Remy Cointreau Looks Fully Valued

 |  Includes: DEO, PDRDF, REMYF
by: Véronique Adam

H1 results for Remy Cointreau (OTCPK:REMYF): Sales down 1% reported to €362m ($546m), down 7% organic. Adjusted EBIT up 4.8% reported, 2% organic. Guidance: Slight organic growth in operating profit for the full year.

Surprisingly good numbers at first sight.
Adjusted Earnings before tax increased by 18% to €54.5m ($82.3m), owing to +100bp gain in EBIT margin (18.1%) and lower “other financial costs”.
Margins improved thanks to the liqueurs division and the swing to profit generated by the partner brands.

Negative volume impact on cognac and champagne margin.
In spite of its “ambitious pricing policy”, Remy Cointreau was not able to offset the negative volume/mix impact in cognac (-€25m (-$37.7m) in H1).
The decline in champagne was even sharper (-46% H1) leaving no room for price increases. As a result, Remy Cointreau lost €38m in H1 due to lower volume and gained only €23m ($34.7m) through pricing.
H2 should benefit from an easy comparison base as sales were down 25% last year. We expect a return to high single digit growth in sales while margins could slightly increase owing to higher volume combined with savings in general and administrative expenses and lower media costs.

Cash management is under pressure.
Operating cash flow decreased by 17% to €16.5m ($25m). In addition “other cash expenses including Capex” doubled to €25m ($37.7m), resulting in a cash outflow (-€8.2m (-$12.3m) vs +8m ($12m) free cash last year). Average debt went up in H1 (€647m ($977m) vs €477m ($720.5m) last year) and borrowing costs increased.

Remy Cointreau trades at 17.4xP/E, implying a 20% premium to peers. Our DCF suggests a valuation closer to €30-32 ($45-$48) per share. However, we think that Remy will find it hard to achieve peers margins given its lack of scale, which might continue to fuel speculation around future partnership.

Stock price: €34 ($51)

Conclusion: Reported results better than cash earnings. Remy cointreau looks fully valued trading at a 20% premium to Diageo (NYSE:DEO) and Pernod Ricard (OTCPK:PDRDF).