Stock price: €64.1 ($84.1)
Conclusion: Q3 confirms a rebound in sales. We are slightly upgrading our valuation range up to €65-€67 per share, mostly due to improved currency. We reconfirm that Pernod looks fairly priced.
Q3 sales were up 14% to €1.5bn (down 4% 9m), +16% organic (+2% 9m). Guidance F10 raised to 3% organic growth in EBIT from +1-3% previously.
Q3 growth was stronger but also boosted by “technical effects”.
-More than 2/3 of growth came from the conjunction of destocking in Q3 last year, an earlier Easter and later Chinese New year.
-Sales momentum remains highly contrasted. Emerging markets grew 31% driven by India, China (+40%) and Vietnam. Western Europe continued to decline, impacted by Spain, the UK and Ireland while the US were only slightly up.
-Overall price/mix effect improved in Q3 mainly due to Martell. However, 6 strategic brands reported a lower YTD price/mix impact vs H1, notably Absolut and Chivas but also Ricard, Malibu, Beefeater and Havana Club.
As expected Fiscal 2010 will be a year of consolidation (EPS expected to go down 9%).
-Organic EBIT growth (+5%) could slightly exceed guidance, despite higher marketing expenses.
-Reported growth will be held back by negative forex impact (- 4% estimated, less than management forecast) and changes in scope (-3%).
-In addition, EPS will be diluted by the recent share issue.
Fiscal 2011 could return to double digit growth (EPS est €4.45)
-Organic growth (+4%) should benefit from easy comps in H1.
-Growth in emerging markets looks sustainable based on economic forecasts. We think sales could expand 8%, accounting for 2/3 of consolidated growth. The rest, around 1/3, would come from +1.5% growth in Europe and +3% growth in the Americas.
-It remains to be seen whether Absolut will return to growth in the US where the industry has engaged in heavy discounting.
-Forex impact could turn positive (almost 4%) based on current exchange rates.
-Gross margin should benefit from positive leverage combined with the benefits of a weaker €. Although management did not comment on marketing spending for next year, we think they might continue to rise in Asia where competition is tougher, but also in Europe where Pernod Ricard has underinvested over the recent period.
-Conversely, a stronger dollar will impact financial expenses derived from US debt.
Pernod Ricard trades at 15.4xP/E and 12.7xEV/EBITDA (8% premium to Diageo) based on calendar 2010 estimates. Our DCF suggests a slightly higher value. We think that brewers look cheaper and continue to offer a better return.