Stock price: €48 ($68 USD)
Conclusion: Attractive Risk Reward, looking for 15%+rerating.
Trading update on 2009 year (end of June): sales up 9% reported, 0% organic. Management confirmed the low end of +3-5% organic profit growth guidance and around +10% net profit.
Notwithstanding some improvement in Q4, with sales down only 3% versus 12% in Q3, we expect revenue growth in financial 2010 to remain held back by poor on-trade traffic and continued destocking from wines and spirits distributors.
However, we find Pernod Ricard attractive for three reasons:
- First, we feel that there is a huge upside potential for Absolut (acquired in August 2008) outside the US, thanks to the existing distribution network of Pernod Ricard. In addition, the network is in place and the integration should be executed at a marginal cost.
- Second, cost control looks even more critical when top line growth slows down. Management’s track record following the acquisition of Allied Domecq leads us to believe that SGA should remain under control and help to preserve the bottom line. Last year for instance, Pernod Ricard managed to increase organic profit by 3% despite flat underlying sales growth.
- Thirdly, the recent right issue coupled with the disposal of Wild Turkey should be sufficient to reduce the refinancing risks. We expect Pernod Ricard to generate €1bn of free cash flow in 2010.
Pernod Ricard looks cheap trading at 11.3x 2009 versus 12.8x for Diageo (DEO) and 18x for Remy Cointreau (GM:REMYF). The stock is down 13% in a year, the worst performance in the sector.
We think Pernod Ricard should trade within a €53-58 ( $75-$82 USD) range, in line with our DCF valuation, which should provide around 15% return in 12 months.
Disclosure: No positions