeyFinancials

2016/2017 2017/2018e 2018/2019e 2019/2020e 2020/2021e 2021/2022eRevenues(m€) 9,010 9,465 10,118 10,775 11,366 11,897Rev.growthyoy 3.8% 5.1% 6.9% 6.5% 5.5% 4.7%EBIT(m€) 2,380 2,461 2,681 2,855 2,955 3,093EBIT-margin 26.4% 26.0% 26.5% 26.5% 26.0% 26.0%ROA 4.6% 5.0% 5.4% 5.6% 5.6% 5.6%ROE 10.2% 10.7% 11.0% 11.3% 11.1% 11.0%Debt/Equity 0.62 0.56 0.53 0.52 0.50 0.48EPS(€) 5.28 5.78 6.33 6.91 7.28 7.62DPS(€) 1.92 2.37 2.60 2.83 2.99 3.13DPSgrowthyoy 2.3% 23.4% 9.5% 9.1% 5.4% 4.7%

Source:TeamAnalysis,S&PCapitalIQ

Europe Americas Asia,RestoftheWorld

Figure2:PernodRicard’sGeographicalSales

BUSINESSDESCRIPTIONPernodRicardSA(RI.PA),incorporated1975,isanalcoholicbeveragesproducer,oneoftheleadingworldwide international groups: 2nd in wine and spirit and 1st in premium/ultra-premium andprestige spirit. (1)With a decentralization strategy and a geographically segmented business, theentity has a headquarter for each region: Europe, the Middle East and Africa/Latin America(EMEA/LATAM) in Paris, France, North America inNew-York, US, and Asia in Hong-Kong, China.PernodRicardisstructuredwithsixbrandscompaniesinchargeofthestrategicbranddevelopment,theproductionandmanagementofindustrialfacilitiesand86marketcompaniestaskedwithmarketstrategies. On the 30th June 2017, the group counted 96 industrials production site, 18,442employees.Products: Pernod Ricard owns 38 premium brands that are classified under five categories:international strategic brands (13), strategic wine brands (4), innovation (3), luxury (3) anddomestic strategic brands (15). The product range is wide: Whiskey, Liqueurs, Cognac, Brandy,Bitters,Anise,Gin,Vodka,Champagne,TequilaandWine.Twothirdofthesales(intermofvolume)comefrom2categoriesofalcohol:whitespiritsandrumsandwhiskeys,forwhichthegrouprankedrespectively 3rd and 2nd position among international groups. The creation of value is completedfromtheharvestoftherawmaterialtothecustomer’sdeliverythroughoutproductioninfrastructuremodernizationandcapacityupgrade.Geographic location: The group has expanded into 86 regions. Its decentralized organizationalstructure enables flexibility and agility to meet customers’ and consumers’ needs and market’sexpectations.Salesareoriginatedfor29%intheAmericas,40%inAsiaandtherestoftheworldand31% in Europe (see Figure 2). The 96 industrial sites are located worldwide. This geographicscattering enables the group to locally embed its activities, is sometimes necessary to respect“appellationoforigin”requirementsandcreatesanetworkenhancingthesynergiesbetweensites:

• Wineproduction:France(Champagne),Spain,Australia,NewZealand,Argentina,CaliforniaandChina;

• Productionofdistilledalcohols:SwedenandPoland(vodka),UKandGermany(gin),Cuba(rum),Scotland,Ireland,India,CanadaandBrazil(whiskey),FranceandArmenia(cognac),Mexico(tequila);

• Production of liqueurs and various spirits: Europe (France, Spain, Italy, Finland, CzechRepublicandGreece),Asia(India)andAmericas(USA,BrazilandArgentina).

COMPANY’SSTRATEGIESAdaptationtonewconsumptionwaysandnewmarkets

• EMEA/LATAM: winning strategy, market share gains. In Europe, Pernod Ricard aims toconsolidateitspositionandwinemarketshare(leaderwith30%ofmarketshareinFrance)through two key growth drivers: prestige and innovation. In Latin America, theinternationalbrand’spenetrationshouldbedonethroughaportfoliooflocalbrands.

• NorthAmerica:“reboundinworld’slargestmarket”,PernodRicardrestructuredsalesandmarketing organization around consumption occasions. In addition to the newdecentralized-market approach, marketing and sales teams are working more closely,intermediateelimination,tohaveabetterandfasterunderstandingofconsumerneedsanddecision-making process. Pernod Ricard’s top brands of this market are Jameson andAbsolute, followed byMalibu,Martell andAltos. Innovation plays a key role in the salesgrowthforallthesebrands.

• Asia: “ideally positioned in a high-potential market”. Pernod Ricard aspires to takeadvantage to the intense economic and demographic dynamic of the region in order todevelop its global market and sales. Inspired by the increasing purchasing power, theydecidedtoimplementapremium/super-premiumstrategyandtodeveloptheirportfoliointhis specific sector. They have developed an excellent knowledge of the local routes tomarket,which isessentialfortheirmarketpenetration.Accountingfor74.4%oftheAsia-Pacificwinemarketvalue,59.4%ofthespirit-marketandreflectingahighgrowthpotential,China is a targeted market for the group. (12)Despite of the GST, India recorded and isexpected strongwineand spirit industrygrowthswhichconfirmsPernodRicard’s aim tomaintainingitsleadingpositioninIndia:45%marketshareintermofvalue,byattractingthegrowinguppermiddleclasstotheexistingpremiuminternationalbrandsthroughtheconstructionofastronglocalbrandsportfolio.

Innovations:PernodRicardispayingabigattentiontothedevelopmentandimplementationofbothCoreBusiness(incrementalinnovation)andNewBusinessinnovations(breakthroughinnovation)inorder to increase itsfuture growth.Therefore, the Groupcreates newbeveragessuchasJamesonCaskmates,ChivasRegalExtraandAbsolutLime, inordertointroducenew flavorsand,thus,satisfymorecostumers. Inaddition,PernodRicardfocusesonthepremiumizationbycreatingattractive designsand servicesfor their consumers, positioning itself as a premiumcompany.Moreover,theyhaveaBIG (Breakthrough Innovation Group),devotedtoestablishthefuturegroup’sconviviality.Organicgrowth:PernodRicard’smedium-termobjectiveconsistsofreachingtheorganicgrowthofbetween+4%and+5%fromitsrecurringoperations.Toachievethat,thegroupfocusesonoperatio-

14.20%

9.82%7.50%1.50%0.74%

66.24%

SocietePaulRicard

MassachusettsFinancialServices

GroupeBruxellesLambert

CaissedesDepotsetConsignations

Otherstagnantshares

Freefloat

nalexcellence:amoreefficientandsimplifiedorganizationleadingtoabetterexpensemanagement.Concretely, theyoperate through threeheadquarters.Moreover, they consider talentdevelopmenteitherbyimprovingtheiremployeesorbyattractingandacquiringnewones.In2017,PernodRicardhas built a campus to ensure a qualitative training for its employees (700 per years). Anotherimportantstrategicdecisionregardstheroute-to-market/consumer.PernodRicard’sobjectiveistoimprovethedistributionchanneltargeting,andalsoselectthebestamongthetraditionaldistributionchannels (large retailers, bars, restaurants), travel retail (ecommerce) and thehome trade.Travelretail represents a key challenge for the group. Finally, the group promotes sustainability andresponsibilityfortheirperformanceonthelongrun.Theysetthemselvesmediumtermgoalstobeachieved by 2020 focusing on four main pillars such as governance, supply chain, brand andconsumers, and resource stewardship. Thus, Pernod Ricard aims to achieve 100% of certifiedvineyards,100%ofrecyclablepackaging,0%ofwasteatproductionsites,aswellas20%and30%ofreductionofenergyconsumptionandCO2emission.External growth - “A targeted M&A strategy”: Pernod Ricard targets to enhance its portfoliomanagement and a premiumization to position itself as a luxury brand and to attract wealthyconsumer.Inadditionofconstantdevelopmentandinnovation,PernodRicardacquiredthemajoritystakeoffourpromisingbrands:Monkey47(04.2016),DomainesPinnacle(09.2016),SmoothAmbler(01.2017)andDelMaguey(08.2017).Thisenablesthecompanytoprovideadditionalhigh-qualityproducts.Inthesametime,thegroupdecidedtodivestoffournon-coreassets(brands).Today,thecompany’s portfolio, consisting with the most popular and luxury brands, shows how well thecompanyisdiversifiedwithhighqualityproducts.CORPORATEGOVERNANCEShareholders structure:PernodRicard’scapitalstockconsistsofaround265millionsofcommonstocks that are listedonnumerousmarket indices, including:CAC40,LondonStockexchange, theSBF 120 and the SBF 250 French indices; Euronext 100 and DJEuroStoxx. Pernod Ricard hasimplementedonlyonestocksplit,thetwo-for-onesplitof2008.The share capital is broken down as follows: 38.9% of the share capital is hold by various USinstitutionalinvestors,15%bythesociétéPaulRicard,11.2%byUKinstitutionalinvestors,10.6%byFrench institutional investors, the remaining capital is shared by other institutional investors,individuals,boars-management-employees,andGroupeBruxellesLambert(seeFigure3).Moreover,PernodRicardFamilyown21%ofvotingrights.Corporatemanagement:The management structure consists of the General Management,represented by Alexandre Ricard (Chairman & CEO), the Executive Board and the ExecutiveCommittee. As the third generation, Mr. Ricard got back the control of Pernod Ricard after theretirement of the CEO in 2015,Mr.Pringuet, the only non-family member having enrolled theexecutiverole.Atthattime,healsobecamechairman,succeedinghismother.The executive board gathers four directors (see Figure 4) and the CEO; it assists the CEO in hisresponsibilities.AllofthemhavebeenworkingforPernodRicardoranaffiliateforatleastmorethan15yearsandhavealsodevelopedacomprehensiveunderstandingofthecompanyanditsindustry.The executive committee is comprised of 15 members: the executive board and the managingdirectorsoftheaffiliates.FiveofthemstartedtheycareeratPernodRicardas(internal)auditorsanda greatmajority have beenworking for the group for at least 15 years aswell.Theymeet everymonth toenhance the coordinationbetweenheadquartersandaffiliates. In addition, theywork toimprovePernodRicard’sbusinessactivitiesperformance,tosetfinancialandoperationalobjectivesandtoensurePernodRicard’spoliciesmaintenance.Corporategovernance:Theboardofdirectorsismadeof15members,includingthechairmanandCEOMr.AlexandreRicard,ViceChairman,fourDirectors,six IndependentDirectors, twoDirectorsrepresenting employees and one Director representing employees (see Figure 5).With 35.7% ofwomenontheboardofdirectors,thecompany’sgenderdispositionisinaccordancewiththeAFEP-MEDEFcode.Theremunerationof theCEOisdisplayedintheannualreport.PernodRicardmakesgreat emphasis on business transparency, organizing general shareholders meetings, investorsconferences,andonethic,preventingofcorruptionandanti-competitivepractices,inordertoensurea positive relationship among stakeholders: employees, shareholders, customers, consumers,suppliers.SOCIALRESPONSIBILITY:SUSTAINABILITYANDRESPONSIBILITYBeingincludedinmajorCSRindexessuchastheEthibelSustainability(ESI)ExcellenceEuropeandGlobal and the FTSE4Good or EuronextVigeoEiris‘World 120” / “France 20”, Pernod Ricarddemonstratesitshighsocialresponsibilityinvolvement.TheGroupresponsibilitiesarebasedonfourmain areas of engagement, which include promoting responsible drinking, protecting the planet,empoweringemployees,developingcommunitiesandengagingpartners.Thus,topromotethebestpractices and to be responsible toward the alcohol consumption, the Group created an event“Responsib’AllDay”. In addition, Pernod Ricard founded the Fondation pour la Recherche enAlcoologie(FRA),anorganizationthatfinancesandpublishesstudiesonalcoholconsumptionandits

AlexandreRicardChairman&ChiefExecutiveOfficer

ExecutiveDirector

ConorMcQuaidGlobalBusinessDevelopmentDirector

CédricRamatHumanResourcesandSustainability&

ResponsibilityDirector

IanFitzSimonsGeneralCounsel

GillesBogaertManagingDirector,Finance&

Operations

01.AnneLange

02.ManousosCharkoftakisEmployeeDirector

03.WolfgangColbergChairmanoftheauditcommittee

04.KorySorenson

05.GillesSamyn

06.VeronicaVargas

07.PierrePringuetVice-ChairmanoftheBoardofDirectors

08.NicoleBoutonChairmanofthenominationCSR&compensationcommittee

09.CésarGiron

10.SylvainCarréEmployeeDirector

11.MartinaGonzalez-Gallarza12.Paul-CharlesRicard

PermanentRepresentativeofSociétéPaulRicard

13.IanGallienne

14.AlexandreRicardChairman&ChiefExecutiveOfficer

+Chairmanofthestrategiccommittee

Source:TeamAnalysis,PernodRicard

Figure3:ShareholderStructure

Figure4:ExecutiveBoard

Figure5:MembersoftheBoardofDirectors(inbluetheindependent

directors)

Beer Spirits Wine

inbn€

impact on consumer’s health. Finally, they participate to educational programs and awareness-raising campaigns targeting young people and pregnant women. The company is also proud toobservethat“86%ofaffiliatescarriedoutatleastoneresponsibledrinkinginitiative(2016-2017)”.Moreover,thecompanymakesalotofpartnershipswithdifferentcountriesfinancing,forexample,thePaulRicardOceanographicInstitutethatprotectaquaticbiodiversityandmarineecosystemsinFranceorhelpingtheWorldWideFundonNature(WWF)toprotectsnowleopardinRussia.PernodRicardalsotakesactionstoreduceCO2emissionsbyinstalling5,000m2ofsolarpanelsinIndiaandtoprotecttheplanet’swaterresourcesbysaving,reusingandrecyclingit.Inaddition,theGroupiscaringabouttheiremployeesbyhighlyrespectinghumanandworkingrightsandbytrainingtalentsinPernodRicardUniversitydevelopedin2011.INDUSTRYOVERVIEWANDCOMPETITIVEPOSITIONINGIn2015,wineandspiritscontributedonly21.1%totheglobalalcoholconsumptioninvolumeterms,whileinvaluetermsthesetwosegmentsaccountedfor47.4%fortheoverallvalueofthealcoholicbeverageindustry,whichintotalaccountedforabout760bn€(seeFigure6).(13)Thereby,demanddynamicsanddrinkinghabitsareverydiverseandculturalinfluenced.Meanwhile,thetrendtowardspremiumizationandregionaldiversificationwitha focusonemergingmarketsappears tobecomethenewpriorityforinternationalbrandcompanies.MacroeconomicsThekeydeterminantoftheconsumptionofwineandspirits,especiallyinthepremiumsegment,istheincreasingdisposableincomeofpotentialcustomers,whichinturncorrelatespositivelywiththeeconomicgrowth.TheWorldBankexpectstheglobalrealGDPtogrowmoderatelyby3.1%in2018with significant distinctions between mature and developing markets. (14) High growth rates, incombination with favorable demographic development, higher personal wealth and continuingglobalization are interpreted to drive the increasing demand for premium alcohols in emergingmarkets. Inconnectionwiththis, thehistoricallystrongpopulationgrowthindevelopingcountriesrepresentsanassistingfactortoincreasetheconsumerbase.(15)Incontrast,thepremiumizationanddigitalizationinmaturemarketssuchasNorthAmericaandEuropemightbeoneofthesolutionstofacemodest growthandnewdrinkinghabits. In combinationwiththepositiveeconomic situationandoutlookthistranslates intooverallstrongexpectationstowardsgrowthforthealcoholmarket(seeAppendix7).France:Economicrevivalofthe“GrandNation”takestimeThemainambitionoftheFrenchPresidentMacronisthereductionoftheunemployment(9.5%inthethirdquarterof2017),theachievementofasustainablelevelofpublicdebt,andthestopoftheerodingcompetitiveness.ThelabormarketreformsareinterpretedtosupporttheGDPgrowth,eventhoughtheymaypartlycontradictthetraditionallystrongprivateconsumptionsandinvestmentsasrealwagestendtodecrease.Inaddition,theappreciationof+15%oftheEurotowardstheUS-Dollarwithin the last twelve months shortens the possibilities for the export sector. Nevertheless, theprogressivereductionincorporatetaxationshouldhelptheinflationratetoslowlymuscleupto1.30% and GDP to grow by 1.80% in 2018, respectively, underlining the positive overall outlook forFrance. (16)Thetaxadjustment inFrance isnot expected tohaveany significant impact,asPernodRicard’sbusinessisgloballydiversified.US:FED’sdilemmaofstronglabormarketbutlowinflation

- TherealGDPgrowthof3.2%inthethirdquarterof2017confirmedthegoodshapetheUSeconomyiscurrentlyin.(17)Thestronglabormarketwithanunemploymentrateclosetofullemploymentandpositiveconsumerspendingfavorthebusiness friendlyenvironment.Confrontedwithsuchagooddevelopment, the FED may see itself forced to increase interest rates gradually to prevent anoverheatingofthelabormarketeventhoughinflationisclearlybelowitstarget.(18)Butinflationarypressure is likely tobegeneratedwhen theforeigndemandforUSexports acceleratesdue to theglobal economic growth and relatively advantageous USD weakness. Uncertainty arises from thereplacementofFEDchairwomanYellenandtheforeignaffairs,especiallywithregardtoprotectionistmeasures conductedbyPresidentTrump.The tax reform howeverwill havea positive on theUSeconomyingeneralin2018.

- - China:Structuraltransformationdethronestwo-digitalgrowth

China is simultaneously characterizedby stabilityandadecelerationof growth.The inflation rate,CPI +1.9% in December 2017, (19) is in line with the target area. In spite of a mining and steel-producing industry that lost itsmomentum and does not stimulate excessive foreign investmentsanymoreandaweakeningexportsectorasincreasingwagesreducethecompetitiveness,theoutlookforChinaisverypositive.(20)(21)China’sPremierLiKeqiangannouncedarobustGDPgrowthof6.9%for2017,whichisabovethetargetedanannualrealGDPgrowthof6.5%.(22)Thatratewouldimplyadoublingofthecountry’seconomybetween2010and2020.Theaccessibilityofthisambitioustargetdependssignificantlyonthesuccessoftheinitiatedtransformationprocess.Itincludesanincreaseininnovationintheformofhigherqualitativecompetitiveness, focusingonthetertiarysector,andagrowing domestic consumption, which complementary underpins the potential for the premiumbeveragesectorinChina.Inthelongrun,theimplementationofasocialinsurancesystemwouldfur-

France US China India

2006 2.37 2.67 12.72 9.26

2007 2.36 1.78 14.23 9.80

2008 0.20 -0.29 9.65 3.89

2009 -2.94 -2.78 9.40 8.48

2010 1.97 2.53 10.64 10.26

2011 2.08 1.60 9.54 6.64

2012 0.18 2.22 7.86 5.46

2013 0.58 1.68 7.76 6.39

2014 0.95 2.37 7.30 7.51

2015 1.07 2.60 6.90 8.01

2016 1.19 1.62 6.70 7.11

Figure6:GlobalAlcoholMarket-ProductSegmentation

Source:TeamAnalysis,Frent,M.(2016)

Figure7:Historicyoy-GDPgrowth(%)

Source:WorldBank

30%- - - - - - -

- - - -

thercontributetothedomesticdemandasgrosssavingsremainat46.1%ofGDP.(23)India:ChallengesindemonetizationandGSTwillberewardedinthelong-termThedemonetizationaswell as the standardizationof the taxsystemand theharmonizationof thedomestic market by introducing a national Goods-and-Service Tax (GST) in 2017 led to massivedisruptions in India.GDPgrowthdecreased from9.1% in the firstquarterof2016 to5.7% in thesecondquarterof2017. (24)Inthe long-run,both laysthefoundationforsustainablegrowth.Giventhe robust domestic demand and the possible stimulus for investmentsand increasingexports astransportationshellbenefitfromtheGST,negativeseffectwillbetemporaryandtheIndianeconomyislikelytorecoverwithaGDPgrowthof7.30%in2018.IndustryRegulativesituationplaysakeyroleforsuccessoftheindustryThe alcoholic beverage industry is highly sensitive to regulatory measures and legally bindingrestrictions.Country-specificregulationsregardingminimumdrinkingage,saledaysandtimesandthe prohibition of public drinking, reduce the availability of alcoholwhile restrictions or bans onadvertising and promotion of alcoholic products limit the product awareness throughmarketingchannels. (25) The federal implementations of the Chinese anti-corruption campaign, initiated in2012/2013,impactedthealcoholbeverageindustry.PernodRicard’ssalesmateriallydroppedfrom24%and9%in2012respectively2013to-23%in2014(seeFigure8).(26)ThoughcompetitiveenvironmentThe alcoholic beverage industry is characterized by high entrance barriers due to capital andoperational requirements, difficulties in fulfilling regulatory standards, and market access topotentialcustomersviabrandawareness.Whilethewinesegmentishighlyfragmentedwithvariouslocalandinternationalplayers,thespiritsegmentismoreconcentrated.Theproductdifferentiationislimitedthustheswitchingcostsforend-consumersarerelativelylow.Tocompensatethislackofdifferentiation, alcohol manufacturers are striving for innovative products and the coherentmarketingmixaskeyelementforcustomeracquisition.Thebargainingpowerofsuppliersdependson the origin of products and/or services: suppliers from the agricultural sector are powerfulbecausetheyarehighly specialized inmonoculturesandinducerelativelyhigh switchingcosts formanufacturersbasedontheuniquenessandrequiredqualityoftheirproducts.Industrialsuppliers(cork,bottles, labels,carton)have lowbargainingpowerduetoa lowdegreeofspecializationandconsequentlylowswitchingcosts.However,thepremiumsegmentremainshighlyattractiveaswineandspiritsareofferinghighermarginscomparedtootherconsumergoodsandgrowth-promotingfactors(seeFigure9+10,Appendix9).DriversandtrendsAside from an increasing population and wealth asmain determinants, the industry is driven byhighly divergent consumption habits. In mature markets such as Europe and North America, agrowingawarenessofhealthissuesandamodern,sportivelifestylecontradictsalcoholconsumptionas frequency and volume go down. Simultaneously, occasional drinking patterns allow premiummanufacturers to promote their products and specialize on a new target group. In this context,product innovationandalso individualizationofproduct servicesaregrowing.Thedigitalizationdoes not only offer the chance of using Big Data to systematically contact customers via smartadvertising, but also boost e-commerce and reduce costs. Further, higher travel propensitythroughout the world offers travel retail opportunities for leading beverage brands, i.e. duty-freeshops.TheforecastedgrowthforPernodRicard’skeymarketswithfocusonfinewineandspiritsisverypositive.CompetitivepositioningPernodRicard is positioned 2nd globally in terms of sales after Diageo.With regard to its criticalmarketsize,adequatecapitalfacilities,widedistributionnetworkandtightsupplierrelationshipsthegroupiswellequipped. Itswell-knownproductportfolio, itspowerin innovationasdemonstratedwithitsAbsoluteVodkavariationsand itssuccessoftheIrishwhiskeybrandJameson, itsstrategicorientation towardsa comprehensivepremiumizationand itsbroadgeographicalpresenceensurePernodRicard’sgoodcompetitiveness(seeAppendix8).INVESTMENTSUMMARYInvestmentThesisWeissueaBUYrecommendationonPernodRicardwithatargetpriceof150.00€whichrepresentsanupsideof14.86%,basedontheclosingpriceon15thJanuary2017.OurestimationisbasedonacombinationofaDCF-Equitycashflowmethodandrelativevaluation.Awareof thefactthatpeershavedifferentstrategiesthatimpactstheaccountingtreatmentandconsequentlythemultiples,weprefer to limit the influenceof the relativevaluationbydevotingaweightof70% to the intrinsicvaluation.Ascrucialkeydriversofourevaluationwedetect:

Food, Beverages and Tobacco

Beverages

Avg. Com-petitor Premium Segment

Gross Margin

27.60% 40.30% 52.60%

EBIT-Margin

12.40% 16.30% 20.90%

Source:TeamAnalysis,Frent,M.(2016)

EntranceBarriers

Figure9:Porter’sFiveForces

Figure8:PernodRicard’sHistoricalSalesGrowthinChina

Figure10:Globalindustryattractivenessbymargin

RivalryBargainingpowerofcustomers

Substitutionrisk

Bargainingpowerofsuppliers

2011/2012

2012/2013

2013/2014

2014/2015

2015/2016

2006200820102012201420162018e2020e

Figure11:Historicsalesgrowthandfuturetrendoffinewine/

champagneandspirits

France US

China India

2016/2017

2017/2018f

2018/2019f

2019/2020f

2020/2021f

2021/2022f

Europe(France) Americas(US) Asia(China&India)

0% 2% 4% 6% 8%

2017/2018f

2018/2019f

2019/2020f

2020/2021f

2021/2022f

Europe(France) Americas(US) Asia(China&India)

Strongindustrygrowth:Thealcoholicbeverageindustrybenefitsfromthepickupinconsumptiondue to increasing economic conditions worldwide. In recent years, the growth of the industryoutperformed the GDP growth. Especially in emergingmarkets, the sound environment and theincreasing wealth leading to a broader middle-class drives the premium segment. While maturemarketssuchasFranceandtheUSareexpectedtogrowfrom4.2%to3.2%andfrom6.5%to4.2%inthenext fiveyears,ChinaandIndiaarecharacterizedbygrowthratesbetween7.9%and6.8%,12.9% and 5.1%, respectively. Despite the adaptions triggered by the Chinese anti-corruptioncampaign,theIndianintroductionoftheGSTanddemonetization,whichwillcausealowergrowthforPernodRicardin2018,webelievethatthestrategicandgeographicpositioningwillboostPernodRicard’s sales and help them to gain even more market share in Asia. This development isaccompaniedbyourpositivemacroeconomicprospect.Costefficiency:Whiledonotseegreatroomforimprovingthegrossmarginduetothestrongtieswith (specialized) suppliers, especially for high-quality agricultural products, the initiated costefficiencyprogramislikelytoaffectPernodRicard’smargins.Theinternaloptimizationinthecashconversion cycle by reducing the inventory of finished goods as well as externally reduced netinterestexpensescontributeanincreasingEBTmargin,whichweassumetoincreasefrom20.6%in2017to21.8%in2020e.Further,graduallygrowingstructuringcostsandthemanagement’ssignaledtargetmarginforadvertisingandpromotionexpensestoremainat19%ofthenetsalessendingastrong commitment towards increasing cost efficiency.We think thatmodernmarketing channels(digitalization,e-commerce)canbeasupportiveinstrumenttoeasethecostpressure.Product innovation and brand awareness: Pernod Ricard’s competitive advantage is its wideportfolioofpremiumbrands indifferentprice ranges.With its localbrands, the companyalreadygained great awareness in domestic markets. The decentralized, consumer-centric organizationallows to serve various markets individually, which is proven by the innovation track record(Jameson,Chivas,andAbsolute).Social & technological development: As mentioned, digitalization will strengthen the directchannel between Pernod Ricard and its customers and represents an important marketinginstrument.Notonlycanitreduceconventionaladvertisingcostsbutadapttoandidentifytrendsinconsumerbehavior.PernodRicardhassignaledthatthecompanyiseagertoinvestearlyinthisfieldtosecuremarketshares.WebelievethathealthylifestylesandoccasionalconsumptionpatternsnotnecessarilyhavenegativeeffectsonPernodRicard’sbusinessastheymightshiftdemandtopremiumsegments.VALUATIONIntrinsicvaluationWedecidedtouseaDiscountedCashFlow(DCFintheformofFreeCashFlowtotheFirm)approachbecausePernodRicard is amature company that generates stable cash flows. Inour opinion, thecompany’s demonstrated capacity to sustainably achieve sufficient free cash flows to the firmrepresents a sound base for our valuation. It also enables us to particularly pay tribute to thecompany’sshort-termfuturegrowthaswellasfactorsthecompany’sperformanceissensitiveto.ExplicitgrowthperiodBased on PernodRicard’s 2016/2017 geographically allocated revenues, we examined the futureindustrygrowthandassessedPernodRicard’srevenuegrowthforthekeymarketsFrance, theUS,China and India. Subsequently,we applied thesewith regard to the particularmarket share on aspecificyear-to-yearforecastuntil2021/2022(seeFigure12).Whilewebelievethatin2017/2018PernodRicard’sgrowthwillstillsufferslightlyfromdifficultiesintheUSwithitsleadingvodkabrandAbsolute and the last extensions of the Chinese anti-corruption campaign as well as the GSTintroduction,alcoholbananddemonetizationinIndia,weassumethatthefollowingyearsareoverallcharacterizedbyhighone-digitalgrowths(seeAppendix5).PernodRicardmayparticipateabovethemarketgrowthbecauseofitsexistingdistributionnetwork,brandawarenessandproductmixthatcovers thepremium, superpremiumandprestigeprice range.Thedifferentiation ingrowth ratesconsequentlyleadstoashiftinmarketcontributiontotherevenuecomposition(seeFigure13).TerminalGrowth:Weorientatedourresidualgrowthrate,namely3.62%,onthehistorical11-yearsGDPgrowthrateforthefourkeymarketsandonthehistorical11-yearsindustryspecificgrowthforthesecountries.Weweightedthem95:5.InouropinionitisappropriatetoconsiderthisweightfortheGDPasitwilldefineanaturallimittothecompany’sgrowthinthelong-run,whileitincludesthepositiveindustrydynamics,whichareevenlikelytocontinuebeyondtheexplicitplanninghorizon.Bytakingthelast11yearswemakesurethatwecoveratleastonebusinesscycleandbyusingtheregionalrevenue strengthwerespectthevariation ingrowthdynamicsaccording to theprojectedrevenuepatternin2021/2022(seeAppendix5).However,asAsianmarketsarelikelytomature,weexpectgrowthratestoconverge.Capital Expenditure (CapEx): Hence Pernod Ricard invested steadily in property, plant andequipment, we do not identify an investment lag. However, as operations continue to grow,

Source:TeamAnalysis

Source:TeamAnalysis,Euromonitor

Figure12:ForecastedSalesGrowth

Figure13:ForecastedShiftinRegionalSales

02000400060008000100001200014000

2012/2013

2014/2015

2016/2017

2018/2019e

2020/2021e

Millions

Figure17:Revenues(€)

Revenue Growth

additionalcapacitiesmayberequired.WethereforeassumeagrowthinCapEx,whichcorrelateswiththesales,assufficientcapacitiesarerequiredtomaintainaneffectiveproductionprocess.ChangeinOperatingWorkingCapital(OWC):Linkedtotheefficiencyproject,PernodRicardwasalreadyable to save50m€ inOWC.Theambitious targetofsavinga totalof200m€by2020 isrealistic. However, we do not believe that this means cutting OWC in general but optimize itsutilizationtoinherentlyachievethisgoal.Capital structure:To follow thedeleveraging trend and securinga high investment grade is onefundamental principle of Pernod Ricard’s capital structuring. Hence, we believe that next year,outstandingdebtof357m€willberepaidfully.Duetothegrowth,weassumethatnofurthercutsinthe debtwill occur but that PernodRicardmay steadily increase its debt at a low rate. Retainedearningsmaymainly achieve the deleveraging. Further, we anticipate the change with regard toimplementationof IAS17in2019/2020,whichmayleadtoanexcursiveincrease inthe long-termdebt,asoperatingleaseswillbetreatedasfinancialleasesfromthataccountingperiodon.Costofequity:Wecomputedtwocostsofequity,takingintoconsiderationa“normalization”intheinterestratelevelinthelong-run.Hence,costofequitywascalculatedaccordingtotheCapitalAssetPricingModel:thecurrentGerman10-yearsBUND(0.59%)wasusedasriskfreerateforthespecificforecastingperiod,whilethelastmonthly5-year’saverageoftheGerman10-yearsBUND(1.19%)isapplied for the residual value calculation. The Beta of 0.7874 and the expectedmarket return of9.01%areestimatedwiththehelpoftheSBF250onaweeklybasisoverthelast5years(seeFigure15,Appendix5).MultipleValuation:Peeranalysis/RelativevaluationForourrelativevaluation,wefirstselectedpeersfromDistiller&Vintnersindustry, thatsharethesame objective to becomemarket leader, have similar geographical presence, and have the samestrategy, consisting in the premiumization, innovation as well as portfolio diversification. Afteridentifyingthemajorindustryplayers(seeFigure15),wecomparedtheirperformanceindicators,inorder to eliminate outliers and createa reliable peergroup.We useda sale indictor,because thegrowthofwell-establishedcompanies ismostlydrivenbysales,andaROIC indicator,showingtheefficiencyofmaturecompaniestogeneratereturns.CalculatingROIC,weusedtheEBITinsteadofthenetincometoavoidtheinfluenceofdifferenttaxsystemsandcapitalstructures.Thus,weidentifiedfourcomparablecompanies:Diageoplc,ConstellationBrands,Inc.,DavideCampari-MilanoS.p.A.,andRémy Cointreau. Accordingly, considered P/E, EV/FCF and EV/Net Sales as themost appropriatemultiplestorealizethevaluation.P/E multiple: it can serve as a growth and risk estimator for companies but is biased by thecompany’spayout strategy.Asdenominator, thedilutedEPSallows to consider the impactof anystockoptionorconversionontheprice.PernodRicard’sP/Eratiothatequalsto24.87x,whichisalittlebitlowerthanitspeers’P/Eaverage,indicatingalsothatthecompanyisundervalued.EV/FCFmultiple: itwell indicateshow fastmaturegroupswith stable investmentsgenerateandreinvest cash. To calculate this ratio, we took the enterprise value and unlevered FCF, makingcompanies more comparable and removing the impact of capital structure on a firm’s valuation.Pernod Ricard has a positive ratio, equaling 32.74x, which is one of lowest compared to othercompanies.Therefore,itindicatesthatinvestorsofPernodRicardwillreceivetheirinvestmentsbackmorequicklythanitspeers.EV/NetSalesmultiple:Asindicated, thesaleshighlyaffectthegrowthacompanysuchasPernodRicard.Tobuythesalesof thegroupthepriceequalsto4.72xof itssales,which is lowerthanthecomparable companies’ ratio average.Thus,we can perceive that themarket undervaluesPernodRicard.Therefore,buyingthestockofPernodRicardcanbeconsiderasagoodinvestmentbecauseinvestorswill receivebenefit outof it. Finally, togetourEnterpriseandEquityValuewe took theaverageofmultiples,which isquite lower than themedian, inorder tobemore conservative.WeelaboratedarangefortheEquityValuefrom137.86€to210.37€andtheEnterpriseValuefrom167.52€to192.61€.OuranalysisconcludesonPernodRicard’spriceof170.40€(seeAppendix6).FINANCIALANALYSISIncreasingsalesvolumethroughopportunitiesinestablished&growthmarketsPernodRicardachievedan increase in revenuesof9.68%(seeFigure17)over the last fiveyears,highlydrivenbytheglobaleconomicupturnmainlypropelledbyChinaandIndia.PernodRicardhasbeen able to capitalize on thesemarkets and still create growth thanks to the implementation ofvariousstrategiessuchasthelaunchofthenewChivasExtra12,adedicatedbrandfortheChinesemarket, throughamulti-yearpartnershipwithNBAChina,and theuseofAmaroRamazzotti foracampaign on social responsibility as well as for fair and equitable trade in India.Currently, thegrowthisattenuatedbysomeregulatorychangesoccurredduring2017inIndia,i.e.thetotalbanof

Beta 0.7874Expectedmarketreturn 9.01%Riskfreerate(1) 0.59%Riskfreerate(2) 1.79%Costofequity(1) 7.22%Costofequity(2) 7.47%

Figure14:Costofequity

Source:TeamAnalysis

Figure15:PeerAnalysis

2012/2013

2014/2015

2016/2017

2018/2019e

2020/2021e

Figure18:GrossMargin

PernodRicard DavideCampari-MilanoS.p.A.

RémyCointreau

Figure19:IndustryComparisonof‘Normalised’ROA

10,000

12,000

14,000

16,000

2012 2013 2014 2015 2016 2017

Millions

Figure20:DebtandEquityFinancing(€)

Totaldebt Totalequity

Debt/Equityratio

FY2013 FY2014 FY2015 FY2016 FY2017

Figure21:QuickRatio

Quickratio 5-Yearavg.

FY2013 FY2014 FY2015 FY2016 FY2017

Figure22:CurrentRatio

Currentratio 5-Yearavg.

alcoholinthestateofBiharandliquorssellingnearhighways.However,weassumethatthesekeymarketswillcontinuetoobserveapositivegrowthinthefuture,giventhestrategiesimplementedbyPernodRicardtocopewiththeseeventsreportedabove.Indeed,itbecamealsoevidentinthe1QFY2017/2018wherenetsalesinAsia/RoWexhibitanorganicgrowthof7%.Thisfact,togetherwithasolidgrowth in theothermainmarkets, ledus toestablishapositiveoutlook forPernodRicard’srevenuegenerationandgrowth.(27)Operatingcosts:Stable&undercontrolThegrossmarginofPernodRicardisverystable,floatingaround61.4-62.8%overthelastfiveyears(seeFigure18).Webelievethatthiswillcontinuetobethecasefortheforecastedfuturegiventhedependencyonhighqualitysuppliesandproduction.Themaincostdriversstemfromrawmaterials,labourandmarketing/sellingcosts.In2017labourcostsaccountfor18.98%ofoperatingexpensesandisinlinewithindustrypeers.Thismightchangeifthefirmdecidetoincreaseitsproductionincountries with lower labour costs, however this is not likely to be implemented in the shortforeseeablefuture.Profitability:theimpactoftheintangibleassetsIn2017,theROAofPernodRicard’sROAis4.9%,whichissignificantlylowercomparedtoitspeers.Thisratio,however,isaffectedbythesignificantamountofintangiblesheldbyPernodRicard,whichhaveabookvalueof11,775m€,representing57.01%ofitstotalassets.Nevertheless,theweightofthe intangibles decreased over the last five years from its maximum of 61.18% in 2012. Such adecreaseisalsoduetoimpairments,observedalmosteveryyear.Inparticular,duringthefiscalyearending on the 30th June 2017, impairment of intangible assets, resulting primarily from brandimpairment,amountedto73m€.Theseweremainlydrivenbythe58m€impairmentof Imperialbrand. However, since the company has now adjusted theamount of these assets to reflect theircurrentvalue,webelievethatthisissueisnotgoingtoaffectthefutureprofitabilityofthecompanysignificantly. Inrelationtothepast,instead,webelieveappropriatetoanalysea ‘normalised’ratio,adjustedtoremovetheeffectof the intangibleassets. Itresulted inaROAequalto18.33%, in linewiththeperformanceofitscompetitors,witha4.23%increaseincomparisonwiththelastyear(seeFigure19).DeleveragingtoenhancegrowthopportunitiesPernodRicardhasactivelybeendecreasing itsDebt/Equityratio from92.7%in2012to61.6%in2017 (see Figure 20). This deleveraging strategy, together with the improvement in profitability(EBIT+15.21%inlastfiveyears)andareductionofthefinancialinterestexpense(-24.67%overthesametimeperiod),resultedinasignificantimprovementofsomeimportantsolvencyratiosliketheNetDebt/EBIT (-14.33%over the last fiveyears)and the coverage ratio (+38.89%over the sametimeperiod).ThishighlightsacommitmentofPernodRicardtoincreasethesolvencyofthecompanyanddecreaseitsfinancialrisk,inordertogetabetterratingtoreducefuturefinancialexpenses.Inaddition, the deleveraging increases the firm’s flexibility to efficiently finance new acquisitions. Itgives us a final positive overview on the real effectiveness of company’s effort to improve itssolvency,whichisalsosupportedbytheanalysisoftheAltmanZ-scorethatrevealsa5-yearsaveragescoreof3.76.ThisimpliesthatPernodRicardhasaverylowprobabilityofbankruptcy(seeAppendix10).LiquiditysupportedbystructuredfactoringplanThepastandcurrentliquiditysituationofPernodRicardshowsapositivetrendasindicatedbyanincreaseof+41.50%inthecashratio(from0.12xin2013to0.18xin2017),of+12.74%quickratio(from0.43xin2013to0.49x in2017)andof+20.00%inthecurrentratio(from1.50x in2013to1.80x in2017)(seeFigures21and22).PernodRicardisalsoexhibitingagoodperformance initscashgenerationcycle.Thenumberofdaysofsalesoutstandingdecreasedto44.61(-14.39%overthelastfiveyears)whilethenumberofdaysofpayablesincreasedto71.17(+26.34%overthesametimeperiod). It indicates that Pernod Ricard collects its receivables before paying its suppliers, whichindicatesagoodworkingcapitalmanagement.Inaddition,amulti-currencyrevolvingcreditfacilitiesofover2,500m€andEuro-andforeigncurrency-denominatedfactoringagreementsinEuropeandintheAsia-PacificandOceaniaareas,sustainPernodRicard’sliquidityandflexibility.ChangesinaccountingstandardsOn30thJune2014,theInternationalAccountingStandardsBoard(IASB)issuedsomeamendmentstoIAS16-Property,plantandequipmentandIAS41–Agriculture,inrelationtobearerplants,effectivefrom the 1stJanuary 2016. These amendments required bearer plants being accounted for inaccordancewithIAS16,i.e.usingeitherthecostortherevaluationmodel,movingawayfromIAS41where they were measured at fair value less costs to sell. Pernod Ricard introduced theseamendmentsfromthefiscalyearstartedin1stJuly2016accountingforthevineyardsinaccordancewithIAS16.Itcausedanetdecreaseinthevalueofthevineyards,andacorrespondingdecreaseintheequity,for99m€(0.32%oftheFY2016/2017totalassets)which,inlinewiththeassessmentofthefirm,wedonotconsidermaterial.Overthenextfiscalyears,thecompanymaybealsoaffectedbytheintroductionofthenewIFRS15–Revenuesfromcontractswithcustomers,IFRS16–Lease,andIFRS9–FinancialInstruments.AfterananalysisofthebusinessofPernodRicard,weassessedthattheimpactofthesenewstandardswillnotbematerialforthecompany.(28)

Source:TeamAnalysis,S&PCapital

SatisfactoryreportedearningsqualityWeperformedthe8-variableBeneishM-scoreanalysisforthelastfiveyear-endfinancialstatementstoevaluatePernodRicard’searningsquality.WeobserveanaverageM-scoreof-2.32duringthelastfiveyears,which isbelowthe-2.22thresholdconsideredaconcernintermsof financialreportingquality. Accordingly, our analysis indicates that Pernord Ricard exhibits a lower probability ofearningsmanipulations.Thus,weassessearningsqualityofthefirmtobeadequate(seeAppendix11). INVESTMENT RISKS (seeAppendix14)Economicrisk1:Decelerationintheglobaleconomicgrowth(Impact:High/Prob.:Low)Anextensivedownturninglobaleconomicgrowthwouldnegativelyaffectthesalesinthealcoholicbeverage industryasspiritsandwineconsumptionisnegativelycorrelatedtoeconomicrecession,unemploymentanddecreases inpurchasepower.Especially, thepremiumstrategymakesPernodRicardsufferintwoways: firstofall, thedemandsensitivityforpremiumspiritsishigherthanforlowqualityspirits,allowingconsumerstodown-tradefrompremiumtostandardproducts.Secondly,PernodRicardhasalimitedchancetoreactondecreasingdemandasitspremiumstrategypursuesanexclusivitycharacterandthereforerestrictsitspricerange.TheriskispartlymitigatedbyPernodRicard’s diversified business activity with. A sensitivity analysis in Appendix 13 exemplifies thetarget price changes due to changes in the terminal growth as consequence of altered economicconditions.Economicrisk2:Troublingemergingmarkets(Impact:Moderate/Prob.:Moderate)Itisseenthattheeconomicanddemographicdevelopmentaswellasthelowinternationalbrandedconsumption of alcoholic beverages in emerging markets provide significant growth potential.However,anover-estimationoftheincreasingwealthandwiderconsumerbaseincombinationwithanintensifyingcompetitionbetweeninternationalalcoholicbeveragecompaniesandlocalproducerscanharmtheexpansionintheemergingmarkets.PernodRicard issensitivetothisriskespeciallyduetoitsoperationsinleadingemergingmarketssuchasChina,IndiaorRussia.Marketrisk1:Changeinlifestyle&consumptionhabits(Impact:High/Prob.:Moderate)In the light of the spreading awareness of alcohol-related diseases and general health concerns,maintaining a healthy and sportive lifestyle became the new “luxury” for younger generations.SupportedbyfederalgovernmentsandNGOs,newdrinkingpatternsfollowingwisedrinking-mottosdiscouragetheexcessiveconsumptionofalcohol.Whilethereductionof theconsumptionquantityand frequency negatively affects the producers of alcoholic beverages, the change towardsmoreoccasionallydrinkingcanbeinterpretedasachanceforpremiumizationasthequalityofspiritsandwinegathersrelevance.Marketrisk2:Decriminalizationofmarijuanaraisescompetition(Impact:Low/Prob.:High)The recent liberalization process in North America with regard to a regulated production,distribution,marketingandconsumptioncanmakemarijuananotonlyavailableformedicalbutalsorecreational reasons, creatingapotential substitute toalcohol.While surveys indicatemarijuana’shealth concernsbeing loweror in linewithalcohol, theconsumptionismainlydrivenbyyoungergenerationsandthepotentialgrowthtoavaluablemarketsizemaytaketime. (29)Accordingly, thesubstitutioneffectisseentobelow.Marketrisk3:Competition&MarketConsolidation(Impact:Moderate/Prob.:High)Despite the high market entry barriers in general, the competitive environment in the alcoholicbeverageindustrydependsontheproduct.Whilefew,globaloperatingcompetitorsandmanysmalllocal spiritmakers characterize the spirit sector, thewine sector ishighly fragmented.The recentconsolidation of themarket intensifies the competition and emphasizes the risk of losingmarketshare.Also,agrowingsuccessoflocal,artisanproducersisrecognizable.Theriskofinorganicgrowthextendstothedifficultiesgoingalongwiththeeffectiveintegrationoftheacquiredcompanyintothegroup’soperational andorganizational structure.PernodRicard’sdecentralized structure stronglycontributestoasuccessfulintegrateasitensuresanextensivescopeofindependencetoitsbrands.Politicalrisk1:Tighteningofregulatory&legalconditions(Impact:High/Prob.:Moderate)The alcoholic beverage industry is considerably regulated, both statutory, i.e. based on federal orstate law, and non-statutory. (30) Besides regulations on production, sales and consumption(prohibitionofpublicdrinking)aswellas limitationsofaccesstoalcohol(minimumdrinkingage),legalbindingrestrictionsalsocovermarketingandadvertisingactivities.Possiblemarketingbansortighteningintheexistingregulationsaswellastheintroductionofpackageregulationsintheformofhealthwarnings can be seenas political instruments to curb alcohol consumption. (31)The risk ofregulatory interventions similar to the Chinese anti-corruption campaign is regarded to bemorelikely indeveloping countries.Thegeographical and jurisdictionaldiversificationofPernodRicardmitigates the impacts of changes in the regulatory environment.Nevertheless, they can indirectlyaffect Pernod Ricard’s revenues from limited product placement and brand awareness, damagereputationandincreasesincosts.

Source:TeamAnalysis

Figure23:RiskMatrix

PoliticalRisk2:Protectionism&taxregimes(Impact:Moderate/Prob.:Low)The high sensitivity of the wine and spirit sector to variations in tax regimes, which are notforeseeable,representsamajorthreat.Similartofuturetaxincreases,protectionistinstrumentssuchas import barriers and excise duties become the most important aspects under the globaldiversificationstrategyandcanadverselyaffecttheprofitabilityofPernodRicard.(32)(33)Moreover,theoutcomeof theBrexitnegotiationswill influencePernodRicard’sScotchwhiskeysegment.ThewidelylocatedmanufacturinganddistributionnetworkofPernodRicardpartlydiminishtheextentandtheimpactofsuchactions.OperationalRisk1:Pricevolatility&increasingoperationalcosts(Impact:Low/Prob.:Low)Asproductsof thealcoholicbeverage industryareprimarilymadeoutofagriculturalproducts, theindustry is sensitive to price volatility of these commodities, which aremainly influenced by theweather conditions, the possibility of natural disasters and climate changes. If the suppliers areconfrontedwithapoorharvest,shortagesinsupplycaneitherleadinsufficientproductionvolumeorsignificant appreciation in the raw materials’ prices. This can result in higher operating costs.Besides, increasing energy, transportation, distillation and other operating costs might also putpressureonthemargins.PernodRicardmitigatestheriskofincreasingpricesandsupplyshortfallbyenteringnon-physicalhedgeagreementsandphysical supply contracts. In addition,wineyards inpossessionofthecompanyincreasesitsautonomyfromglobalcommoditymarkets.OperationalRisk2:Productquality(Impact:Moderate/Prob.:Low)Regarding the necessity of a good reputation/image, it is a company’s inevitable responsibility toensureproductquality.Theriskofcontaminationofthebeverageanddefectofrelatingmaterialsareinherentinthemanufacturingprocess.PernodRicardminimizesthisriskby implementinganISO-certifiedmanagementandcontrolsystemtoactivelymonitortheprocurementofrawmaterials,thedistillationorfermentationprocessaswellaspackaging.Further,thecompanyworkscloselywithitssuppliersbyintroducingpartnershipagreementsandintegratingquality-ensuringmeasuressuchastheResponsibleProcurementPolicy,thesupplierCSRCommitment,andCSRRiskMappingTool.Financialrisk1:Increasinginterestrates(Impact:Low/Prob.:High)ThesignalsoftheECB’squantitativeeasingcomingtoanendandtheexpectationoftheFEDtoraisethe federal funds in 2018may lead toa slow drain of the extensivemarket liquidity. Asa result,interestratesare likely to increase.The linked riskofhigherfinancial costs ispartlymitigatedbyinterestrateriskhedgesonamediumandlong-termhorizon,PernodRicardentered.Financialrisk2:LiquidityandSolvency(Impact:High/Prob.:Low)The lack of fulfilling its short- and long-term obligations is a major risk for corporations thus itconsequently harms credit and supplier relationships. It can arise from an insufficient cashconversion cycle, insignificant revolving credit facilities, and a poor debtormanagement. Further,unsatisfying operational results threaten the capability to serve long-term debts in the form ofinterest payments and reimbursement. Various financing products allow Pernod Ricard to havesufficientshort,medium,andlong-termcreditfacilitiesandprovideadequatefinancialresourcestothecompany.Thelong-termcredibilityisfurtherconfirmedbytheexternalcreditratings,whichareallInvestmentgrade.Financialrisk3:Exchangeraterisk(Impact:Low/Prob.:Moderate)The divisiveness of the US-American and European monetary policy, the Brexit and globaluncertainty cause fluctuations in foreign exchange rates to which Pernod Ricard is substantiallyexposeddue to its globalbranchesandoperations.Though, thedecentralized structureofPernodRicardguaranteesnaturalhedges.Moreover,thecompanyenteredfairvalueandcashflowhedgesintheformofcrosscurrencyswapsandforwardsinthemaincurrenciesUSD,GBPandSEKtoreducepotentiallossesgoingalongwithvariationsinexchangerates.Unpredictablerisk1:Explosionrisk(Impact:Moderate/Prob.:Low)Theriskofexplosion ishighlypresentasthealcoholisaveryflammableproduct. It threatensnotonly the company’s facilities, but also employees. Therefore, Pernod Ricard has to be sure toimplement all sources of protection and prevention as required by the EuropeanDirective ATEXDirective2014/34/EU.Unpredictablerisk2:Terrorismactsanddeclarationofwar(Impact:High/Prob.:Moderate)In Europe in recent years, terrorism acts were an important subject of concern not only for thegovernment,butalsoforindustriesandbusinesses.Infact,ithighlyimpactsevent,travelandtourismindustry. As a consequence, it negatively impacts the number of tourists, the sharing momentsbetweenfriends,eveningevents,andthusdecreasesthealcoholconsumption.Unpredictablerisk3:Naturaldisasterrisk(Impact:High/Prob.:Low)As the Group is presented in different countries the risk of natural disasters such as earthquake,flooding,hurricaneisusuallynotpredicted,butcanhighlydamageplacesofalcoholstorage.PernodRicard has to implement specific preventivemeasures to cover this risk, eitherby insuring orbydistributingtheriskwith“catbonds”,forexample.

Ratings Long-term Short-term Outlook

Fitch F3 BBB POS

Moody's P-2 Baa2 STABLE

Standard&Poor's BBB A-2 POS

Source:Bloomberg

Figure23:CreditRatings

Appendix1:Pro-formaIncomeStatementinm€ 2012/

20132013/2014

2014/2015

2015/2016

2016/2017

2017/2018e

2018/2019e

2019/2020e

2020/2021e

2021/2022e

Netsales 8,575 7,945 8,558 8,682 9,010 9,465 10,118 10,775 11,366 11,897Costofgoodssold -3,224 -2,958 -3,262 -3,311 -3,407 -3,597 -3,845 -4,095 -4,319 -4,521 38% 37% 38% 38% 38% 38% 38% 38% 38% 38%Grossmarginafterlogisticexpenses 5,351 4,987 5,296 5,371 5,603 5,868 6,273 6,681 7,047 7,376

62% 63% 62% 62% 62% 62% 62% 62% 62% 62%Advertisingandpromotionexpenses -1,644 -1,503 -1,625 -1,646 -1,691 -1,751 -1,872 -1,940 -2,046 -2,141

19% 19% 19% 19% 19% 19% 19% 18% 18% 18%Structuringcosts -1,476 -1,428 -1,433 -1,448 -1,517 -1,609 -1,720 -1,832 -1,932 -2,023 17% 18% 17% 17% 17% 17% 17% 17% 17% 17%Others -26 -17 -19 -15 -15 - - - - - 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Operatingincome 2,205 2,039 2,219 2,262 2,380 2,508 2,681 2,909 3,069 3,212 26% 26% 26% 26% 26% 27% 27% 27% 27% 27%Netinterestexpenses -518 -423 -428 -400 -357 -339 -331 -331 -347 -365 6% 5% 5% 5% 4% 4% 3% 3% 3% 3%Othernon-operatingincomeandunusualitems -120 -284 -690 -199 -164 -169 -177 -186 -199 -213

1% 4% 8% 2% 2% 2% 2% 2% 2% 2%EBT 1,567 1,332 1,101 1,663 1,859 2,000 2,173 2,393 2,522 2,635 18% 17% 13% 19% 21% 21% 21% 22% 22% 22%Incometaxes -359 -305 -221 -408 -438 -481 -523 -575 -607 -634 23% 23% 20% 25% 24% 24% 24% 24% 24% 24%Netincometocompany 1,208 1,027 880 1,255 1,421 1,519 1,651 1,817 1,916 2,001 14% 13% 10% 14% 16% 16% 16% 17% 17% 17%Minotiryinterestsinearnings -19 -11 -19 -20 -28 -25 -28 -33 -33 -35

2% 1% 2% 2% 2% 2% 2% 2% 2% 2%Netincome 1,189 1,016 861 1,235 1,393 1,494 1,623 1,784 1,883 1,966 14% 13% 10% 14% 15% 16% 16% 17% 17% 17%

Source:TeamAnalysis

Appendix2:Pro-formaBalanceSheetinm€ 2012/

20132013/2014

2014/2015

2015/2016

2016/2017

2017/2018e

2018/2019e

2019/2020e

2020/2021e

2021/2022e

Assets 27,488 27,616 30,398 30,598 30,088 30,724 31,928 33,600 35,067 36,640

Current 6,507 6,648 7,420 7,288 7,531 8,403 9,367 10,850 11,930 13,115

24% 24% 24% 24% 25% 27% 29% 32% 34% 36%

Cashandcashequivalents 597 477 545 569 677 1,469 2,026 2,969 3,725 4,677

9% 7% 7% 8% 9% 17% 22% 27% 31% 36%

TradeandotheroperatingReceivables 1,159 1,051 1,152 1,068 1,134 1,230 1,366 1,509 1,591 1,666

18% 16% 16% 15% 15% 15% 15% 14% 13% 13%

Inventoriesandworkinprogress 4,484 4,861 5,351 5,294 5,305 5,371 5,767 6,142 6,479 6,662

69% 73% 72% 73% 70% 64% 62% 57% 54% 51%

Othercurrentasset 267 259 372 357 415 333 208 230 135 110

4% 4% 5% 5% 6% 4% 2% 2% 1% 1%

Non-current 20,981 20,968 22,978 23,310 22,557 22,645 22,774 23,070 23,455 23,839

76% 76% 76% 76% 75% 74% 71% 69% 67% 65%

Intangibleassets 11,780 11,542 12,212 12,085 11,755 11,755 11,755 11,990 11,990 11,990

56% 55% 53% 52% 52% 52% 52% 52% 51% 50%

Goodwill 4,973 4,907 5,494 5,486 5,397 5,397 5,397 5,397 5,397 5,397

24% 23% 24% 24% 24% 24% 24% 23% 23% 23%

Property,plantandequipment 1,940 2,012 2,194 2,188 2,298 2,355 2,468 2,577 2,946 3,331

9% 10% 10% 9% 10% 10% 10% 11% 11% 12%

Othernon-currentassets 2,288 2,507 3,078 3,551 3,107 3,138 3,154 3,106 3,122 3,122

11% 12% 13% 15% 14% 14% 14% 13% 13% 13%

Liabilities 16,137 15,838 17,111 17,092 16,202 15,957 16,199 16,821 17,181 17,596

59% 57% 56% 56% 54% 52% 51% 50% 49% 48%

Current 4,417 3,905 5,138 4,956 4,256 4,131 4,313 4,539 4,714 4,880

27% 25% 30% 29% 26% 26% 27% 27% 27% 28%

Tradeandotheroperatingpayables 1,546 1,463 1,696 1,688 1,826 1,834 1,961 2,129 2,246 2,351

35% 37% 33% 34% 43% 44% 45% 47% 48% 48%

Interestburdendebt 1,568 1,219 2,052 2,027 1,167 1,008 1,038 1,069 1,101 1,135

35% 31% 40% 41% 27% 24% 24% 24% 23% 23%

Othercurrentliabilities 1,303 1,223 1,390 1,241 1,263 1,288 1,314 1,340 1,367 1,394

29% 31% 27% 25% 30% 31% 30% 30% 29% 29%

Non-Current 11,720 11,933 11,973 12,136 11,946 11,827 11,886 12,283 12,467 12,716

73% 75% 70% 71% 74% 74% 73% 73% 73% 72%

Long-termdebt 7,712 7,674 7,458 7,335 7,380 7,306 7,343 7,694 7,810 7,966

66% 64% 62% 60% 62% 62% 62% 63% 63% 63%

Othernon-currentdebt 4,008 4,259 4,515 4,801 4,566 4,520 4,543 4,588 4,657 4,750

34% 36% 38% 40% 38% 38% 38% 37% 37% 37%

Equity 11,351 11,778 13,287 13,506 13,886 14,766 15,730 16,779 17,885 19,044

41% 43% 44% 44% 46% 48% 49% 50% 51% 52%

Capital 411 411 411 411 411 411 411 411 411 411

4% 3% 3% 3% 3% 3% 3% 2% 2% 2%

Stockpremium 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052

27% 26% 23% 23% 22% 21% 19% 18% 17% 16%

Retainedearningsandcurrencytranslationadjustment

6,765 7,389 9,050 8,912 9,159 10,039 11,003 12,052 13,158 14,317

60% 63% 68% 66% 66% 68% 70% 72% 74% 75%

Appendix3:CashFlowStatementinm€ 2012/

20132013/2014

2014/2015

2015/2016

2016/2017

2017/2018e

2018/2019e

2019/2020e

2020/2021e

2021/2022e

Netincome 1,189 1,016 861 1,235 1,393 1,494 1,623 1,784 1,883 1,966

Depreciation&amortization 185 203 214 219 219 215 213 217 221 226

Currentassetsandliabilities(workingcapitalchange)

-289 -279 -40 -118 30 171 -405 -349 -303 -153

Cashflowfromoperations 1,085 940 1,035 1,336 1,642 1,880 1,430 1,652 1,801 2,038

Capitalexpenditure -304 -273 -323 -333 -367 -353 -370 -387 -442 -500

Otherinvestmentcashflows 113 -38 59 -26 74 36 21 33 28 38

CashflowfromInvesting -191 -311 -264 -359 -293 -317 -349 -354 -414 -461

Netdebtborrowings -797 -168 -260 -413 -609 -233 67 383 147 189

Dividendpayments -435 -448 -461 -497 -496 -523 -568 -714 -753 -786

Otherfinancingactivities 24 -16 -14 -18 -51 -15 -23 -24 -26 -28

Cashflowfromfinancingactivities

-1,208 -632 -735 -928 -1,156 -771 -524 -355 -632 -625

Cashatthebeginningoftheperiod

787 597 477 545 569 677 1,469 2,026 2,969 3,725

FXandothereffects 124 -117 32 -25 -86 - - - - -

Cashflow -314 -3 36 49 193 792 557 943 755 952

Cashattheendoftheperiod 597 477 545 569 676 1,469 2,026 2,969 3,725 4,677

Appendix4:DCF-CalculationFreeCashFlowtotheEquity

2016/2017

2017/2018e

2018/2019e

2019/2020e

2020/2021e

2021/2022e

TerminalValue

NetEarnings 1,393.0 1,494.0 1,622.7 1,784.5 1,882.6 1,965.6 +Depreciation 219.0 214.9 215.5 219.3 223.8 228.5 -CapEx(NetInvestments) -367.0 -353.3 -370.2 -386.6 -441.9 -499.6 -ChangeinOWC 306.0 -154.0 -405.2 -349.1 -302.6 -153.2 +NetLT-DebtRepayment 45.0 -73.8 36.5 351.4 115.4 156.2

=FCFE 939.0 1,127.8 1,099.2 1,619.5 1,477.3 1,697.5 45,677.5 DiscountedFCFE 1,051.9 956.2 1,314.0 1,117.9 1,198.1 31,856.3 37,494.46

*TargetPriceperSharebasedonintrinsicvaluationonly.

Equity Value Shares outstanding 37,494.46 m€ 265,421,592

Target Price per Shares* 141.26 €

Source:TeamAnalysis

Appendix5:CostofEquity,TaxRate&GrowthWeseparated thecostofequity for theexplicit timehorizonand for the residualvalue;hencewebelieve that interest ratesandconsequentlytheriskfreeratearelikelytoriseinthelongrun.

COSTOFEQUITYOurcostofequityis7.22%fortheexplicitforecastingperiodand7.47%fortheterminal value. Our calculations are based on the Capital Asset Pricing Model,using weekly SBF250’s weekly returns of the last 5 years for computing theexpectedmarket return.Forus, it is reasonabledue to low individual companyweightsandindustrydiversification;thefrequencypretendsfromcontaminationbecauseofnoise.Asproxy for the risk free rate,becauseof itsAAA-rating,highliquidity,and€-denominationweselectedtheGerman10-yearsBUNDof0.59%,respectively the last 5-years monthly average of 1.79% to anticipate a“normalization”. This is driven by our expectation towards a strengtheningEuropeaneconomyandrobustinflation,thepositiveglobaloutlookandtheFED’ssignals to increase rates,whichmay result in a termination of theECB’s quantitativeeasingprogram.

MARGINALTAXRATEPernod Ricard’s theoretical tax rate was 34.45% in 2017.However,thecompanymanagedtopayaneffectivetaxrateof23.56%.Withregardtoitshistoricalaveragetaxrates,thepeers,andthecurrentchangesoftaxreformsinFranceandthe US, we assume an effective tax rate for the followingyearsof24.05%.

EXPLICITANDTERMINALGROWTHWeorienttherevenueforecastsonPernodRicard’skeymarketsFrance,theUS,ChinaandIndiaastheyrepresentthedynamicsthataredominantintheseregions.Basedonthebroaderfinewine/Champagne&spiritsexpectedgrowth(Euromonitor),wecalculatedthenetsalesforPernodRicardforthenextfiveyearsaswellastheregionalweightsofthenetsales.Netsales&share

Europe(France) America(US)

Asia(China/India)

Totalnetsales OverallCAGR

2016/2017 30.9% 2,781.00 29.5% 2,661.00 39.6% 3,568.00 9,010.00 2017/2018e 30.4% 2,875.15 29.6% 2,798.84 40.1% 3,791.17 9,465.17 5.05%2018/2019f 29.6% 2,998.96 29.3% 2,961.45 41.1% 4,157.38 10,117.79 6.90%2019/2020f 29.1% 3,131.26 28.9% 3,113.44 42.0% 4,530.71 10,775.42 6.50%2020/2021f 28.6% 3,249.15 28.7% 3,258.55 42.7% 4,858.18 11,365.88 5.48%2021/2022f 28.2% 3,353.54 28.5% 3,396.47 43.3% 5,147.06 11,897.07 4.67%

Europe America Asia Terminal

growthrateWeightedGDPgrowth

0.26% 0.42% 3.65%

Weightedindustrygrowth

0.96% 2.94% 6.57%

0.29% 0.54% 2.79% 3.62%TheGDPandindustrygrowthwasadjustedfortheterminalvaluetotakeintoconsiderationthematuringoftheAsianmarketsandeconomies.Thereby,weobtainasustainablegrowthrate.

Beta 0.7874

Expectedmarketreturn 9.01%

Currentriskfreerate 0.59%

Long-termriskfreerate 1.79%

Costofequity(explicit) 7.17%

Costofequity(residual) 7.47%

Averageeffectivetaxrate 2years 5years 10yearsPernodRicard 24.05% 22.80% 20.31%Diageo 16.65% 19.92% 20.71%Cointreau 28.15% 32.16% 29.10%Campari 29.60% 32.12% 31.85%Brown-Forman 28.30% 30.08% 31.08% Average 25.35% 27.42% 26.61%

Source:TeamAnalysis,PernodRicard,Bloomberg

Source:TeamAnalysis,Euromonitor

Source:TeamAnalysis

Appendix6:RelativeValuation

Marketdata Financialdata Relativevaluation

Companynames Price(share)

MarketCap(M) EV(M) Netsales

(M)UnleveredFCF(M) DilutedEPS P/EPS EV/UFCF EV/Net

Diageo(£) 2,620.00 65,134.00 73,405.20 12,050.00 2,663.00 106.00 24,71x 27,56x 6,09xConstellationBrand(US$) 217.76 42,520.00 49,509.00 7,223.80 823.40 7.52 28,95x 60,12x 6,85x

Campari(€) 6.38 7,393.00 7,009.80 1,726.50 201.60 0.29 22,00x 34,77x 4,06x

RémyCointreau(€) 115.45 5,552.00 5,614.80 1,094.90 112.10 3.68 31,37x 50,08x 5,12x

MEDIANofpeers 26.83 42.43 5.61

AVERAGEofpeers 26.26 39.36 5.32

PernodRicard(€) 130.60 34,664.06 42,534.00 9,010.00 1,299.00 5.25 24,87x 32,74x 4,72x

PRshareoutstanding 265.42 ENTERPRISEVALUE

Valueparshare

51,124.51 47,965.93Marketdebt 8,547.00 137.87 192.62 180.72

Marketdebt/share 32.20 EQUITYVALUEValuepershare

43,254.51 55,835.93

Cash 677.00 167.52 162.97 210.37

Cash/share 2.55

Equityvalue/share Enterprisevalue/shareStockpriceof15.01.18 170.40€ 180.28€

Source:TeamAnalysis,S&PCapitalIQ,PernodRicard

Source:TeamAnalysis

Appendix7:PESTEL-Analysis

Appendix8:SWOT-Analysis

PoliticsEconomicsSocietyTechnologyEnvironmentLegislation

•Changeintaxregimes•Policiesseekingtocurbalcoholconsumption•Anti-corruptioncampaign

•Globaleconomicrecovery•Emergingmarketsupgrading

•Healthconcerns•Changeindrinkingpatterns•Globalizationandincreasingbrandawareness•Premiumization

•ProductinnovationandTastes•Digitalization(e-commerce,BigData)

•Ecologicaluseofwater•Reductionofwasteandpollution

•Variouslegalbindingrestrictionsonadvertising,andpurchasing,andconsumptionofalcohol

• IncreasingRegulatoryEnvironment

• SubstitutionRisk• HigherHealth

Consciousness• IncreasingOperating

• GoodEconomicClimate• ExpansioninEmerging

Markets• ChangesinConsumers'

LifestyleandConsumptionBehavior

• StrategicAcquisitionstoExpandBusinessRegions,TargetGroupsorProductMix

• Digitalization(BigData,e-Commerce,andMarketing)

• RelativelylowProfitability• RelativelylowLiquidityand

Solvency• RelativelyhighConversion

Cycle• LowPricingFlexibility

• GlobalDistributionNetwork• TightSupplierRelationships• DecentralizedOrganizationStructure• Growth-focusedPremiumizationand

DiversificationStrategy• Well-knownbrandandproduct

portfolio

Source:TeamAnalysis

EntranceBarriers

Competitiveness

SubstitutionRiskBargainingPowerofSuppliers

BargainingPowersofCustomers

Appendix9:Porter’sFiveForcesMarketentrancebarriers:veryhigh(5)Inthealcoholicbeverageindustry,marketentrancebarriersarehighduetotherequiredbrandawarenessandimageoftheproduct.To generate presence and visibility by marketing and promotion activities in order to establish a powerful brand, a companyrequiresastrongcapitalbase.Awell-workingsupplychainanddistributionnetworkandhighinvestmentsinPPEfurtherstimulatessynergies and economies of scale. Besides complying with legal restrictions on the production of alcohol,commercializing/marketing is limited or partly banned from public life. Therefore, the highly regulatory character of alcoholicproductsreducesthethreatofnewentrants.Rivalryofexistingcompetitors:high(4)Therivalryisconsideredtobehigh.Whileforspiritsthecompetitivelandscapeischaracterizedbyafewglobalcompetitorsandsmalllocalmanufacturers,thewinesegmentishighlyfragmented.Ontheotherhand,spiritsshowamoderatemarketconcentrationwithDiageo,PernodRicard,andCampari.Therivalry,however,iseasedascompetitorsspecializetowardscertainpriceorproductsegments.Thecompared tootherconsumergoodspromisinggrowthoutlook,premiumization trendandrelativelyhighmarginsraisemarketattractivenessandavoidpricingwarsasthepricesignalsexclusivity.Threatofsubstitution:moderate(3)Thethreatofsubstitutesismoderate.Productdifferentiationishardtoobtainandoftendependonthewholeproduct,notonlythebeverage itself.Marketingconceptionscancontribute toa reducedsubstitutionriskwithin theproduct-specificalcohol segment;sameeffecthavingexcellenceinproductquality,exclusivity,innovationandextraordinarinessintastewhichiscrucialespeciallyinthe premium segment.We therefore interpret the substitution risk of another brandmoderate,whereas a cross-product groupsubstitution between beer, wine, champagne and spirits or substitution by other consumption substances such asmarijuana ispossiblebutnotverylikely.Thedependencyontheeconomicdevelopmentaswellassocialtrendstowardsbrandsandproductsareimportantnottounderestimate.Ineconomicslowdowns,thesubstitutionriskfor"mainstream"alcoholicdrinkswillincrease.Bargainingpowerofsuppliers:high(4)Overall,thebargainingpowerofsuppliersismoderate.Ontheonehand,specializedfarmingfirmsandwineyardscharacterizethesupplyofagriculturalproducts.Theirbargainingpower isveryhighas theyprovideunique,high-qualityproducts,givencertaingrapes, sugars and other ingredients, butmight also cover other value-adding activities, including special treatment of the rawmaterials.Consequently,theswitchingcostsforalcoholmanufacturersarehighandtheyaimforlong,sustainablerelationships.ThefactthatPernodRicardownsseveralwineyardsandagriculturalproductionsitesrelaxesthedependencyonsuppliersslightly.Ontheotherhand, industrialsuppliersofcork,glass,andpackagingelementshavelittlebargainingpowerandareeasilyreplaceablebecausetheprovidedproductservicesarehighlystandardizedandlowswitchingcostswouldoccur.Bargainingpowerofcustomers:high(4)Intheoff-tradechannel,end-consumersbuyalcoholicproductsfromwholesalersandsupermarketsthuspurchaseandconsumptiondiffertimely.Confrontedwithagreatvarietyofproducts,itisveryeasyandcheapfortheend-consumerstoswitch.Intheon-tradechannel(bars,restaurants,clubs,hotels,events)thissituationslightlychangesastheyonlyhavealimitedchoice.Thefact,thatthealcoholicbeverageindustryrecognizesthehighlydivergentconsumptionpatternsofgeographicalandculturalregionsemphasizesthehighbargainingpoweroftheend-consumer.Withregardtoon-tradevendors,thebargainingpowerisslightlylessastheyactasintermediaries between the manufacturer/brand and the end-consumer. Although they can decide for the product mix andindependenton-tradevendorsmightofferaholisticrangeofproducts,majorplayersinthisindustryarepressuredbycustomers'expectationstoincludewell-establishedbrands.

Legend:0=none1=verylow2=low3=moderate4=high5=veryhigh

Source:TeamAnalysis,Ferent,M.(2016)

Appendix10:AltmanZ-scoreAnalysisTheZ-scoreformulaforpredictingbankruptcyformulatedbyAltmanisa5ratioslinearcombinationmultipleanalysisthatindicatestheprobabilityofacompanytogoinbankruptcywithin2years.WiththespecifiedformulatakenfromBloomberg,theindicatorshowsascore, inwhichbelowof1.81indicatesafirmhasahighprobabilityofbankruptcy,called“Distress”Zone,andascoreofmorethan2.99,“Safe”zone,indicatesafirmisfarfromahighbankruptcyprobability.Theformulais:

Z=(1.2*X1)+(1.4*X2)+(3.3*X3)+(0.6*X4)+(1.0*X5)*

INPUT VARIABLES 2013 2014 2015 2016 2017 Current Assets 6,507 6,648 7,420 7,288 7,531 Current Liabilities 4,417 3,905 5,138 4,956 4,256 Working Capital 2,090 2,743 2,282 2,332 3,275 Tangible assets 10,735 11,167 12,692 13,027 12,936 Total Liabilities 16,137 15,838 17,111 17,092 16,202 Retained earnings 9,280 8,938 9,550 9,362 8,547 Sales -535 -499 -493 -463 -403 EBIT 2,283 2,039 2,219 2,262 2,380 Market Value of Equity 53,353 52,331 50,391 48,760 52,405 DERIVED VARIABLES X1: Working Capital / Tangible Assets

0.194 0.246 0.180 0.179 0.253

X2: Retained Earnings/ Tangible Assets

0.864 0.801 0.752 0.719 0.660

X3: EBIT / Tangible Assets 0.213 0.183 0.175 0.174 0.184 X4: Market Value of Equity / Total Liabilities

3.306 3.304 2.945 2.853 3.234

X5: Sales / Tangible Assets

-0.049 -0.044 -0.039 -0.035 -0.031

OUTPUT Altman Z-score 4.079 3.955 3.574 3.470 3.745

*the formula is taken from Bloomberg L.P.

Source:TeamAnalysis

Appendix11:Beneish'sM-scoreAnalysis

The Beneish's M-score analysis by Beneish measures the earnings quality in their financial results, in regards of earnings manipulation detection. The method contemplates the use of 8 different variables, which identify any earnings manipulation or financial distortions made by the firm. If the M-score is lower than -2.22, the firm is not likely to be a manipulator of earnings, on the other hand if the M-score is greater than -2.22 it indicates that is likely that the firm is. The formula of the Beneish's M-score is:

M = -4.84 + (0.92*DSRI) + (0.528*GMI) + (0.404*AQI) + (0.892*SGI) + (0.115*DEPI) - (0.172*SGAI) - (0.327*LVGI) + (4.679 *TATA)

INPUT VARIABLES

2013 2014 2015 2016 2017

Sales 8,575 7,945 8,558 8,682 9,010 Cost of Good Sold (COGS) 3,224 2,958 3,262 3,311 3,407 Net receivables 1,159 1,051 1,152 1,068 1,134 Current Assets (CA) 6,507 6,648 7,420 7,288 7,531 Property, Plant and Equipment 1,940 2,012 2,194 2,188 2,298 Depreciation 156 172 180 185 186 Securities 9 0 0 0 0 SG&A Expenses 3,131 2,948 3,077 3,109 3,223 Total asset (TA) 27,488 27,616 30,398 30,598 30,088 Current Liabilities 4,417 3,905 5,138 4,956 4,256 Total long-term debt 7,712 7,674 7,458 7,335 7,380 Income from continuing operations 2,283 2,039 2,219 2,262 2,380 Cash Flow from operations (CFO) 1,085 940 1,035 1,336 1,642 DERIVED VARIABLES DSRI: Day’s Sales Receivables Index 0.861 0.978 1.017 0.913 1.023 GMI: Gross Margin Index 0.984 0.994 1.014 1 0,995 AQI: Asset Quality Index 0.991 0.991 0.996 1.009 0.975399854 SGI: Sales Growth Index 1.043 0.926 1.077 1.014 1.038 DEPI: Depreciation Index 0.966 1.021 1.127 1.052 1.129 SGAI: SG&A expenses index 1.021 1.016 0.969 0.996 0.999 LVGI: Leverage Index 0.962 0.950 0.988 0.969 0.962 TATA: Total Accruals / Total Assets 0.043 0.039 0.039 0.031 0.024 OUTPUT M-score - 8 variable model -2.371 -2.369 -2.182 -2.383 -2.295

Source:TeamAnalysis

Appendix12:KeyFinancialRatios 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017GrossMargins% 62.4% 62.8% 61.9% 61.9% 62.2%ReturnonAssets% 4.26% 3.69% 2.97% 4.05% 4.59%IntangibleAssets% 60.95% 59.56% 58.25% 57.43% 57.01%Normalised’ReturnonAssetsRatio%

21.27% 18.26% 17.48% 17.36% 18.40%

Debt/EquityRatio% 83.4% 75.9% 72.5% 69.3% 61.6%NetDebt/EBITRatio% 494.76% 538.23% 514.57% 476.59% 389.22%TotalLiabilities/TotalAssets% 55.9% 56.3% 57.4% 59.4% 61.3%QuickRatio 0.43x 0.43x 0.37x 0.38x 0.49xCurrentRatio

1.50x 1.70x 1.40x 1.50x 1.80xCashRatio 0.12x 0.14x 0.09x 0.12x 0.18xDaysofsalesoutstanding(DSO)days

52.10 50.76 46.98 46.67 44.60

Numberofdaysofpayables(DPO)days

56.34 69.12 67.37 71.13 71.18

Inventoryonhand(DOH)days 496.95 576.56 571.33 586.74 586.74Cashconversioncycle(CCC)days

492.71 558.21 550.95 562.28 541.17

Appendix13:SensitivityAnalysisforintrinsicValuation -20%down GrowthRate(terminalvalue) +20%up

PredictedPricein€ 2.88% 3.06% 3.24% 3.42% 3.62% 3.78% 3.96% 4.14% 4.32%

-20%down 5.98% 181.03 191.31 202.96 216.27 231.63 249.55 270.73 296.13 327.18

CostofEquity(terminalvalue)

6.35% 161.26 169.26 178.21 188.27 199.67 212.68 227.69 245.18 265.836.73% 145.39 151.79 158.85 166.70 175.45 185.30 196.44 209.17 223.837.10% 132.39 137.60 143.31 149.58 156.50 164.18 172.76 182.39 193.297.47% 121.55 125.87 130.56 135.67 141.26 147.41 154.19 161.72 170.117.85% 112.38 116.01 119.93 124.16 128.77 133.78 139.26 145.28 151.938.22% 104.53 100.39 110.93 114.49 118.33 122.49 127.01 131.92 137.308.59% 97.74 100.39 103.22 106.25 109.50 113.00 116.77 120.85 125.28

+20%up 8.97% 91.81 94.10 96.55 99.15 101.93 104.91 108.10 111.54 115.24

Source:TeamAnalysis

Appendix14:RiskMatrix

Appendix15:Endnotes(1) PernodRicard.(13.11.2017).RegistrationDocument2016/17.Availableat:https://admin.pernod-ricard.com/en/our-news-

and-press/our-publications-and-reports/(2) PernodRicard.(9.11.2017).2017Shareholders’meeting.(3) Diageoplc.(08.08.2017).AnnualReport2017.Availableat:https://www.diageo.com/en/investors/financial-results-and-

presentations/annual-report-2017/(4) RémyCointreau.(10.07.2017).RegistrationDocument2016/17.Availableat:https://www.remy-cointreau.com/en/annual-

report-2016-2017_hd/(5) DavideCampari-MilanoS.p.A..(2017).Annualreportfortheyearending31December2016.Availableat:

http://www.camparigroup.com/sites/default/files/docs/annual_report_2016_final.pdf(6) Brown-FormanCorporation.(14.06.2017).2017AnnualReport.Availableat:

http://www.camparigroup.com/sites/default/files/docs/annual_report_2016_final.pdf(7) BacardiLimited.(31.04.2017).2016fullreport.Availableat:https://www.bacardilimited.com/corporate-responsibility/about-

this-report/downloads/(8) LVMHMoëtHennessyLouisVuittonSE.(03.2017).2016Annualreport.Availableat:

https://www.lvmh.com/investors/publications/?publications=29(9) ConstellationBrands,Inc..(2017).2016SummuryAnnualreport.Availableat:http://www.cbrands.com/investors/financial-

information(10) BeamSuntory,Inc..(2017).SummaryofconsolidatefinancialstatementsasofDecember31,2016.Availableat:

https://www.suntory.com/news/article/mt_items/12837-3.pdf(11) HiteJinroCo.,Ltd.(2017).Incomestatement2016.Availableat:

https://www.capitaliq.com/CIQDotNet/Financial/IncomeStatement.aspx?CompanyId=2492830https://www.capitaliq.com/CIQDotNet/company.aspx?companyId=2492830

(12) Marketline.(10.2016).MarketlineIndustryProfile“WineinChina”.Availableat:(13) Frent,Mihai.(11.2016).TheGlobalAlcoholicBeverageIndustry:themarket,MarketAnalysis-2017-2023Trends-

CorporateStrategies.Xerfi.(14) TheWorldBank.(01.2018).GlobalEconomicProspect.Broad-BasedUpturn,butforHowLong.(15) PWC.(01.06.2017).France:Corporate–Taxesoncorporateincome.Availableat:http://taxsummaries.pwc.com/ID/France-

Corporate-Taxes-on-corporate-income(16) OECD.(2017).RealGDPforecast.Availableat:https://data.oecd.org/gdp/real-gdp-forecast.htm(17) BureauofEconomicAnalysis.(21.12.2017).NationalIncomeandProductAccounts,GrossDomesticProduct:ThirdQuarter

2017(ThirdEstimate),CorporateProfits:ThirdQuarter2017(RevisedEstimate).Availableat:https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

(18) GoldmanSachs.(2017).MacroeconomicOutlook2018.Availableat:http://www.goldmansachs.com/our-thinking/pages/outlook-2018/?videoId=154422

(19) NationalBureauofStatisticsofChina.(2017).NationalEconomyMaintainedtheMomentumofStableandSoundDevelopmentandExceededtheExpectations.Availableat:http://www.stats.gov.cn/english/

(20) Reuters.(27.09.2017).Chinatocancelathirdofironoreminingrightsinfightagainstsmog.Availableat:https://www.reuters.com/article/us-china-steel-mining/china-to-cancel-a-third-of-iron-ore-mining-rights-in-fight-against-smog-idUSKCN1C21I5

(21) OECD.(11.2017).China-Economicforecastsummary(November2017).Availableat:http://www.oecd.org/economy/china-economic-forecast-summary.htm

(22) Woodhouse,Alice.(2018).China’spremierexpects6.9%GDPgrowthfor2017.FinancialTimes,[online].Availableat:https://www.ft.com/content/910bfee1-1a59-304f-93cb-2975faf6b03e[Accessed11.01.2018].

(23) Datatakenfrom:WorldBank.Availableat:https://data.worldbank.org/indicator/NY.GNS.ICTR.ZS?locations=CN(24) Stacey,Kirian.(2017).India’seconomicgrowthrateticksupto6.3%inthirdquarter.FinancialTimes[online].Availableat:

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(34) Datatakenfrom:S&PCapitalIQ.Availableat:https://www.capitaliq.com/CIQDotNet/my/dashboard.aspx(35) Datatakenfrom:BloombergL.P.Availableat:https://www.bloomberg.com/europe

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