CFA Institute Research Challenge irc documents...respectively grew by 14.4% and 5.6% in revenues...
Transcript of CFA Institute Research Challenge irc documents...respectively grew by 14.4% and 5.6% in revenues...
CFA Institute Research Challenge
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Team K
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Pernod Ricard SA January, 22nd 2018
Beverages
Alcoholic beverages
Exchange: Euronext Paris
CIQ Ticker: ENXTPA:RI
BUY
Target Price: €153
Current Price (as at 01/22/18): €130.0
Upside: 17.7%
That’s the spirit Market data
Current price €130.0
52-week high (01/11/18)
€133.6
52-week low (02/10/17)
€106.7
Market cap (m) €34,326.7
Shares out. (m) 264.1
Free float 58.3%
EV (m) €48,409.8
EV/EBITDA 2018e 17.8x
P/E 2018e 29.7x
Source: Capital IQ
PERNOD RICARD STOCK PERFORMANCE OVER 3 YEARS
Source: Capital IQ
VALUATION SUMMARY (€/SHARE)
Source: Team estimates
KEY FINANCIALS
HIGHLIGHTS We initiate coverage of Pernod Ricard with a BUY recommendation and a target price of
€153 (17.7% upside). Pernod Ricard is the #2 largest spirit player globally and is well-positioned to take advantage of key trends in the industry.
Our investment case relies on the following points:
Pernod Ricard is the #2 largest spirit player globally in a profitable industry
The industry is concentrated as Top 5 spirits companies (including Pernod Ricard) account for 63% of global volumes. Pernod Ricard brands portfolio is highly diversified in terms of categories (white and brown alcohol) or geographies (emerging countries accounted for 38% of Pernod Ricard sales in FY17). Those brands are mainly positioned on the premium market segment (more than 70% of Pernod Ricard brands are premium), generating high margins (the group EBITDA margin reached 29.0% in FY17).
An attractive industry expected to grow at 4-5% in the next 5 years, driven by emerging markets and premiumisation
The spirits industry has grown from 4% to 5% per year historically due to upscaling and consumption growth in emerging markets: the Chinese and Indian spirits market respectively grew by 14.4% and 5.6% in revenues between 2011 and 2015 and are expected to continue to do so. Pernod Ricard will benefit from this trend with a 42% market share in cognac in China and a 45% market share in premium spirits in India. Moreover developed markets are recovering: in the US, growth is expected to reach 3 to 4 % p.a. in the next 3 years despite stagnating volumes growth. This growth is driven by innovation (1/3 of the growth), and increasing prices allowed by premiumisation. We believe Pernod Ricard is well-positioned to capture future growth from these trends: we assume a growth of 3.4% (2017-2022e CAGR) for our topline forecast.
Pernod Ricard generates strong cash flows
In FY17, Pernod Ricard reached a historical high in its cash flow generation (+61% in 2 years), thanks to efficient operational initiatives (Allegro program). This gives the group an opportunity to strengthen its balance sheet by deleveraging. The group net debt/EBITDA decreased from 3.7x in FY14 to 3.0x in FY17 allowing Pernod Ricard to consider M&A opportunities again.
An undervalued company offering a strong upside potential
According to our valuation Pernod Ricard is undervalued: the group is trading at 16.0x 2018e EV/EBITDA (according to the market) vs 18.3x for its peers. We believe the market undervalues the following points: (i) Pernod Ricard has room for improvement in terms of margins and positioning (both categories and geographies), (ii) Pernod Ricard’s performance could be even stronger in emerging countries such as India and China and (iii) Pernod Ricard has improved its financial position while remaining the #2 largest spirit player in the world.
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130
Pernod Ricard SBF 120
149.4
159.0
DCF
Tradingcomps
Source: Team estimates, company reports
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e
Sales 8,575.0 7,945.0 8,558.0 8,682.0 9,010.0 9,289.4 9,671.4 10,035.2
% Growth - -7.3% 7.7% 1.4% 3.8% 3.1% 4.1% 3.8%
EBITDA 2,424.0 2,259.0 2,454.0 2,503.0 2,613.9 2,718.0 2,831.2 2,960.8
% Margin 28.3% 28.4% 28.7% 28.8% 29.0% 29.3% 29.3% 29.5%
EBIT 2,104.0 1,815.0 1,588.0 2,094.0 2,230.9 2,308.7 2,405.6 2,514.6
% Margin 24.5% 22.8% 18.6% 24.1% 24.8% 24.9% 24.9% 25.1%
Net income 1,206.0 1,025.0 878.0 1,254.0 1,419.9 1,362.6 1,418.4 1,531.3
% Margin 14.1% 12.9% 10.3% 14.4% 15.8% 14.7% 14.7% 15.3%
FCF 1,725.7 1,427.8 1,473.0 1,815.8 2,065.6 2,262.3 2,353.2 2,459.3
EV/EBITDA - - - - 18.5x 17.8x 17.1x 16.4x
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Whiskey40%
Vodka 6%
Cognac 6%
Rhum7%
Gin 10%
Pastis7%
Champagne7%
Liquor7%
Brandy3%
Tequila7%
COMPETITIVE POSITIONING OF PERNOD RICARD PORTFOLIO
Sources: Company reports, team analysis
PERNOD RICARD PORTFOLIO IN VOLUME
Sources: Company reports, team analysis
BCG MATRIX: PERNOD RICARD TOP 13 BRANDS (APPENDIX 6)
Sources: Team Estimates, Company reports
BUSINESS DESCRIPTION
THE WORLD #2 IN SPIRITS AND WINES
Pernod Ricard was founded in 1975 with the merger of the two anise producers Pernod and Ricard. Today, the firm is the second spirits and wine player ‒behind the British Diageo‒ with 70 million liters sold, a world volume share of 4.9% and sales of €9.0 billion in 2017. The company produces a broad range of liquors (including scotch, whiskey, anise, cognac, brandies, rums, gin, vodka, wine, and champagne – Appendices 1 and 2) and has a strong international presence with 101 production sites spread across 23 countries. Asia and the Rest of the World (RoW) contribute over 40% of the group’s sales with #1 position in spirits sales in China (Martell) and India (Jameson). Pernod Ricard ranks second following Diageo in its core regions -Western Europe and North America- which represent respectively 22% and 16% of its global revenues. Boosted by a strong growth in emerging markets (China alone grew by 14.4% CAGR in revenues between 2011 and 2015), group sales have grown at a 4.2% CAGR since 2006.
For the past few years, the value creation strategy of the company has revolved around four main axes:
(i) Investing heavily in communication and premiumising its international strategic
brands to attract and gain the loyalty of affluent individuals to boost the growth of its brand portfolio.
(ii) Seizing emerging markets opportunities (e.g. the IMF expects Asia to grow by
20% in the next 4 years): Pernod Ricard has been successful in India; in particular its whiskey portfolio (local brands Royal Stage and Imperial) enabled the firm to thrive in the Indian peninsula.
(iii) Deleveraging and restructuring following the acquisition of Vin & Spirit in 2008. (iv) Implementing a Corporate Social Responsibility policy to advocate for
responsible drinking.
The most premium portfolio in the spirits industry
Pernod Ricard leads several European and American markets with its Iconic Global Brands (such as Absolute, ranking second on the vodka category in terms of sales volume and Chivas Regal, the number two whiskey worldwide in the super-premium category). Almost 80% of Pernod Ricard’s portfolio is premium, making it the spirits company with the highest share of premium spirits in the industry. Nonetheless, most of these brands still have room for improvement as many of them are ranked #2 or below. Pernod Ricard’s spirits portfolio strategy is twofold. First, upscaling its portfolio to create value and accelerate growth by placing its International Strategic Brands at the core of its activity. Second, using its Local Strategic Brands to penetrate local markets, leverage its distribution platform and ultimately convince customers to trade up for their most exclusive (and profitable) beverages. This balance enables Pernod Ricard to enjoy a premium positioning whilst its standards brands finance the upscale brands development.
In terms of brand growth, results are diverse: Martell grew over 15% in 2017 while Kahlua shrank by 3%. However, 14% of its International Strategic Brands performed strongly, namely Jameson and Martell. 36% of its international brands are ‘cash cows’ with Kahlua and The Glenlivet having the highest world market shares. A question remains for Beefeater, Malibu, Ballantine’s and Chivas Regal which grew more slowly and have a weak market share.
Overall, Pernod Ricard’s International Strategic Brands exhibit a strong growth and potential for further improvement.
Important marketing expenses to power premium brands
Marketing expenses are key to develop brands and increase their value. Since 2014, Pernod Ricard’s marketing expenses represent around 19% of its revenues. Advertising and Promotion (A&P) expenses focus on creating premium brands and responding to the needs of new customer categories such as Millennials (which represent 26% of the world’s population), who look for innovative and exclusive products. Additionally, the cocktail scene is growing and bartenders have an essential role: to set the quality standard and as opinion leaders. Therefore, an important part of the marketing expenses focuses on training mixologists to serve Pernod Ricard’s spirits. Further, Pernod Ricard’s size, its decentralized organization and its large distribution network allow them to increase the sales of a local ‘craft brand’ overnight, supporting its growth strategy.
Pernod Ricard was built through acquisitions targeting mainly Premium and Super-Premium brands that they integrated with great success. On top of that, the group manages the new brands to achieve a great performance as the Drinks International Magazine 2017 Annual Bar Report proved by naming Monkey 47 as the most trending spirits brand in the world. This is a key advantage of Pernod Ricard as having the best portfolio and the ability to develop brands is essential in this industry.
Jameson
Perrier-Jouët
Martell
Havana Club
Malibu
Beefeater Ballantine's
Absolut
The Glenlivet
Royal Salute
Chivas Regal
Kahlua
Mumm
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20%
-0.5%0.0%0.5%1.0%1.5%2.0%
Volu
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Brand market shareStars
Cash cows Dogs
Question marks
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%
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%
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%
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% 62
%
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Liq
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& B
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Rhum
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Bo
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Cognac &
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Te
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Cham
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Gin
Overa
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Premium Standard
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ExecutiveManagement
Rights andObligations ofShareholders
Board of Directors
Disclosure,Transparency &
Engagement
Takeover Defence
14.2%
7.5%
10.2%
9.8%
58.3%
Société Paul Ricard *Groupe Bruxelles Lambert *Capital Group CompaniesMFS Investment ManagementFloat
* > 10% voting rights
SHAREHOLDER STRUCTURE
Source: Company Data, Capital IQ
GOVERNANCE STRENGH ASSESSMENT (RATED ON 5)
Source: Company data, Team estimates
CORPORATE GOVERNANCE
SHAREHOLDER STRUCTURE
Pernod Ricard is listed on the NYSE Euronext SA Paris Eurolist and belongs to major indexes such as the CAC 40. Pernod Ricard is originally a family-owned company but the family’s share (Société Paul Ricard) has progressively been diluted to a 15% stake and 19% of voting rights. The majority of Pernod Ricard shares are traded publicly.
GOVERNANCE
Overall we do not foresee any governance issues with Pernod Ricard’s governance which we rate as strong:
Executive Management - Strong: Pernod Ricard executive management is a team of
qualified and experienced managers acquired through several years in the group and/or across the Food & Beverages industry. The former CEO retired in February 2015 and Alexandre Ricard took the head of the company.
Rights and Obligations of Shareholders - Strong: One-share-one-vote policy at the
exception of shares held for more than 10 years from the 12 May 1986 that are eligible to double voting rights within the limit of 30% voting rights. This approach tends to protect and support historical and long-term investors.
Board of directors - Medium: 6 out of 15 members are independent directors, one third
are women and two directors are employees’ representatives (Appendix 3). Moreover, Mr Ian Gallienne is an independent director but also CEO of Groupe Bruxelles Lambert that holds 10.9% of voting rights in Pernod Ricard. With the ownership of less than 10% of the shares, the status of Mr Gallienne is compliant with the regulations but we could challenge the status of independence regarding the capacity of voting rights of this director.
Disclosure, Transparency & Engagement - Strong: Strong investor relations
department, providing strong and high-quality reports. Compensation is disclosed. Resources are deployed to conduct internal audits and compensation incentives are consistent with shareholder interests. Three members of the Board are employee representative, one is a non-director.
Takeover Defence - Medium: 58.3% of the shares are floating publicly, the main
shareholder is Société Paul Ricard (14.2% of the shares and 19.8% of voting rights) as of 30 June 2017.
CORPORATE SOCIAL RESPONSIBILITY
By clearly defining its policy and an action plan, Pernod answers expectations from consumers, builds a story around the group and its brands and consolidates its marketing position. To do so, Pernod involved more than 1,300 stakeholders through a survey and identified four actions to promote in its CSR policy:
Promoting responsible drinking: 86% of affiliates carried out at least one responsible drinking initiative in 2016/2017
Protecting the planet: Paul Ricard Oceanographic Institute (IOPR) was created in 1966 and promotes the knowledge and protection of marine environments
Promoting engagement: 1,142 suppliers signed the Supplier CSR commitment Empowering all employees: brand positive impact with the Chivas Venture project that supports social entrepreneurs.
GROWTH BY COUNTRY (GDP PER CAPITA)
Sources: IMF, OECD data
INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
Historically the spirits market has grown in value at an average of 4-5% per year. Yet, for future trends we need to differentiate developed and emerging economies.
Traditional markets still hold opportunities
The US and the European economy are engaged in a slow but consistent recovery, contributing to the disposable income of consumers and therefore the spirits industry. In the US and Europe the spirits market is well-established, alcohol has been part of the culture for decades. Despite a decrease in volume in Europe, the price-mix balances the downturn. Growth is stable in the US with an expected 3-4% CAGR expected for the next three years. Vodka and Whisky dominate the sales in most Western markets. Premium brands gather most of the growth, overall volumes remain stable but value increase through upscaling.
Strong emerging markets drive economic growth
The Chinese and Indian spirits market grew 14.4% and 5.6% (CAGR) in revenues respectively between 2011 and 2015 (vs GDP growth of 7.3% and 8.1% respectively). Growth is expected to continue as IMF forecasts an increase of Asian GDP of 20% over the next 4 years. China GDP per capita growth should slightly decrease but India’s will continue to grow reflecting strong economic performance in the region, improved urbanization and the rise of its middle class. As the effects of the anti-corruption measures implemented in China since 2013 are now fading, Cognac sales are expected to recover.
2%
4%
6%
8%
India: 8.7%
China: 7.9%
The US: 3.4%
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PRICE EVOLUTION (PRICE PER UNIT, BASIS 10)
Sources: Statista, Team analysis
MONKEY 47 WEB ENTRIES (GOOGLE MEASURE)
Sources: Google trends
TAXES IN A BOTTLE OF SPIRITS
Source: French government, team analysis
In India, the restrictions induced by the GST and the highway ban should be more moderate than initially thought. LATAM and RoW growths are more vulnerable due to political and economic instability. Overall, a growth ranging from 3% to 8% is expected in the main emerging markets (see appendix 5)
Premiumisation: a trend pushed by increasing incomes and millennials
Disposable income increases in both developed and emerging markets. Since spirits consumption is perceived as a social distinction and income increase, there is room for price growth. The premiumisation is also explained by a stronger competition in standard prices. Premiumisation takes different aspects according to spirits type: the production process of brown spirits (loss in volume with aging) justifies upscale prices and premium brands. In white spirits or liquors however, it is enabled by innovation. We assume that premium brands generate an additional margin after advertisement and promotion.
Marketing & innovation are key success factors as Millennials shape the future of the industry
Consumption of spirits is more popular among younger generations but women recently also increased their consumption (cocktails). Millennials represent 1.7 billion people in 2017, close to 25% of the global population, and their purchasing power is bound to grow significantly in the coming years. They are demanding customers, require transparency from companies and look for unique, premium products but also convenience and experiences.
Since millennials are sensitive to experience new products, innovation is key to reach this pool of consumers. Global brands lose their appeal as they lack the capacity to answer specific and new expectations. Digitalization shapes their expectations and consumption habits, spirits companies diversify their marketing strategy to compete:
(i) Companies have implemented online platforms to buy their products online (links towards e-commerce platforms on most of their brands websites).
(ii) Brands keep introducing new flavored products and extensions of existing brands, (Pernod Ricard’s Black Barrel is priced 25% above its mother brand, Jameson).
(iii) Brands advertising is strong on social media; promotion also plays on product placement or celebrity sponsorship (US rapper P.Diddy for Ciroc vodka).
(iv) Companies try to influence bartenders, key opinion leaders who set the quality standard with a growing cocktail scene.
A highly regulated industry
Direct and indirect taxes represent most of a retail spirit bottle price (e.g. 50 to 80% of retail price in France or in the United States). Taxes limit profit margins, so price must be high enough to cover the costs, which is easier to achieve with a premium brand. To prevent harmful alcohol consumption most countries enforce restrictions: a minimum drinking age (21 years in the US), a minimum purchasing age (sellers are required to ask for ID in Swedish liquor stores) and production, advertising and sales channels are also often regulated by governments. Restrictions can extend to ban in several countries (mostly in Middle East such as Kuwait or Iran).
No major M&A deals expected
The spirit & Wines industry is highly concentrated: Diageo and Pernod Ricard have close to 15% volume market share in 2016. When considering premium spirits, their share increase to 41% as of March 2016. The top 5 represents 63% of the global volume within this segment. A new wave of M&A started in 2014 (Suntory’s acquisition of Beam, Diageo taking control of United Spirits) and since then, deals have targeted small companies focused at the top end of the market (Campari’s takeover on Grand Marnier). High multiples have been paid by acquirers (more than 20x EBITDA), making the operation dilutive in most cases. Given Pernod Ricard’s size, we can expect it to play the role of an acquirer in the future.
COMPETITIVE OVERVIEW
The spirits industry is an attractive industry, highly concentrated and that can be difficult to enter.
Raw materials supply is abundant (A)
There are two main spirits categories: (i) the white spirits, such as vodka or gin and (ii) the brown or ageing spirits, such as cognac or whisky. Both are produced from agricultural products such as grains or other vegetals. Vodka can be made from potatoes, beetroots and other ingredients, so supply sources are wide, and manufacturers can switch from one to another. Some raw materials choice can be limited: Brandy or Cognac are made from wine and global production went down 8.2% in 2017 to reach its lowest in 50 years.
New players can shake the big ones (B)
Despite high entry barriers (capital to set up facilities, instore brand awareness and licenses to produce), some players managed to play their hand and be successful as crafters. Tito’s vodka grew 37.4% in volume in 2016 to sell 3.8 million cases and seize market shares from traditional players (as Absolut) in the US market. Spirit crafters boomed following the craft brewing trend, and raised equity on crowdfunding platforms (Santamania raised £400k in less than a week) or from the numerous private equity funds specialized in spirits.
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Whisky, 75cl sold €15 in France
VAT
Socialcontributions
Indirect tax
Non-taxedvalue
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China
India
LATAM
N.America
Europe
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PORTER’S FIVE FORCES (APPENDIX 4)
Legend
0 – No threat to the business
5 – High Threat to the business
Sources: Company data, Team estimates
Consumption trends and counterfeit moderately threaten the Spirits Industry (C)
Health and wellness trends push consumers to buy more non-alcoholic beverages. In emerging markets, such as China, counterfeit is difficult to measure but is common practice, as empty bottles are refilled with substitute alcohol.
End-consumers lead the trends but distributors are constrained (D)
Alcohol is not a first necessity product and consumers have a strong bargaining power both on-trade and off-trade with low switching costs and a broad range of choice in terms of beverages both alcoholic and non-alcoholic. Despite a large choice of supplier distributors power is more limited, the influence of some brand on customers can push them to sell without margins (Pernod Ricard’s Pastis).
Competition is fierce (E)
The industry is strongly concentrated as Top 5 spirits companies account for 63% of global volumes. To thrive in the beverages industry, a firm must master three key success factors: (i) be differentiated: players should allocate an important portion of the sales to marketing expenditures to generate brand awareness and customer loyalty – crucial in an industry where consumer have a myriad of choices; (ii) better segment their customer base and improve their advertising targeting, invest in big data and digitalization: such investment will enable firms to have a more granular understanding of their customer base and hence generate customer loyalty and (iii) sell in high volumes to offset the fixed costs incurred by the producers of alcoholic drinks.
NO PREMIUM FOR SIZE IN VALUATION
Luxury is an acquired taste
Pernod Ricard is undisputedly the most premium spirits producer of all with almost 80% of high-end brands. Pernod Ricard made premiumisation one of their priorities after divesting Orangina in 2001 to clarify in their offer. Since then, the company focused on deleveraging and carrying out bolt-on acquisitions to build a more prestigious portfolio. As we stated before, size is a crucial asset in this industry because it enables new brands to be known worldwide thanks to an extensive distribution network. Pernod Ricard clearly intended to take advantage of its size and acquired super-premium companies and developed more craft spirits. This strategy proved to be a success in 2016 as they acquired a majority stake in Monkey 47. In 2017, the Drinks International Magazine 2017 Annual Bar Report declared Monkey 47 as the most trending brand in the world. Indeed, thanks to the deleveraging that the company has achieved, we believe that Pernod Ricard intends to pursue this differentiation path with Smooth Ambler and Del Maguey, bourbon and mezcal brands respectively.
Pernod Ricard strong position in India and China
In Asia – mainly China and India which together account for 17% of Pernod Ricard total sales – the group will benefit from a strong recovery after subdued last 2 years. Especially as it is positioned on the premium segment, expected to post double-digit sales CAGR over the next 5 years. In India, Pernod Ricard is only exposed to the fast-growing premium segment while its main competitor United Spirits is not (only ~50% of its sales). This will help the group to increase its domination on the local market (45% market share as of FY16). In China, Pernod Ricard will benefit from the recovery of the cognac market (Martell represents 80% of the group’s sales in the country). As well as in India, Pernod Ricard is in the right place to both seize the Chinese premium opportunity and fill in the absence of International spirits in China (only ~1% of alcohol volumes).
Diageo
Rémy Cointreau
Campari
Marie Brizard
Constellation Brands
Brown-Forman
Stock Spirits Group
Pernod Ricard
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
- 1,000 2,000 3,000 4,000 5,000
EV
/EB
ITD
A
EBITDA (m€)
EV
(m€)
Large diversified spirits
Small specialists
Source: Team estimates, Capital IQ
0
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20%18% 17%
21%23%
24% 24% 25%
2017 SALES BREAKDOWN BY GEOGRAPHIES
Sources: Company data
EVOLUTION OF FCF/SALES RATIO
Sources: Company data
INVESTMENT SUMMARY
We issue a BUY recommendation with a target price of €153, an upside of 17.7% from valuation date’s closing price of €130.0. Our recommendation is based on (i) a steadily growing market offering opportunities for leading players, especially in emerging markets (ii) a well-balanced and well-diversified brand portfolio and (iii) an undervalued company with a strong cash generation.
GOOD GROWTH PERSPECTIVE
We believe that Pernod Ricard has a unique positioning to capture growth especially in emerging countries. Indeed, the spirits industry is historically steadily growing (in terms of value) at a 3% to 5% growth rate p.a. Growth is and will be driven by emerging countries (in particular by China and India), with a growth range of 3% to 8% in main emerging countries next years. Historical markets (mainly Western countries) are engaged in a slow but consistent recovery: in the US, growth is expected to reach 3% to 4% p.a. growth in the next 3 years. Simultaneously, spirits industry is affected by 2 major trends: innovation and premiumisation. We believe that Pernod Ricard is particularly well-positioned (i) to benefit from growth in both emerging and historical markets when taking into account its geographical positioning and (ii) to maintain its #2 rank on the market thanks to a voluntarist innovation policy and a strong positioning on premium brands. As a consequence, Pernod Ricard’s strategy focused on high-end brands and emerging countries will help improve its topline and margins.
A STRONG CASH GENERATION ALLOCATED TO DEBT REDUCTION
Thanks to the implementation of efficient operating measures and a strong financial discipline, Pernod Ricard achieved a 5.7% improvement in its cash generation (FCF/sales), reaching 22.9% of sales in FY17. We believe, this trend will continue in the future (24.5% in 2020e). Pernod Ricard historically generated margins above its peers (21.3% 1992-2017 EBITDA margin in average vs 20.0% for peers). We expect this outperformance to continue in the coming years (29.5% EBITDA margin in 2020e). This improved cash generation will strengthen the group’s financial position through deleveraging: the group net debt/EBITDA now stands at 3.0x vs 3.7x in FY14. This improvement provide an opportunity to reconsider strategic acquisitions in the future after years of financial restrictions.
AN UNDERVALUED COMPANY VS PEERS
Our valuation suggests that Pernod Ricard is undervalued: the group is currently trading at 16.0x 2018e EV/EBITDA (according to the market) vs 18.3x for its peers. Pernod Ricard is also undervalued compared to its key competitor Diageo (#1 largest spirits player globally), which is trading at 17.6x 2018e EBITDA (Appendix 9). We believe the market currently underestimates the quality of Pernod Ricard positioning mainly in India (45% market share in premium spirits) as well as its ability to deleverage thanks to its cash flow generation. Moreover, spirits is a highly attractive industry in which multiples offered are high (at around 20.0x EBITDA) for craft brands, which are really popular with millennials. Pernod Ricard is already positioned on this market and has already invested in such brands (Del Maguey Mezcal acquisition in FY17) and should strongly benefit from these developments.
EVOLUTION OF PERNOD RICARD REVENUE (€M)
Sources: Company data
EVOLUTION OF PERNOD RICARD TOPLINE GROWTH (ORGANIC)
Sources: Company data
FINANCIAL ANALYSIS
A STEADILY GROWING INDUSTRY, DRIVEN BY EMERGING MARKETS
Pernod Ricard sales reached €9,010m in 2017 compared to €8,682m in 2016
(+3.8% YoY), with the following breakdown: Europe (30%), Americas (30%) and Asia (40%). Its decentralized business model allows the group to capture growth and benefit from growth drivers in all countries in which it is present and to gain protection against a potential slowdown in some areas. Pernod Ricard organic sales growth amounted to 4% in 2016, in line with the average historic growth in the sector, reaching 3% to 5%. This performance reflects a strong operating efficiency of the group entities (growth is not only driven by acquisitions). However, Pernod Ricard’s performance has to be mitigated by a relatively low 2013-2017 sales CAGR (1.0%). Indeed, the group has been strongly affected by a challenging environment but has since implemented operational improvement projects, such as Allegro.
Pernod Ricard grew in all regions in FY17 but with different profiles:
America recorded a 7% organic growth in spite of a slowing market (+3.1% in FY17 vs
5.9% in FY 16 according to Nielsen). In the US, the 5% growth was mainly driven by international strategic brands such as Jameson and Martell (+15% and +25% respectively). America -excluding the US- achieved a 11% growth driven by Canada with a 6% organic growth and Mexico, which returned to growth. The latter was mainly driven by Chivas.
Asia RoW recorded a 1.0% organic growth, in spite of the strong Korean decline. In China,
Pernod Ricard achieved a sustainable rebound with a 2% growth in FY17 vs -9% in FY16, driven by cognac Martell (+6%) which dominates the Chinese market with a 42% market share. In India, FY2017 was rather difficult (only 1.0% growth) due to changes in regulations but Pernod Ricard confirms its leading position with a 45% value market share.
Europe achieved a strong 3.0% organic growth in FY17 driven by 3 countries: Spain, UK
and Russia. In Spain, Seagram’s gin drove the strong local performance (+5%), and allows
Americas30%
Asia / RoW40%
Europe31%
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EVOLUTION OF PRICE PER 9L CASES
Sources: Company data, team estimates
EXPENSES BREAKDOWN IN FY17
Sources: Company data
EVOLUTION OF PERNOD RICARD PRO
Sources: Company data
EVOLUTION OF PERNOD RICARD AND PEER EBITDA MARGIN
Sources: Capital IQ, company reports
EVOLUTION OF PERNOD RICARD NET DEBT TO EBITDA
Sources: Company data
Pernod Ricard to keep a 24% market share. In Russia, the group benefitted from a strong positive pricing (variation in the RUB/EUR exchange rate) and from the growth of strategic international brands such as Absolut or Ballantine’s. In France, Pernod Ricard maintained its leading market share (30%) but recorded only a 1.0% organic growth after adjustments for advance shipments at end of FY15.
Innovation is a key consideration for Pernod Ricard
Innovation accounts for nearly one third of organic growth and is mainly concentrated in the fastest growing brands. In FY17, innovation delivered 1.0% incremental topline growth. The group expects that innovation will drive 20 to 25% of the group’s future growth.
Price and volume both increased in FY 2017
Sales in strategic international brands are driven by both growth in price and volume: sales per 9L cases remain flat between FY17 and FY16 (-0.1% YoY), in spite of a slightly forex impact but improved by 3.5% yearly between FY14 and FY17. Price per 9L cases increased over the period by €11.6 from €106.0 to €117.5. We believe these results illustrate the premiumisation strategy undertaken by the group.
PREMIUMISATION AS A CATALYST FOR MARGINS GROWTH…
Pernod Ricard places operational excellence among the “four essentials” to attain leadership status by 2020
The group tries to improve its business performance delivering significant savings in (i) COGS, advertising and promotion expenses and (ii) in working capital requirements. As at 2016/17, approximately one quarter of the savings of the operational efficiency roadmap have been delivered, amounting to €400m over the period 2015-2020.
Gross margin, amounting to 62,2%, improved due to a better product mix, lighter price pressure and tight management of cost of goods sold.
Advertising and Promotion (A&P) investments were up +3% to €1,691m. The operational excellence initiatives drove stronger efficiency: half of savings on costs are reinvested in A&P. Expenditure on A&P is a decisive factor in the success of a brand, in order to meet premium clients and to convince bartenders. A&P expenses were refocused on key markets, including the US, but were also allocated to key projects.
General and administrative costs increased less than sales, due to a strong discipline (Allegro program) to achieve 60 million euros in savings in FY17. These savings mainly dealt with supply chain with a better freight and negotiation cost and an optimized procurement policy.
Profit from recurring operations (PRO) increased by 40bp reaching 26.6% of sales, driven by the good performance of the Americas (+ 8% on a like-for-like basis) and a 2% positive forex impact. From a global point of view, PRO breakdown followed the same trends and reparation as topline. We note a slight decrease in PRO margin in Asia due to India in spite of a positive price effect in China.
A historically strong financial performance compared to peers (Appendix 9)
To better understand Pernod Ricard’s business, financial performance and environment, we analyzed the group financial performance in comparison with a sample of 30 companies over the world, specialized in spirits, wine or champagne for nearly 30 years. It appears that Pernod Ricard margins are well above peers’ average since 2001: Pernod Ricard 2017 EBITDA margin was nearly 8% higher than peers’ average. It is mainly explained by the fact that Pernod Ricard’s business model, in comparison with peers, includes businesses with higher margins such as wine or champagne. At the same time, Pernod Ricard historical margins are relatively stable but progressing over the time, at around 26% since 2012. In 2017, the group EBITDA margins increased by 40bp due to the effectiveness of the cost savings program implemented in 2015. Consequently, Pernod Ricard achieved higher operating margins than its peers as described above (Pernod Ricard operating margins are higher than peers since 2001).
Despite the rise in the income tax, the net result stood at 16.4%, favorably impacted by the fall in the cost of debt (3.3% in FY2017 vs 3.8% in FY2016) and the rise of the PRO.
A highly profitable company well above peers
Net margin amounting to 15.8% in FY17 stood above 5 previous year net margins (550bp above FY15 net margin) mainly due to a strong decrease in financial expenses and, once more, effects from the Allegro cost reduction program. Furthermore, Pernod Ricard recorded a historical net margin average of 10.5% over 1992-2017 well above peers average, standing at 5.6% (median 7.3%).
…ALLOWING A BETTER CASH GENERATION…
In FY17, the group generated very strong FCF (+22.4% YoY), reaching a historical high, with +61% in 2 years, particularly thanks to operational efficiency initiatives.
The working capital requirements decreased between FY17 and FY16, amounting to 184 days of sales vs 194 days, thanks to Allegro program (€50m in savings in FY17) favoring a better demand and stocks management.
The high cash conversion rate (86.0% in FY17) is based on (i) a 3.3% increase in profit from recurring operations, (ii) a controlled increase in long-term stocks (for whiskey), (iii) a
10.0%
15.0%
20.0%
25.0%
30.0%
Pernod Ricard EBITDAmargin
Aggregated peers EBITDAmargin
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EVOLUTION OF PERNOD RICARD ROIC
Sources: Company data, team estimates
EVOLUTION OF PERNOD RICARD ROE
Sources: Company data, team estimates
working capital down €123m thanks to improved logistics and (iv) finally capex up to €20m in line with sales growth.
The net cash generation comes out at €801m in FY2017 vs €461m in FY2016 and allows a reduction of the net debt to €7.9bn. The net debt/EBITDA ratio at average rates was 3.0 as at 30/06/17, significantly down from 3.4 at 30/06/16. Indeed, the group pursues a strong deleveraging strategy for years, improving its credit profile.
…OFFERING AN ATTRACTIVE PROFILE FOR INVESTORS
Strong and stable ROIC
ROIC historical average over 5 years reached 7.9% and stood well above WACC. The ROIC including goodwill of Pernod Ricard amounted to 8.3% in 2017 against 6.4% in 2015. This increase and the return to historical levels is explained by (i) an improvement in the EBITA margin (+ 700bp) and (ii) an optimization of assets. After restating the goodwill resulting from the acquired brands, the ROIC reached 26.9% in 2017, which is 340bp below the historical average (Appendix 13).
ROE is quite stable over the period, standing above peers level
Pernod Ricard ROE is relatively stable over the time at around 10% but the group ROE returns to its 2013 level in 2017 and reached 10.6%. A DuPont analysis (Appendix 14) shows this is due to lower financial expenses, despite an increase in corporate income tax rate. According to our historical analysis, Pernod Ricard trailing median ROE over 5 years is above peers level that stands at 8.6% vs 9.3% for Pernod Ricard.
An attractive pay-out ratio
Pernod Ricard strongly improved its dividend policy in FY17 which reinforces the attractiveness for Pernod Ricard stock. The group distributed €2.02/share dividend in FY17 (+7% YoY, +23.2% vs FY14). This represents a pay-out ratio of 36%, which accounted for around 1/3 of the group net profit from recurring operations. In our forecasts, we expect Pernod Ricard’s pay-out ratio will follow the same trend (+11.0% in FY18e).
Source: Team estimates, company reports
WACC CALCULATION FOR YEAR 1&2
WACC calculation
Risk-free rate 1.8%
Incl. premium of -
Beta 0.94
Market risk premium 7.6%
Cost of equity 9.0%
Pretax cost of debt 3.2%
Marginal tax rate 33.3%
After-tax cost of debt 2.1%
% equity 81.4%
% debt 18.6%
WACC 7.7%
Sources : Team estimates, company reports, Capital IQ
VALUATION Our valuation leads us to a EUR 153 target price which implies a potential upside of 17.7%, based on the discounted cash flow method and trading multiples-based method.
We also conduct a Monte Carlo simulation which supports our buy recommendation (Appendix 19).
DCF VALUATION – EUR 149.4 TP – 15.0% UPSIDE
We made our forecasts on an 8-year period (2018e-2025e), completed by a terminal value (TV). Our assumptions are relatively conservative, in line with market trends. We assume a top line CAGR of 3.3% for the period 2018e-2023e (in line with industry market forecasts), a 29.5% EBITDA margin in 2020e, a stable level of capital expenditures (3.7% of sales on the first 3 years of our model) and 7.7% WACC for the first two years of our model, a 7.9% WACC for the next two years and a 8.0% WACC for the remaining years. We base our terminal value on a 2.2% sales growth rate, a 30.2% EBITDA margin and 3.3% capex/sales ratio.
P&L Forecast explanation – We split Pernod Ricard revenues in 3 geographic areas to
show different growth profiles. The decentralized organization enables the group to seize every opportunity for growth. Hence, we assume a long-term growth rate of 2.8% (until 2025e). We estimate that sales growth will be stronger in Asia with 3.8% organic growth in FY18e versus 2.3% in Europe, which is the least dynamic zone. We consider that margins will constantly improve thanks to the savings plan that runs until 2020. We maintain stable A&P expenses (in line with recent years) but we favor the savings measures initiated by the group in terms of structural costs. Higher A&P expenses could allow the group to increase sales as well. We expect (i) a reduction in net debt more conservative than assumed by the group, despite the rise in the cash conversion rate and (ii) an improved working capital management, in line with the Allegro cost reduction plan.
WACC – We determine Pernod Ricard’s WACC using the Capital Asset Pricing model. To
account for the current low level of interest rates (that will probably increase over the next few years), we gradually increase Pernod Ricard’s WACC. Our calculation leads us to a 7.7% WACC for the first two years in our DCF model (i.e. 2018e and 2019e), a 7.9% WACC for the next two years (i.e. 2020e and 2021e) and a 8.0% WACC for the rest of our DCF model, from 2022e (please see WACC calculation in appendix 17). Beta: to reflect market trends as well as possible and since France represents a significant
part of Pernod Ricard’s sales, we used the SBF 120 index as a benchmark to compute
8.7%
6.6%
9.3%
10.2%
2014 2015 2016 2017
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e
EBITDA margin 28.3% 28.4% 28.7% 28.8% 29.0% 29.3% 29.3% 29.5%
Net margin 14.1% 12.9% 10.3% 14.4% 15.8% 14.7% 14.7% 15.3%
ROE 10.6% 8.7% 6.6% 9.3% 10.2% 9.9% 10.2% 10.9%
ROIC (incl. Goodwill) 8.9% 8.2% 6.4% 7.6% 8.3% 8.3% 8.5% 8.7%
EBIT/interest 3.9 3.6 3.1 4.4 5.4 9.5 9.4 9.5
Net debt/EBITDA 3.6 3.7 3.7 3.5 3.0 2.9 2.9 2.9
Cash conversion 87.5% 87.9% 86.8% 86.7% 86.0% 87.2% 87.2% 87.3%
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WACC SYNTHESIS
Sources: Team estimates, company reports, Capital IQ
VALUATION SUMMARY (€/SHARE)
Sources: Team estimates, company reports
Pernod Ricard’s beta. Using monthly 5-year monthly returns against this index, we obtain a 0.94 beta.
The market risk premium is based on the average SBF 120 yearly performance over 9
years and is equal to 7.6%.
The risk-free rate is based on French government bonds over 30 years to consider the
current low levels of interest rates. As explained above, we assume interest rates will increase over the next few years. We applied a 0.2% premium for the first two years of our DCF model (2020e and 2021e), and a 0.4% premium for the next years. This calculation leads us to a 1.8% risk-free rate for the first two years of our model.
Cost of debt: We take into account Pernod Ricard credit rating, (i.e. BBB with a positive
outlook according to S&P) and obtain a 3.2% pretax cost of debt and a 2.1% after-tax cost of debt.
TRADING MULTIPLES MODEL – EUR 159.0 TP – 22.3% UPSIDE
Given the diversification of Pernod Ricard, we select 2 types of companies, representative of Pernod Ricard’s core business: (i) global spirits leaders including Diageo ‒that we identified as Pernod Ricard main competitor‒ and (ii) regional leaders. We decide to exclude the group regional diversified leaders from our calculation because these companies are less similar to Pernod Ricard’s core business than the former ones but we kept them as a benchmark. In the same way, we don’t select companies specialized in wine or champagne as they are structurally different from spirits (lower A&P expenses and lower margins for example). As the great majority of Pernod Ricard sales are generated by spirits, we mainly focus on spirits-based companies. Moreover, as Diageo is the best comparable for Pernod Ricard due to similar product offering and geographical reach, we apply a discount of 10% on all trading comparables, except Diageo.
We focus on the EV/EBITDA multiple, allowing the comparison of firm’s ability to generate cash flow regardless of their capital structure and depreciation policies. We overweight the first group of trading comparables, i.e. global spirits leader, at 70%. As a result, we obtain an average of 18.4x 2018E EBITDA multiple, i.e. an enterprise value of €42,021m (€159.0 per share).
COMPARABLE TRANSACTIONS MODEL – EUR 178.3 TP – 37.2% UPSIDE
Within this methodology, we select a range of key transactions specialized in Pernod Ricard core business, i.e. spirits industry (group 1 in the table in the Appendix 24). For the same reasons as above, we don’t consider deals in the wine and champagne industry because multiples are different from the one of spirits industry. This method provides us a median EBITDA multiple of 20.2x, leading us to an enterprise value of €47,111m (i.e. €178.3 per share). Nevertheless, we believe that a potential acquisition of Pernod Ricard is not realistic mainly for antitrust purposes. For that reason, we decide to exclude this methodology for our target price calculation.
VALUATION CONCLUSION – EUR 153 TARGET PRICE – 17.7% UPSIDE
We base our calculations only on the DCF methodology and the trading comparables-based methodology. We overweight the DCF one at 60%. This results in an equity value of €40,496.6m, resulting in an enterprise value of €48,409.8m (€153 per share).
7.7%
7.9%
8.0%
149.4
159.0
DCF
Tradingcomps
Source: Team estimates, company reports, Capital IQ
Net debt/EBITDA
2018e 2019e 2020e 2018e 2019e 2020e 2017a 2018e 2019e 2017a
Pernod Ricard SA (our est.) France 48,409.8 4.4x 4.2x 4.0x 17.8x 17.1x 16.4x 29.0% 29.3% 29.3% 3.0x
Pernod Ricard SA (market est.) France 42376.7 4.7x 4.5x 4.3x 16.0x 15.1x 14.3x 28.8% 29.4% 29.7% 3.0x
Group 1 - Global spirits leader
Diageo plc United Kingdom 85,205.1 6.1x 5.8x 5.6x 17.6x 16.5x 15.6x 32.2% 34.6% 35.5% 2.1x
Brown-Forman Corporation United States 22,941.2 8.6x 8.1x n.a. 23.8x 22.1x n.a. 35.0% 35.9% 36.6% 1.7x
Becle, S.A.B. de C.V. Mexico 5,058.9 4.5x 4.1x n.a. 16.6x 14.3x n.a. 26.6% 27.4% 29.7% n.a.
Average Group 1 5.9x 5.6x 5.6x 18.0x 16.4x 15.6x 31.3% 32.6% 33.9% 1.9x
Median Group 1 6.1x 5.8x 5.6x 17.6x 16.5x 15.6x 32.2% 34.6% 35.5% 1.9x
Group 2 - Regional leader
Davide Campari-Milano S.p.A. Italy 8,983.5 4.9x 4.8x 4.5x 20.6x 19.4x 18.2x 23.6% 24.4% 25.0% 3.0x
Rémy Cointreau SA France 5,879.7 5.1x 4.8x 4.5x 22.2x 20.2x 18.5x 22.5% 23.1% 23.7% 1.6x
Average Group 2 4.5x 4.3x 4.1x 19.3x 17.8x 16.5x 23.1% 23.8% 24.4% 2.3x
Median Group 2 4.5x 4.3x 4.1x 19.3x 17.8x 16.5x 23.1% 23.8% 24.4% 2.3x
Group 3 - Diversified regional leader
Constellation Brands, Inc. United States 42,588.4 6.7x 6.3x 5.9x 17.9x 16.3x 15.0x 36.9% 38.0% 38.8% 3.2x
Emperador Inc. Philippines 2,565.0 3.7x 3.5x n.a. 15.6x 14.9x n.a. 25.1% 23.4% 23.7% 2.4x
Marie Brizard Wine & Spirits SA France 357.6 0.8x 0.7x 0.7x 14.8x 8.9x 6.5x 3.8% 7.1% 9.0% n.a.
Lucas Bols N.V. Netherlands 253.8 2.7x 2.6x 2.6x 10.1x 9.7x n.a. 23.0% 25.3% 26.0% 1.8x
Average Group 3 3.1x 2.9x 2.7x 13.1x 11.2x 9.7x 22.2% 23.5% 24.4% 2.5x
Median Group 3 2.8x 2.7x 2.3x 13.7x 11.0x 9.7x 24.1% 24.4% 24.9% 2.4x
Peers average (incl. a discount of 10%, except for Diageo) 5.5x 5.2x 5.1x 18.4x 16.8x 15.9x 27.2% 28.2% 29.1% 2.1x
Peers median (incl. a discount of 10%, except for Diageo) 5.6x 5.4x 5.1x 18.1x 16.9x 15.9x 27.6% 29.2% 29.9% 2.1x
4.8% 5.6%
4.4%
7.8%
7.8%
9.0%
7.3%
8.2%
8.4%
8.2%
10.6%
17.8%
10.6%
36.4%
CAGR Sales
2018e-2020e
CAGR EBITDA
2018e-2020e
3.9%
5.3%
6.5%
3.9% 7.6%
9.0%
5.3%
5.2%
5.4%
5.4%
5.7%
5.1%
Name Country EVEV/Sales EV/EBITDA
5.4%
5.3%
6.2%
6.5%
7.3%
EBITDA margin
6.2%
n.a.
5.9%
8.6%
n.a.
6.5%
9.2%
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25%17% 20%
6% 4%
#1
#6#3
#1#1
RISK MATRIX
Source : Team analysis
ABSOLUT US SALES, NIELSEN VALUE $
Source : Company data
HAVANA CLUB MARKET SHARE AND RANK, IN VOLUME
Source: Company data, Team analysis
PERNOD RICARD RECOVERY IN CHINA
Source: IMF, Company data
STRUGGLING INDIAN SPIRITS MARKET
Source: Company data
INVESTMENT RISKS
Pernod Ricard faces diverse risks that could impact our recommendation.
BUSINESS RISKS
Overpaying for M&A targets
After a strong deleveraging in 2012-13, Pernod Ricard acquired highly specialized small companies (Monkey 47, Smooth Ambler). If prices paid were undisclosed, we have reasons to believe they topped average deals in the sector. Recent acquisitions, such as Campari / Grand Marnier, reached 20-25x EBITDA. As premiums increase, payback on acquisitions lengthens. However, we think Pernod Ricard will be able to integrate future M&A targets as it did in the past.
Pressure on vodka in the US
Absolut vodka is Pernod Ricard’s most selling brand, representing 23% of total sales. It faces pressures in the US coming from fierce competition and new entrants (i.e. Tito’s vodka) in the premium segment. This country accounts for a third of Absolut volumes and its growth has been driven by high-end / super premium vodka (+6.9% in 2016 vs +0.9% for premium vodka). Absolut’s positioning prevents Pernod Ricard from catching this growth, that’s why the company launched super premium Absolut Elyx in 2015. At a price of $40 per bottle, it will undeniably head towards growth in the US. As of today, Absolut Elyx is said to account for 1% of Absolut value sales in the country: that is €1.1 M assuming a market share of 5% for Absolut in the US.
Failure to achieve cost-cutting promises
In 2015, the group launched a roadmap targeting gross P&L savings of €200m over the FY16-20 period. Meanwhile, it aims at lowering working capital by €200m through supply chain improvements. During FY 17, savings were delivered as planned but a failure to meet these commitments would impact accordingly future operating margins.
ECONOMIC & GEOPOLITICAL RISKS
US embargo on Cuba goods
Due to the embargo on Cuba, Pernod Ricard is not allowed to sell its Cuban rum (Havana Club) in the US territory. If Obama administration lifted partially the ban, with US citizens now entitle to bring back up to $100 of Cuban rum into the US, the embargo is a serious constraint on Pernod Ricard’s development in the country. In 2016, 24.7m 9-liter cases were sold in the US (respectively #1 and #2 in terms of value and volume). The premium positioning of Havana Club is a serious opportunity in the US, given this segment has been growing faster than value rum (0.8% vs -3.5% in 2016). Assuming a penetration of 10-15%, like Western Europe, Pernod Ricard could sell about 2.5m 9-liter cases of its rum (almost 60% of FY17 Cuba volume) in Cuba.
Instability in Africa
Pernod Ricard employs 500 people in 7 Sub-Saharan Africa countries where it has been experiencing a strong growth (CAGR 2012-17 at 15%). Recent drop of oil prices impacted growth of producers such as Nigeria and Angola. In FY17, the group reported only 1% growth, but a rebound is expected from 2018 thanks to stabilization of oil prices. In FY17, this region accounted for only c.4% of Pernod Ricard revenues. But the company bets on its development to stand out in the long term.
Slowdown in China
China weights more than 30% of Pernod Ricard Asia sales (9% of global sales) but growth has been stalling in recent years. The low penetration of international spirits so far (<1%) and its large population make the country a pillar for future growth. A potential slowdown in China would impact negatively Pernod Ricard, of up to 0.1% per percentage of China growth change. A growth in China of 5.4% instead of 6.4% as expected would thus reduce Pernod Ricard revenues by €9m in 2018.
FINANCIAL RISKS
Pernod Ricard’s debt is mainly in dollars
As of FY 17, 55% of the group’s debt is in dollar meaning Pernod Ricard is exposed to an increase in US interest rates. In 2017, the FED lifted short-term interest rates three times and experts expect more rate hikes in 2018 as the US economy recovers. However, 68% of this debt is at fixed rate therefore, out of the €8.5bn debt, only €1.5bn is at risk.
REGULATORY RISKS
India remains a tough market
The country is Pernod Ricard’s second market accounting for 9% of total sales. The company has suffered from both demonetization and the prohibition on highway liquor stores over the past 12 months. In August however, the Supreme Court partially back-pedaled explaining that the ban did not apply within city limits. In FY17, organic growth dropped to 1% vs double-digit growth during the 2013-16 period. The implied impact on the group was -0.3% of global sales (€27M in FY17) compared with 2016.
Raising awareness of alcoholic drinks dangers
Governments implement awareness campaigns to reduce consumption of alcoholic drinks, especially for young generation (i.e. designated driver in France). Some countries also decide to have a high minimum drinking age, such as the US (21).
-2%
-5%
-3%
-5%
2014 2015 2016 2017
6%
7%
8%
-30%
-15%
0%
15%
30%
Organic Growth (Left Axis)
GDP (Right Axis)
22%
15%17% 18%
12%
1%
FY12FY13FY14FY15FY16FY17
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APPENDICES
APPENDICES
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Appendix 1 – Pernod Ricard products
Strategic international brands
Strategic wines
Strategic local brands
Appendix 2 – Positioning of Pernod Ricard brands portfolio by category
Premium Brand Unit
Premium %
Standard Brand Unit
Standard %
Total Brand Unit
Whiskey 8 62% 5 38% 13
Vodka 1 50% 1 50% 2
Cognac & Brandy 2 100% 0 0% 2
Rhum 1 50% 1 50% 2
Gin 3 100% 0 0% 3
Aniseed 1 50% 1 50% 2
Champagne 2 100% 0 0% 2
Liqueurs & Bitters 1 50% 1 50% 2
Mezcal 1 100% 0 0% 1
Tequila 2 100% 0 0% 2
Bourbon 1 100% 0 0%
Overall 23 72% 9 28% 32
Source: Company website
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Appendix 3 – Composition of the Board of Directors & Committee
Board of Directors (30/06/2017)
Related to Mr Paul Ricard Family
Strategic Committee
Audit committee
Nomination, Governance
and CSR committee
Compensation committee
Executive Directors
Mr. Alexandre Ricard* X X
Mr. Pierre Pringuet X X
Independent Directors
Ms. Nicole Bouton X X
Mr. Wolfgang Colberg X X X
Mr. Ian Gallienne** X X
Mr. Gilles Samyn
Ms. Kory Sorenson X X
Ms. Anne Lange X
Directors & employee representative
Mr. Cesar Giron* X X X
Ms. Martina Gonzalez-Gallarza
Mr. Paul-Charles Ricard (Societe Paul Ricard representative)
X
Ms. Veronica Vargas X
Directors representing the employees
Mr. Sylvain Carré
Mr. Manousos Charkoftakis X
Mr. Hervé Jouanno (non director)
* Executive member ** CEO of Groupe Bruxelles Lambert, holds 7,5% of Pernord Ricard's shares and 10,95% of voting rights
Source: Company reports
Appendix 4 - Porter 5 forces
Threat of suppliers – INSIGNIFICANT
Low bargaining power: a myriad of suppliers produces the ingredients.
Low forward integration threat.
Threat of new entrants – MODERATE
High barriers to entry as important capital is required to set up and maintain the equipment and facilities.
0 No threat to Pernod Ricard - 5 High threat to Pernod Ricard
0
1
2
3
4
5
Threat ofsuppliers
Threat of newentrants
Threat ofsubstitutes
CustomersPower
IndustryRivalry
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To thrive on the spirits industry, an extensive distribution network is key.
Brand awareness and customer loyalty require high expenditures on marketing.
New players need licenses to produce alcohol and they need to deal with tightening government regulations
Profits are strongly dependent on volume sales hence scale economies are essential in this industry
Threat of substitutes – LOW
Competition is spread between alcoholic and non-alcoholic drinks.
Producers compete for a share in the consumer budget regardless of the type of beverage.
Consumers have low switching costs between beverages.
Health and wellness trend might induce consumers to buy more non-alcoholic beverages.
Threat of Buyers – SIGNIFICANT
Low switching costs
Moderate cost sensitivity
Differentiated products
Alcohol is not first necessity product
Rivalry - HIGH
Highly competitive (mostly in international spirits and wine segments) where the production is highly fragmented.
The industry is strongly concentrated as Top 5 spirits companies account for 63% of global volumes
Operational margins are traditionally high (28.5% in 2017 for Top 5 companies in spirits).
Competition is strongly determined by marketing and distribution expenditures: crucial to promote brand awareness and create customer loyalty.
Appendix 5 – Industry & Macroeconomic key metrics
CONSUMPTION EVOLUTION BY GEOGRAPHY
Source: Company reports
Urbanisation Rate
2015-2017 e2018-2021 2017 e2020 Growth % 2017 e2020 Growth % 2016
Europe 2.0% 1.9% 674.6 675.0 0.1% 37,267 39,212 5.0% 73.0%
LATAM 7.5% 5.8% 383.1 394.7 2.9% 9,985 11,330 11.9% 80.0%
Asia 5.0% 3.9% 3,478.2 3,550.7 2.0% 6,754 8,059 16.2% 48.0%
North America 5.8% 3.4% 362.1 369.8 2.1% 57,993 64,255 9.7% 82.0%
China 4.5% 3.0% 1,383.9 1,391.2 0.5% 8,481 10,644 20.3% 57.0%
India 9.7% 7.7% 1,339.3 1,384.3 3.3% 1,850 2,358 21.5% 33.0%
The US 6.1% 3.5% 325.50 332.4 2.1% 59,609 66,194 9.9% 82.0%
Sources: IMF, World Bank, United Nations, Eurostat, Nielsen, Team Estimates
Reg
ion
Co
un
try
Population (in millions)CAGR (in revenues) GDP per Capita (USD)
3.5%
0.0%
1.2%
1.2%
3.1%
5.4%
2.0%
3.8%
1.6%
-3.4%
-3.5%
3.2%
-0.7%
2.8%
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
North America
Western Europe
Eastern Europe
LATAM
Asia
Africa/Middle East
Oceania
Volume % change CAGR 2005-2016
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 15
Appendix 6 - BCG Matrix on International Strategic Brands
Methodology:
Three variables have been considered as we built this chart. On the horizontal axis, the worldwide market share of the brand. On the
vertical axis, we have the brand growth from 2016 to 2017. The size of the bubbles is determined by the relative market share of the
brand in respect with Pernod Ricard’s largest competitor (i.e. Diageo).
The portfolio of Pernod Ricard’s International Strategic Brands has the following characteristics:
On the most dynamic side, Martell and Jameson are its stars accounting with the highest growth and an important market
share.
The cash cows that finance the development of the stars are Kahlua, The Glenlivet, Mumm, Absolut.
The question marks are Royal Salute and Perrier-Jouët who have a fairly high growth but a low market share.
The dogs are Beefeater, Malibu and Ballantine’s and Chivas Regal who according to this chart might be draining the
resources of Pernod Ricard.
Appendix 7 - SWOT analysis
Strength
Pernod Ricard’s brand portfolio is well positioned with 83% Premium brands and famous worldwide (e.g. Absolut, Jameson,
Martell, Havana Club).
Pernod Ricard has one of the best distribution systems in the spirits industry which enables it to integrate successfully newly
acquired brands and almost guarantee successes.
Its sales are balanced between the Americas, Europe and Asia/ Rest of World, each representing a third of the producer’s
revenues. The firm has proven to be successful in India which alone represents 25% of revenues in the Asia – RoW division.
Pernod Ricard’s margins are higher than its peers’ and carried out a smoothly managed deleveraging policy.
Weaknesses
Among Pernod Ricard’s stars, the company has several brands with a weak growth and a low market share such as Malibu
or Ballantine’s.
The French spirits producer is dependent on fluctuations on volatile emerging markets as it derives 38% of its sales in
2016/2017 from Asia, Eastern Europe and Latin America.
As it is a highly internationalized company, Pernod Ricard is strongly exposed to currency risk with sales in different
currencies and an outstanding debt in dollars.
Outsiders can take stakes of Pernod Ricard as 76.4% of its shares are free floating.
Opportunities
Emerging countries, in particularly China and India with revenues having grown to a CAGR of 14.4% and 5.6% respectively
between 2011 - 2015, offer a bright future for the company. Indeed, these countries are going through cultural changes and
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 16
are increasingly trading their local liquors to international spirits. Just in China, approximately 1% of alcoholic drinks are
international spirits and Pernod Ricard is well positioned to seize this opportunity with its soaring sales of Martell..
The premiumization trend will enable Pernod Ricard to leverage on its position as most Premium spirits producer and gain
the loyalty of demanding consumers as Millennials.
Its cost-cutting and deleveraging policy enabled Pernod Ricard to carry out bolt-on acquisitions such as super-premium
Monkey 47.
Threats
The strengthening of regulations in India with the “highway ban impacted Pernod Ricard sales as 30% of all outlets are
concerned by the regulation headwinds.
Overpaying M&A targets to complete their premium offering, such as Campari / Grand Marnier, reached 20-25x EBITDA.
We have reasons to believe that Pernod Ricard topped average deals in the sector.
Absolut vodka represents 23% of Pernod Ricard’s total sales and faces pressures in the US coming from fierce competition
and new entrants (i.e. Tito’s vodka) in the premium segment.
Appendix 8 – Historical stock price performance (€/share)
Source: Team estimates, company reports, press releases, Capital IQ
50
60
70
80
90
100
110
120
130
140
01-13 07-13 01-14 07-14 01-15 07-15 01-16 07-16 01-17 07-17
Historical stock price performance (€)
French presidential
election
Acquisitions in premium segment
Mezcal del Maguey tequila
acquisition Alexandre
Ricard becomes CEO
S&P upgrades credit rating to
BBB Expansion in Africa
Brexit
Kenwood Wines acquisition
Anti-corruption campaign in
China
Suntory buys Beam for $16bn
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 17
Appendix 9 – Pernod Ricard vs peers historical analysis
Source: Capital IQ, company reports
-30%
-10%
10%
30%
50%
70%
Revenue growth (%)
Pernod Ricard growth Average peers growth
Median peers growth
10.0%
15.0%
20.0%
25.0%
30.0%
EBITDA margin (%)
Pernod Ricard EBITDA margin
Aggregated peers EBITDA margin
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
EBIT margin (%)
Pernod Ricard EBIT/Revenues
Aggregated EBIT/Revenues
5
15
25
35
45
Net income/Market cap
Pernod Ricard Market Cap/Net income
Aggregated Market Cap/Net income
0.0
5.0
10.0
15.0
20.0
25.0
EV/EBITDA
Pernod Ricard EV/EBITDA (x) Aggregated EV/EBITDA (x)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
EV/EBIT
Pernod Ricard EV/EBIT (x) Aggregated EV/EBIT (x)
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 18
Appendix 10 - Pernod Ricard income statement
Source: Team estimates, company reports
Appendix 11 – Pernod Ricard balance sheet
Source: Team estimates, company reports
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2022e
Net sales 8,575 7,945 8,558 8,682 9,010 9,289 9,671 10,035 10,351 10,641
Cost of sales (3,224) (2,958) (3,262) (3,311) (3,407) (3,570) (3,718) (3,860) (3,983) (4,096)
Gross margin after logistic expenses 5,351 4,987 5,296 5,371 5,603 5,720 5,954 6,176 6,368 6,545
Advertising and promotion expenses (1,644) (1,503) (1,625) (1,646) (1,691) (1,699) (1,768) (1,833) (1,890) (1,942)
Contribution after advertising and promotion expenses 3,707 3,484 3,671 3,725 3,912 4,021 4,185 4,342 4,478 4,603
Selling, general and administrative expenses (1,477) (1,428) (1,433) (1,448) (1,517) (1,303) (1,354) (1,381) (1,407) (1,414)
EBITDA 2,424 2,259 2,454 2,503 2,614 2,718 2,831 2,961 3,071 3,190
Other operating income / (expense) (125) (240) (649) (182) (163) (176) (184) (191) (197) (202)
Depreciation and amortization (195) (204) (217) (227) (220) (233) (242) (256) (263) (270)
EBIT 2,104 1,815 1,588 2,094 2,231 2,309 2,406 2,515 2,612 2,718
Financial income / (expense) (539) (485) (489) (432) (374) (467) (489) (445) (461) (476)
Profit before taxation 1,565 1,330 1,099 1,662 1,857 1,841 1,917 2,069 2,151 2,242
Corporate income tax (359) (305) (221) (408) (438) (479) (498) (538) (559) (583)
Share of net profit / (loss) of associates 1 0 0 0 1 0 0 0 0 0
Net profit 1,207 1,025 878 1,254 1,420 1,363 1,418 1,531 1,592 1,659
o/w Non-controlling interests 19 11 19 20 28 23 24 26 27 28
Net profit attributable to shareholders 1,188 1,014 859 1,234 1,392 1,340 1,395 1,506 1,565 1,631
Earnings per share - basic 4.51 3.86 3.26 4.68 5.27 5.07 5.28 5.70 5.92 6.17
Earnings per share - diluted 4.46 3.82 3.24 4.65 5.25 5.05 5.25 5.67 5.89 6.15
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2022e
Non-current assets
Intangible assets 11,780 11,542 12,212 12,085 11,755 11,983 12,283 12,544 12,732 12,876
Goodwill 4,973 4,907 5,494 5,486 5,397 5,273 5,282 5,268 5,347 5,408
Property, plant and equipment 1,942 2,016 2,200 2,386 2,336 2,483 2,636 2,790 2,904 3,082
Deferred tax assets 1,721 1,926 2,339 2,505 2,377 2,322 2,321 2,408 2,381 2,448
Other non-current assets 566 577 733 847 691 636 636 636 637 638
TOTAL NON-CURRENT ASSETS 20,982 20,968 22,978 23,309 22,556 22,698 23,158 23,647 24,001 24,452
Current assets
Inventories and work in progress 4,484 4,861 5,351 5,294 5,305 5,388 5,609 5,720 5,797 5,959
Trade receivables and other operating receivables 1,159 1,051 1,152 1,068 1,134 1,161 1,209 1,305 1,346 1,383
Cash and cash equivalents 597 477 545 569 677 621 646 753 828 851
Other current assets 259 257 371 351 405 348 359 369 378 386
TOTAL CURRENT ASSETS 6,499 6,646 7,419 7,282 7,521 7,518 7,823 8,146 8,348 8,580
Assets held for sale 8 2 1 6 10 0 0 0 0 0
TOTAL ASSETS 27,489 27,616 30,398 30,597 30,087 30,216 30,981 31,793 32,350 33,031
Shareholders’ equity
Capital 411 411 411 411 411 411 411 411 411 411
Share premium 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052
Retained earnings and currency translation adjustments 6,530 7,142 8,796 8,639 8,849 8,849 8,849 8,849 8,849 8,849
Group net profit 1,187 1,014 859 1,234 1,392 1,340 1,395 1,506 1,565 1,631
Group shareholders’ equity 11,181 11,619 13,119 13,336 13,705 13,653 13,708 13,819 13,878 13,944
Non-controlling interests 168 157 167 169 180 180 180 180 180 180
TOTAL SHAREHOLDERS’ EQUITY 11,349 11,776 13,286 13,505 13,885 13,833 13,888 13,999 14,058 14,124
Non-current liabilities
Deferred tax liabilities 2,913 3,041 3,373 3,556 3,421 3,541 3,686 3,825 4,140 4,363
Bonds – non-current 6,949 6,844 6,958 7,078 6,900 6,900 6,900 6,900 6,900 6,900
Other non-current financial liabilities 1,857 2,048 1,641 1,502 1,624 2,112 2,531 2,924 2,879 3,105
TOTAL NON-CURRENT LIABILITIES 11,719 11,933 11,972 12,136 11,945 12,552 13,117 13,649 13,919 14,368
Current liabilities
Trade payables 1,546 1,463 1,696 1,688 1,826 1,783 1,856 1,957 2,122 2,235
Bonds – current 1,001 929 1,514 1,884 94 94 94 94 94 94
Other current liabilities 1,870 1,513 1,928 1,384 2,336 1,953 2,026 2,095 2,155 2,209
TOTAL CURRENT LIABILITIES 4,417 3,905 5,138 4,956 4,256 3,830 3,976 4,146 4,371 4,537
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 27,489 27,616 30,398 30,597 30,087 30,216 30,981 31,793 32,350 33,031
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 19
Appendix 12 – Pernod Ricard cash flow statement
Sources: Team estimates, company reports
Appendix 13 – ROIC Tree
Sources: Team estimates, company reports
*The ROIC above indicates successively FY14, FY15, FY16 and FY17
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2022e
Cash flow from operating activities
Group net profit 1,187 1,014 859 1,234 1,392 1,340 1,395 1,506 1,565 1,631
Non controlling interests 19 11 19 20 28 23 24 26 27 28
Share of net loss of associates, net of dividends received (1) 0 0 0 (1) 0 0 0 1 2
Financial (income)/expenses 539 485 489 432 374 467 489 445 461 476
Tax (income)/expenses 359 305 221 408 438 479 498 538 559 583
Net profit from discontinued operations 0 0 (0) 0 0 0 0 0 0 0
Depreciation of fixed assets 185 203 214 219 219 200 208 221 228 234
Net change in provisions (72) (20) (156) (75) (59) (41) (27) (26) (22) (20)
Net change in impairment of goodwill, PP&E and intangible assets 68 64 656 107 75 (7) (0) (3) 4 (1)
Changes in fair value of commercial derivatives 4 (3) (1) 11 (11) 0 0 0 (10) (15)
Changes in fair value of biological assets (22) (6) (11) (15) (3) (15) (15) (20) (20) (24)
Net (gain)/loss on disposal of assets (65) (4) (98) (59) 6 0 0 0 0 0
Share-based payments 38 38 27 32 34 34 34 25 20 20
Self-financing capacity before financing interest and taxes 2,241 2,087 2,218 2,314 2,492 2,480 2,605 2,711 2,812 2,914
Decrease/(increase) in working capital requirements (255) (308) (193) (178) (79) (153) (196) (106) 47 (88)
Interest paid (536) (504) (520) (471) (410) (244) (255) (266) (264) (274)
Interest received 17 76 65 63 46 56 56 56 56 56
Tax paid/received (384) (413) (538) (393) (408) (479) (498) (538) (559) (583)
Net change in cash flow from operating activities 1083 938 1033 1335 1641 1660 1712 1858 2093 2026
Cash flow from investing activities
Capital expenditure (304) (273) (323) (333) (367) (347) (361) (375) (342) (412)
Proceeds from disposals of PP&E and intangible assets 50 20 20 16 17 20 20 0 0 0
Disposal / (purchase) of financial assets and activities 63 -58 38 -42 57 -24 -74 -190 -240 -240
Net change in cash flow from investing activities (191) (311) (265) (359) (293) (351) (415) (565) (582) (652)
Cash flow from financing activities
Dividends and interim dividends paid (435) (448) (461) (497) (511) (567) (688) (829) (1,006) (1,161)
Issuance of debt 1,176 3,292 2,451 3,205 1,608 497 833 1,157 1,095 1,398
Repayment of debt (1,973) (3,460) (2,711) (3,618) (2,217) (1,257) (1,315) (1,370) (1,359) (1,411)
Other movements 24 (16) (14) (18) (36) (36) (50) (70) (90) (100)
Net change in cash flow from financing activities (1,208) (632) (735) (928) (1,156) (1,363) (1,220) (1,112) (1,360) (1,274)
Cash and cash equivalents at beginning of period 783 591 469 535 558 677 621 646 753 828
Cash and cash equivalents at end of period 591 469 535 558 677 621 646 753 828 851
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 20
Appendix 14 – Dupont analysis
Sources: Team estimates, company reports
Appendix 15 – Debt schedule
Sources: Team estimates, company reports
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2022e
Short-term debt
Bonds – current 1,001 929 1,514 1,884 94 94 94 94 94 94
Other current financial liabilities 567 290 538 143 1,071 559 582 604 623 532
Total short term debt 1,568 1,219 2,052 2,027 1,165 653 676 698 717 626
Long-term debt
Bonds – non-current 6,949 6,844 6,958 7,078 6,900 6,900 6,900 6,900 6,900 6,900
New long term debt 0 0 0 0 0 497 833 1,157 1,095 1,398
Other non-current financial liabilities 763 830 500 257 480 464 484 502 518 426
Total long-term debt 7,712 7,674 7,458 7,335 7,380 7,861 8,216 8,559 8,512 8,723
Total debt 9,280 8,893 9,510 9,362 8,545 8,514 8,892 9,257 9,229 9,349
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 21
Appendix 16 – DCF
Sources: Team estimates, company reports
Sources: Team estimates, company reports
Appendix 17 - WACC calculation
Year 1&2
WACC calculation
Risk-free rate 1.7%
Incl. premium of -
Beta 0.94
Market risk premium 7.6%
Cost of equity 8.9%
Pretax cost of debt 3.1%
Marginal tax rate 33.3%
After-tax cost of debt 2.1%
% equity 81.5%
% debt 18.5%
WACC 7.7%
Year 3&4
WACC calculation
Risk-free rate 1.9%
Incl. premium of 0.20%
Beta 0.94
Market risk premium 7.6%
Cost of equity 9.1%
Pretax cost of debt 3.3%
Marginal tax rate 33.3%
After-tax cost of debt 2.2%
% equity 81.5%
% debt 18.5%
WACC 7.9%
Terminal WACC
WACC calculation
Risk-free rate 2.1%
Incl. premium of 0.4%
Beta 0.94
Market risk premium 7.6%
Cost of equity 9.3%
Pretax cost of debt 3.5%
Marginal tax rate 33.3%
After-tax cost of debt 2.4%
% equity 81.5%
% debt 18.5%
WACC 8.0%
Sources: Team estimates, company reports, Capital IQ
Appendix 18 – Sensitivity analysis
Source: Team estimates
Source: Team estimates
In €m, as at June, 30th 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e
Sales 9,289 9,671 10,035 10,351 10,641 10,936 11,239 11,551
% Growth - 4.1% 3.8% 3.1% 2.8% 2.8% 2.8% 2.8%
EBITDA 2,718 2,831 2,961 3,071 3,190 3,302 3,395 3,491
% Margin 29.3% 29.3% 29.5% 29.7% 30.0% 30.2% 30.2% 30.2%
NOPLAT 2,011 2,095 2,191 2,273 2,360 2,444 2,513 2,583
Depreciation (176) (184) (191) (197) (202) (208) (213) (219)
Increase in WC (81) (81) (84) (80) (81) (82) (80) (80)
Capex (347) (361) (375) (342) (412) (361) (371) (381)
FCF 2,262 2,353 2,459 2,498 2,651 2,679 2,750 2,826
WACC 7.7% 7.7% 7.9% 7.9% 8.0% 8.0% 8.0% 8.0%
Present value of FCF 2,101 2,030 1,967 1,853 1,820 1,702 1,617 1,538
Terminal value 34,309
Noplat 2025e 2,583
Terminal growth rate 2.2%
ROIC 2025e 9.8%
Terminal WACC 8.0%
Terminal value 34,309
Terminal value calculation (in €m)
8.1% 1.74% 1.94% 2.14% 2.34% 2.54%
1.96% 7.6% 7.8% 8.0% 8.1% 8.3%
2.16% 7.7% 7.8% 8.0% 8.2% 8.3%
2.38% 7.7% 7.8% 8.0% 8.2% 8.3%
2.56% 7.7% 7.9% 8.1% 8.2% 8.4%
2.76% 7.8% 7.9% 8.1% 8.3% 8.4%
Risk-free rate
Co
st
of
de
bt
######## 1.80% 2.00% 2.20% 2.40% 2.60%
7.64% 36,112 36,459 36,831 37,232 37,665
7.84% 34,917 35,211 35,526 35,864 36,228
8.04% 33,798 34,045 34,309 34,592 34,896
8.24% 32,748 32,954 33,173 33,408 33,659
8.44% 31,762 31,931 32,110 32,302 32,506
Terminal growth
WA
CC
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 22
Appendix 19 – Monte Carlo simulation
Sources: Team estimates, company reports
The Monte Carlo simulation was conducted with 4 random parameters varying around their historical median: the growth (varying of
+/- 0.3%), the ROIC (+/- 0.2%), the Operating Margin (+/- 0.2%) and the tax rate (+/- 0.4%). The discounted free cash flows are
computed over a 10-year period from those parameters, assuming a fix WACC at 8.0%. The terminal value obtained by the Gordon
Shapiro Formula stipulates a long-term growth of 3%. The histogram results in 8000 observations.
Appendix 20 - Sales by geographic area
Sources: Team estimates, company reports
Appendix 21 – Sales by product
Sources: Team estimates, company reports
0
100
200
300
400
500
600
700
800
900
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2022e
Sales 8,575 7,945 8,558 8,682 9,010 9,289 9,671 10,035 10,351 10,641
o/w Americas 2,316 2,142 2,382 2,476 2,661 2,741 2,848 2,945 3,030 3,106
o/w Asia / Rest of the world 3,431 3,031 3,446 3,498 3,568 3,704 3,896 4,087 4,255 4,408
o/w Europe 2,827 2,773 2,731 2,709 2,781 2,845 2,927 3,004 3,067 3,128
Gross margin after logistic expenses 5,351 4,987 5,296 5,371 5,602 5,720 5,954 6,176 6,368 6,545
o/w Americas 1,490 1,394 1,519 1,639 1,790 1,836 1,908 1,973 2,030 2,081
o/w Asia / Rest of the world 2,120 1,848 2,073 2,071 2,102 2,148 2,260 2,371 2,468 2,557
o/w Europe 1,741 1,745 1,704 1,662 1,710 1,735 1,786 1,832 1,871 1,908
Contribution after advertising and promotion expenses 3,707 3,484 3,671 3,725 3,912 4,021 4,185 4,342 4,478 4,603
o/w Americas 1,036 982 1,041 1,130 1,239 1,245 1,294 1,338 1,377 1,411
o/w Asia / Rest of the world 1,457 1,298 1,446 1,450 1,484 1,554 1,635 1,715 1,785 1,849
o/w Europe 1,213 1,204 1,183 1,145 1,188 1,221 1,257 1,289 1,317 1,343
EBITDA 2,424 2,259 2,454 2,503 2,614 2,485 2,589 2,705 2,808 2,920
o/w Americas 607 579 632 706 790 822 854 877 912 941
o/w Asia / Rest of the world 1,016 884 999 982 1,000 1,037 1,091 1,173 1,213 1,278
o/w Europe 608 593 608 588 604 626 644 655 684 701
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2022e
Sales 8,575 7,945 8,558 8,682 9,010 9,289 9,671 10,035 10,351 10,641
o/w Top 14 Spirits & Champagne 5,312 4,960 5,358 5,448 5,701 5,877 6,059 6,246 6,439 6,638
o/w Priority Premium Wines 449 418 468 487 505 523 541 561 580 601
o/w 18 key local brands 1,504 1,423 1,577 1,647 1,686 1,742 1,800 1,860 1,922 1,985
o/w Other income 1,310 1,145 1,154 1,100 1,117 1,147 1,271 1,369 1,410 1,417
SELL
recommandation
HOLD
recommandation
BUY
recommandation
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 23
Appendix 22 – Peers performance
Source: Team estimates, company reports, Capital IQ
Appendix 23 – Trading comparables analysis
Sources: Capital IQ, Company reports, press releases
Diageo plc
Brown-
Forman
Corporation
Becle, S.A.B.
de C.V.
Davide
Campari-
Milano S.p.A.
Rémy
Cointreau SA
Constellation
Brands, Inc.
Emperador
Inc.
Marie Brizard
Wine &
Spirits SA
Lucas Bols
N.V.
CAGR FY15-17 5.5% 0.0% 17.8% 5.1% 2.0% 8.1% -0.5% -2.0% 0.8%
CAGR FY18e-20e 3.9% 6.5% 5.3% 7.7% 5.7% 5.9% n.a. 6.2% 7.3%
FY17 32.2% 35.0% 26.6% 23.6% 22.5% 36.9% 25.1% 3.8% 23.0%
FY18e 34.6% 35.9% 27.4% 24.4% 23.1% 38.0% 23.4% 7.1% 25.3%
FY19e 35.5% 36.6% 29.7% 25.0% 23.7% 38.8% 23.7% 9.0% 26.0%
CAGR FY15-17 4.0% 0.9% 23.7% 8.3% 13.7% 11.1% 4.7% 15.1% -5.8%
CAGR FY18e-20e 7.6% 9.0% 9.2% 7.3% 8.2% 6.5% n.a. 36.4% 10.6%
FY17 86.7% 89.3% 73.7% 87.0% 85.0% 74.5% 45.0% 77.0% 83.8%
FY18e 86.1% 89.7% 74.9% 87.2% 86.4% 76.2% 76.4% 82.7% 91.5%
FY19e 87.4% 90.9% 79.9% 87.3% 86.7% 77.8% 77.8% 87.3% 92.0%
Deb
t
Net debt/LTM EBITDA 2.1x 1.7x ns 3.0x 1.6x 3.2x 2.4x ns 1.8x
FY18e 17.8x 24.0x 14.3x 19.0x 23.7x 17.1x 14.7x 10.3x 11.6x
FY19e 16.6x 22.3x 12.3x 17.6x 21.7x 15.8x 13.6x 7.6x 10.9x
FY18e 23.1x 29.8x 36.4x 30.2x 37.9x 23.5x 17.9x 66.5x 16.9x
FY19e 21.2x 31.5x 25.7x 27.7x 37.6x 27.0x 17.2x 18.7x 15.3x
* Cash conversion = (EBITDA - Capex) / EBITDA
Cash
co
nvers
ion
*
EV
/
EB
ITD
AP
/ES
ale
s
Global spirits leader Regional leader Diversified regional leader
EB
ITD
A m
arg
inE
BIT
DA
2018e 2019e 2020e 2018e 2019e 2020e 2018e 2019e 2020e 2018e 2019e 2020e
Pernod Ricard SA (our est.) France 48,409.8 4.4x 4.2x 4.0x 17.8x 17.1x 16.4x 17.5x 16.8x 16.1x 29.7x 28.6x 26.4x
Pernod Ricard SA (market est.) France 42,376.7 4.7x 4.5x 4.3x 16.0x 15.1x 14.3x 17.6x 16.7x 15.7x 22.7x 20.9x 19.1x
Group 1 - Global spirits leader
Diageo plc United Kingdom 85,205.1 6.1x 5.8x 5.6x 17.6x 16.5x 15.6x 19.5x 18.3x 17.2x 22.7x 20.8x 19.2x
Brown-Forman Corporation United States 22,941.2 8.6x 8.1x n.a. 23.8x 22.1x n.a. 25.1x 23.2x n.a. 33.4x 30.1x n.a.
Becle, S.A.B. de C.V. Mexico 5,058.9 4.5x 4.1x n.a. 16.6x 14.3x n.a. 17.9x 15.4x n.a. 30.8x 23.6x n.a.
Average Group 1 5.9x 5.6x 5.6x 18.0x 16.4x 15.6x 19.4x 17.7x 17.2x 26.8x 23.0x 19.2x
Median Group 1 6.1x 5.8x 5.6x 17.6x 16.5x 15.6x 19.5x 18.3x 17.2x 27.7x 21.2x 19.2x
Group 2 - Regional leader
Davide Campari-Milano S.p.A. Italy 8,983.5 4.9x 4.8x 4.5x 20.6x 19.4x 18.2x 23.5x 22.1x 20.6x 29.5x 26.9x 24.9x
Rémy Cointreau SA France 5,879.7 5.1x 4.8x 4.5x 22.2x 20.2x 18.5x 24.2x 22.0x 20.1x 34.6x 31.2x 28.3x
Average Group 2 4.5x 4.3x 4.1x 19.3x 17.8x 16.5x 21.4x 19.9x 18.3x 28.8x 26.2x 24.0x
Median Group 2 4.5x 4.3x 4.1x 19.3x 17.8x 16.5x 21.4x 19.9x 18.3x 28.8x 26.2x 24.0x
Group 3 - Diversified regional leader
Constellation Brands, Inc. United States 42,588.4 6.7x 6.3x 5.9x 17.9x 16.3x 15.0x 20.5x 18.7x 17.1x 24.6x 22.0x 19.6x
Emperador Inc. Philippines 2,565.0 3.7x 3.5x n.a. 15.6x 14.9x n.a. 17.4x 16.6x n.a. 18.6x 17.7x n.a.
Marie Brizard Wine & Spirits SA France 357.6 0.8x 0.7x 0.7x 14.8x 8.9x 6.5x 23.2x 11.7x 8.0x 40.3x 13.3x 8.9x
Lucas Bols N.V. Netherlands 253.8 2.7x 2.6x 2.6x 10.1x 9.7x n.a. 9.8x 9.4x n.a. 15.6x 14.8x n.a.
Average Group 3 3.1x 2.9x 2.7x 13.1x 11.2x 9.7x 16.0x 12.7x 11.3x 22.3x 15.3x 12.8x
Median Group 3 2.8x 2.7x 2.3x 13.7x 11.0x 9.7x 17.1x 12.7x 11.3x 19.5x 14.6x 12.8x
Peers average (incl. a discount of 10%, except for Diageo) 5.5x 5.2x 5.1x 18.4x 16.8x 15.9x 20.0x 18.3x 17.6x 27.4x 24.0x 20.6x
Peers median (incl. a discount of 10%, except for Diageo) 5.6x 5.4x 5.1x 18.1x 16.9x 15.9x 20.1x 18.7x 17.6x 28.0x 22.7x 20.6x
NameEV/Sales EV/EBITDA EV/EBIT P/E
EVCountry
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 24
Appendix 24 - Comparable transactions analysis
Sources: Capital IQ, Company reports, press releases
Date Country Target Acquiror SectorDeal
value
%
acquiredEV/Sales EV/EBITDA EV/EBIT
Group 1 - Spirits key M&A deals
july-17 Ireland T.J. Carolan & Son Heaven Hill Brands Spirits 141.6 100% 4.2x n.a. n.a.
oct.-16 USA High West Distillery Constellation Brands Spirits 142.7 100% 6.9x n.a. n.a.
apr.-16 UK The BenRiach Distillery Company Brow n-Forman Spirits 309.5 100% 6.5x 19.4x 23.5x
june-16 France Societe des Produits Marnier Lapostolle Davide Campari Spirits 684.3 100% 4.3x 21.4x 27.9x
july-15 France Louis Royer S.A.S SASU Terroirs Distillers Spirits 100.0 100% 2.6x n.a. 24.6x
may-14 UK Whyte & Mackay Limited Emperador UK Limited Spirits 526.7 100% 1.9x 24.4x 38.2x
apr.-14 India United Spirits Limited Diageo Spirits 1,369.0 26% 2.5x 5.4x 5.4x
mar.-14 Canada Forty Creek Distillery Davide Campari Spirits 120.9 100% 4.6x n.a. n.a.
jan.-14 USA Beam Suntory Suntory Holdings Spirits 10,010.0 100% 4.9x 21.1x 25.2x
apr.-13 UK Burn Stew art Distillers Distell Group Spirits 157.6 100% 2.5x 18.7x 21.0x
Average group 1 4.1x 18.4x 23.7x
Median group 1 4.2x 20.2x 24.6x
Group 2 - Beverage industry key M&A deals
sept.-17 France Freixenet Henkell & Co. Sektkellerei KG Wine 319.0 58% 1.0x n.a. n.a.
aug.-17 France Chateau Phelan Segur Private Investor Wine 25.0 100% 4.6x n.a. n.a.
dec.-16 South Africa Distell Group Public Investment Corporation Limited Diversif ied 625.6 26% 2.0x 15.7x 18.2x
nov.-14 Germany Haw esko Holding AG Tocos Beteiligung Wine, Champagne 359.3 49% 0.9x 13.8x 18.0x
feb.-13 USA Crimson Wine Group Leucadia National Corporation Wine 156.9 100% 7.1x 31.9x 64.6x
may-12 Brazil Ypioca Agroindustrial Diageo Spirits, w ine 362.3 100% 4.9x n.a. n.a.
oct.-11 Italy Ruffino Constellation Brands Wine 50.0 50% 2.9x 10.7x 15.3x
may-11 France Piper-Heidsieck-Compagnie Champenoise Societe Europeenne de Participations IndustriellesVin, champagne 146.3 100% 4.0x n.a. n.a.
Average group 2 3.4x 18.0x 29.0x
Median group 2 3.4x 14.8x 18.1x
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 25
Highlights ......................................................................................................................................................................... 1
Business Description ..................................................................................................................................................... 2
Corporate Governance ................................................................................................................................................... 3
Corporate Social Responsibility .................................................................................................................................... 3
Industry Overview and Competitive positioning ......................................................................................................... 3
Investment summary ...................................................................................................................................................... 6
Financial analysis ........................................................................................................................................................... 6
Valuation .......................................................................................................................................................................... 8
Investment risks ............................................................................................................................................................ 10
Appendices .................................................................................................................................................................... 11
Appendix 1 – Pernod Ricard products ......................................................................................................................... 12
Appendix 2 – Positioning of Pernod Ricard brands portfolio by category ................................................................... 12
Appendix 4 - Porter 5 forces ........................................................................................................................................ 13
Appendix 5 – Industry & Macroeconomic key metrics ................................................................................................. 14
Appendix 6 - BCG Matrix on International Strategic Brands ....................................................................................... 15
Appendix 7 - SWOT analysis ....................................................................................................................................... 15
Appendix 8 – Historical stock price performance (€/share) ......................................................................................... 16
Appendix 9 – Pernod Ricard vs peers historical analysis ............................................................................................ 17
Appendix 10 - Pernod Ricard income statement ......................................................................................................... 18
Appendix 11 – Pernod Ricard balance sheet .............................................................................................................. 18
Appendix 12 – Pernod Ricard cash flow statement ..................................................................................................... 19
Appendix 13 – ROIC Tree............................................................................................................................................ 19
Appendix 14 – Dupont analysis ................................................................................................................................... 20
Appendix 15 – Debt schedule ...................................................................................................................................... 20
Appendix 16 – DCF ...................................................................................................................................................... 21
Appendix 17 - WACC calculation ................................................................................................................................. 21
Appendix 18 – Sensitivity analysis ............................................................................................................................... 21
Appendix 19 – Monte Carlo simulation ........................................................................................................................ 22
Appendix 20 - Sales by geographic area ..................................................................................................................... 22
Appendix 21 – Sales by product .................................................................................................................................. 22
Appendix 22 – Peers performance .............................................................................................................................. 23
Appendix 23 – Trading comparables analysis ............................................................................................................. 23
Appendix 24 - Comparable transactions analysis ....................................................................................................... 24
TABLE OF CONTENTS
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