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Stock price: €28.34 ($39.72 USD)
Conclusion: Too expensive considering the lack of visibility

Fiscal 2009 results: Sales down 12.7% to €714m ($1.0B USD) (-11.6% like for like), EBIT down 14% and net earnings down 12.5% to €86m ($120.7m USD). No guidance has been given for fiscal 2010.

It could have been worse, considering the magnitude of the downturn in wines and spirits. RC managed to maintain margin at 19%, despite falling volumes in cognac (-19.5%), champagne (-14.5%) and liqueurs (-7.8%). We were surprised by the increase in gross margin, up 360bp, which helped to offset higher distribution and administrative expenses. In addition, earnings benefited from two other factors: positive exchange gains and €14m ($19.6m USD) related to the exit from Maxxium.

In the absence of guidance, we believe that the decline in earnings could be more pronounced in fiscal 2010 (-22% projected) for three reasons. First, price increases that boosted earnings by €35m ($49.1m USD) last year should be increasingly difficult to implement at a time when distributors keep reducing inventories (notably in champagne) and consumer reduce spending both on the on-trade and the off-trade.

Second, although we view the transition from Maxxium distribution JV to owned distribution as a plus in the long term, we think the timing won’t help. As a result of a depressed environment the gains in gross margins could be offset by weaker volumes and heavier commercial and admistrative costs. However, there is still some room for manoeuvre on the A&P front, given the continuing decrease in media rates. Last, we do not expect the financial charges to diminish, as a result of heavy inventories (up 11%). We predict a cash outflow €20-30m ($28m - $42m USD), which could be less if inventories decrease.

The stock (-4% YTD, +74% 6m,-28% 1y) trades at high multiple of 18x P/E and 13x EV/EBITDA, well above Diageo (DEO) and Pernod Ricard (OTCPK:PDRDF). We feel that the premium is too high in the absence of visibility for the next 12 months. A takeover scenario looks also improbable at a time when management is investing into its own distribution network.

Disclosure: No position

Source: Remy Cointreau: Too Costly, Lacks Visibility