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  • CFA Institute Research Challenge Hosted by

    CFA Society France Team P


  • Pernod Ricard - Student Research. Target Price: 153.7 Recommandation: BUY


    Pernod Ricard is ranked number 2 in the wine and spirits market since 2005 and its

    acquisition of Allied Domecq (Ballantines , Beefeater and Malibu among iconic brands). The

    group produces and distributes a large range of spirits such as Vodka, Whiskey, Gin, Tequila

    and Cognac but also wine. Given its geographic positioning, its wide range of brands and a

    dynamic market in the spirits premium segment, we initiate coverage with a BUY rating on Pernod Ricard supported by target price of 153.7 and a potential upside of 17% over a 1

    year period.

    The main drivers that bring us to stand with this recommendation are as follows:

    A significant rebound in Asian markets: the group is market leader in China and

    India, which are the two most significant spirits markets. Pernod Ricard will benefit

    from the sharp improvement in these countries that mainly consume whiskey, boosted

    by a notable increase in volume and a positive pricing/mix.

    An upward perspective in the high margin Whiskey and Cognac markets:

    underlying trends on these markets are strongly positive, fuelling growth for its

    whiskey and cognac brands, whose exposure in the total group revenues has been

    continuously growing since 2012. Whiskey and Cognac will contribute to improve the

    EBITDA margin, especially in China, India and the US.

    Targeted acquisitions of ultra-premium brands: the group achieved strategic local

    spirits acquisitions over the past years in ultra-premium brands. These type of

    alcohols (Mezcal, Gin, Bourbon) are forecasted to grow at a high CAGR. Hereby, we

    expect the group to create value thanks to its recent acquisitions at sensible multiples.

    December 20th 2017: Fitch Ratings decided to upgrade Pernod Ricards rating to

    BBB. This decision reflects the strong efforts made by the company to deleverage over

    the past two years as well as solid operating performances and improving profitability.

    November 15th 2017: the UK Supreme court decided to implement a minimum price

    for alcohol in Scotland. As of May, a 70cl Whiskey bottle will be sold at a min. GBP14.

    June 7th 2017: Pernod announced the purchase of a majority stake of the Mexican Del

    Maguey Single Village, which is ranked n1 in Mezcal spirits production in the US. This

    investment is consistent with its vision of selling ultra-premium spirits.

    January 31th 2017: NBV Investment, a subsidiary of Pernod, acquired American

    spirits producer Smooth Ambler. The portfolio embraces Contradiction Bourbon and

    Old Scout Single Barrel Bourbons in addition to Gins and Vodkas.

    Figure 1: Company data

    STUDENT RESEARCH TEAM P Agro-Food Industry

    Euronext Paris

    This report is published for educational purposes only by students competing in The CFA Institute Research Challenge.


    Recent news:

    Figure 2: Share price 3y


































    Pernod Ricard CAC 40 Base 100

    Figure 3: Share price data

    Ticker Bloomberg RI.FP

    Ticker Reuters PERP.PA

    Ticker S&P Capital IQ ENXTPA:RI

    Shares O/S (m) 265.42

    Float % 45.8%

    Closing Price 130.95

    Avg 3M Dly Vlm (mm) 0.41

    52-wk High / Low 133.60 / 103.85

    Gap (% Low) 128.6%

    Market Cap (bn) 34 578

    Net debt 2017 (m) 7 853

    Price Earning Ratio 25.05

    Price to Book Ratio 2.55

    Earnings Per Share 5.28

    Dividend yield 2016 % 1.53%

    Market Data (12/01/2018)

    Source: S&P Capital IQ

    Source: S&P Capital IQ

    Source: S&P Capital IQ

    Valuation date January 12th 2018 Current Price 130.95 Target Price 153.7

    Sector Beverages Upside 17% Recommandation BUY

    Pernod Ricard

    % change 1m 3m 1y 3y

    Pernod Ricard 1.1% 7.6% 25.7% 35.3%

    Eurostoxx 50 0.3% 0.2% 9.9% 17.1%

    CAC 40 1.7% 2.9% 13.4% 30.5%

    Diageo -0.3% 2.8% 21.3% 44.1%

    Share price data

    FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023

    Revenue (in m) 8 558.0 8 682.0 9 010.0 9 195.9 9 530.0 9 873.4 10 202.1 10 518.3 10 833.9Revenue growth 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% 3.3% 3.1% 3.0%

    EBITDA (in m) 2 433.0 2 481.0 2 599.0 2 644.4 2 792.4 2 955.5 3 133.9 3 309.4 3 433.2EBITDA margin (in %) 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% 30.7% 31.5% 31.7%

    Net income (in m) 880.0 1 255.0 1 421.0 1 492.7 1 600.5 1 757.8 1 890.5 2 021.2 2 111.8Net margin (in %) 10.28% 14.5% 15.8% 16.2% 16.8% 17.8% 18.5% 19.2% 19.5%

    Free Cash Flow (in m) 1 475.0 1 826.0 1 786.0 1 797.4 1 788.3 1 898.4 2 053.2 2 185.5 2 216.9FCF yield (in %) 4.3% 5.3% 5.1% 5.2% 5.2% 5.5% 5.9% 6.3% 6.4%

    Net debt (in m) 9 086.0 8 793.0 7 870.0 7 709.5 7 082.1 6 515.2 5 749.6 5 013.2 4 290.0Net debt / EBITDA 3.7x 3.5x 3.0x 2.9x 2.5x 2.2x 1.8x 1.5x 1.2xEV / EBITDA 13.5x 14.8x 14.9x 17.7x 16.8x 15.9x 15.0x 14.2x 13.7xDividend yield 1.3% 1.4% 1.4% 1.6% 1.7% 1.8% 2.0% 2.1% 2.2%

    Key financialsHistorical Projected

  • Pernod Ricard - Student Research. Target Price: 153.7 Recommandation: BUY

    The group was created in 1975 following the merger of two French anise-based spirits

    producers Pernod and Ricard. Pernod Ricard, worlds second largest producer of wines and

    spirits after Diageo, enjoyed a turnover of 9.01bn as of June 2017 (+3.8% YoY). Specialized

    in spirits, the group is present in a large range of alcohols from white alcohols, whiskeys,

    cognac and other liqueurs to champagne and wines (although minor as of today).

    The following three well-timed acquisitions performed in the first decade of the 2000s led

    the group to become the second market leader in wine and spirits:

    In 2001, it acquired, jointly with Diageo, in a complex deal, the wine and spirits division

    of Canadian group Seagram, with mostly whiskeys and cognacs, for 3.7bn.

    In 2005, the group purchased the British Allied Domecq which produced premium

    international spirits brands and premium wines for 10.7bn.

    In 2008, the group made its latest large acquisition by purchasing Vin&Spirits, owner

    of the Absolut Vodka brand, for 5.6bn.

    An international and decentralized group:

    Pernod Ricard is well implanted internationally with a presence in three major

    geographical regions (Europe, Americas and Asia). However, its main markets remain

    Asia and the United States. The group owns more than 85 affiliates, 18,000 employees

    and 100 production plants worldwide.

    The group has adopted a decentralized organization. All subsidiaries respond to one

    holding, each of them being specialized in a given brand (eg. development, specific

    strategy and the production of each brand of alcohol) or in a specific market (eg. handle

    the development and distribution of the products at a local level).

    The group has split its products and strategies into four main poles:

    Strategic International Brands: gathers the 14 most prestigious and internationally

    renowned brands of the group (12 spirits and 2 champagnes). This division is the main

    contributor to the groups growth for last fiscal year (+4%), mostly driven by whiskey

    brands such as Jameson, the Martell cognac and the Perrier-Jout champagne.

    Strategic Local Brands: embraces the 15 local brands, mainly exploited to penetrate

    emerging markets. This segment is strongly decelerating with a 1% growth in 2016/17

    compared to 5% last year. This slowdown is mainly due to the negative impact of

    regulations in India.

    Premium Wines: an expanding pole composed of 4 premium wines. Last year was the

    second consecutive year of solid performance for the segment (+4% and +5%


    Other: this diversified segment gathers all products innovation (from innovative

    products to the by-products of Strategic International Brands) but also accounts for the

    resulting growth from new acquisitions, synergies and the premiumization strategy.

    The groups business model:

    Pernod Ricard is continuously focusing its portfolio on strategic local and international

    brands by withdrawing from non-key assets. Last divestitures included non-strategic local

    assets such as the Vodka Frs or Distillery Glenallachie. Alongside with the development of

    its premium wines, Pernod Ricard is also surfing on the strong growth of Whiskey

    consumption worldwide (especially in the US and India) with 50% of its strategic portfolio

    being Whiskeys. Additionally, the group is specialized in premium brands which account for

    76% of SIB (Strategic International Brands) volume sales.

    The group leans on a premiumization strategy that is evidenced by:

    (1) Organic Growth through innovation and development of new premium products

    (2) External Growth through acquisitions of premium trendy alcohols

    (3) A strong presence with a top-quality image worldwide through heavy R&D investments

    3 This report is published for educational purposes only by students competing in The CFA Institute Research Challenge.

    1 Business description




    Sales breakdown by strategic poles