Thursday, 28 August 2014

Pernod Ricard - China turning, a Euro100 share price is my target

Pernod Ricard, the French listed spirits company, got a mention on Financial Orbit yesterday when I was reviewing Brown-Forman (link here):

'I am all for growth businesses but with extra oomph being given by the Jim Beam takeout the share does not excite me at the moment...especially when I can buy broad peers like Remy Cointreau or Pernod Ricard at a discount (to neutral cycle earnings) and also with good brands'

The full year (to end of June) numbers released today by the company highlight some of these attributes and certainly are a continuation of my observations back in February (link here) when I wrote a piece titled:

'Pernod Ricard - building a base in the low 80s despite China issues'

Headline numbers - primarily due to the 'China issue' remained mixed at best.  Whilst organic growth and pricing remained strong...

...the impact of slower (-23%!) sales in China due to the government crackdown and related can be seen on overall Asia-RoW sales growth which is down 4%. This is important for the company as Asia is now the largest region by sales for the group (at 38%). The US slowed down but remained positive whilst Europe improved off an easy / depressed comparison:

 All of this, combined with a FX impact, did pull down recurring operating profit.

Much of this has been discounted however.  Despite some inevitable comments about the 'business environment remaining challenging worldwide, in particular in terms of pricing' I thought one of the most interesting slides from the corporate presentation was this one showing a slow improvement (although still often negative) in China: 

 Combine this with a continued good branded portfolio...

...and a reduction in net debt (still a too high x3.5 of ebitda)...

...a prospective investment case can be made.  

My view is that the stock is trading on a x14 forward EV/ebit valuation with a residual optionality in 'back to normal' Chinese markets for this to compress further.  For a branded business like Pernod Ricard I would pay x14 EV/ebit hence a fuller Chinese recovery (the residual optionality value) still offers scope for the share to trade to around Euro100 over the next year.  Additionally there is a 2% yield which is covered by free cash flow as noted above plus - due to the balance sheet - I believe a discipline that further deals will not be undertaken.  

So the share is more than forming a base in the low Euro80s, I think it is breaking out with Euro100 the target. 

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