ECO579 – Case Studies in Corporate Finance
Case Studies in Corporate Finance
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ECO579 – Case Studies in Corporate Finance
Industry: Spirits
BUY
Share Price: €159.70
Price Target: €180.00
PERNOD RICARD
November 30th, 2020
Share Price Performance (€)
Key Financials
Stock Data
Encouraging Q1 despite Covid-19, strong resilience and agility for FY21
SUMMARY
▪ Q1 FY21 in decline but in marked improvement vs. Q4
FY20 thanks to partial on-trade reopening and continued
off-trade resilience
▪ Despite continued uncertainty and volatility expected
during FY21, Pernod is well positioned to navigate the
current environment given the resilience of off-trade in the
US and in Europe, the return to growth in China, and the
gradual improvement in India
▪ We believe sales will return to growth in Q2 FY21
▪ The future is promising with Pernod’s accelerated digital
transformation and strict cost discipline
INVESTMENTS DRIVERS
Pernod is well positioned to navigate the current environment:
▪ Off-trade expected to remain very resilient
▪ Markets to benefit from partial reopening despite the on-
trade channel being still disrupted due to the lockdown
measures
▪ Strong shipments throughout the work ahead of the festive
period
▪ Travel Retail expected to remain in severe decline ((64%)
for Q1 2021) despite some domestic travel resuming
▪ US (+6% sales organic growth for Q1 2021): robust market
with strong off-trade resilience and on-trade reopening
▪ China (+4% sales organic growth for Q1 2021): growth
driven by on-trade recovery and sale ahead of festive
season
▪ India ((13%) sales organic growth for Q1 2021): improving
vs. last quarter but still lagging due to COVID-19
▪ Europe ((5%) sales organic growth for Q1 2021): good
resilience despite the hard hit of the pandemics on Spain
and Russia; strong dynamism in the UK and Germany
VALUATION
▪ Blended valuation methods (discounted cash flows,
precedent transactions, trading comparable) yield a
Target Price of €180.00
Sources: Company Website, Investor Relations, Broker Reports
Share Price (€) 159.70
Date 27-Nov-20
Price Target (€) 180.00
52-Week Range (€) 112.25 - 171.10
Market Cap. (€bn) 41.82
Shares Out (m) 261.88
Free Float 75.00%
Ticker (Reuters) PERP.PA
We reinstate with a Buy rating, €180 PT, 13% upside
30-Jun YE 2019A 2020A 2021E
Net Sales (€m) 9,182 8,448 8,448
EBITDA (€m) 2,807 2,611 2,611
EBITDA Margin 30.6% 30.9% 30.9%
EBIT (€m) 2,581 2,261 2,261
EBIT Margin 28.1% 26.8% 26.8%
Net Income 1,455 329 1,439
Net Debt 6,620 8,424 7,310
Net Debt/EBITDA 2.4x 3.2x 2.8x
Spot 1m 3m 6m 1Y 5Y 10Y
Share Price (€) 159.7 144.8 147.0 141.0 167.0 107.8 64.0
Performance n.a. 10% 9% 13% (4%) 48% 150%
1
Company Overview
A UNIQUE PORTFOLIO OF PREMIUM BRANDS
▪ Founded in 1975 through the merger of two French anise-based spirit companies, Pernod Ricard
became the world's second-largest spirits company, with a strong presence in all regions
▪ Pernod's main markets are the US, China, India and an important exposure to Travel Retail
▪ Its main brands are Martell Cognac, Jameson Irish Whiskey, Absolut Vodka and Chivas Regal Scotch
▪ Pernod Ricard has built a unique portfolio of Premium brands on an international scale that is one of
the most comprehensive on the market. This portfolio is managed centrally thanks to the House of
Brands, a dynamic tools allowing affiliates to more efficiently prioritize marketing investments
KEY PEOPLE
OWNERSHIP STRUCTURE
▪ Pernod Ricard is listed on the Paris Stock Exchange.
▪ The Ricard family is the largest shareholder, through Société Paul Ricard (comprising Société Paul
Ricard, and a number of other entities), which holds shares representing 15.8% of the share capital
and 21.3% of the voting rights
▪ Groupe Bruxelles Lambert is another long-term holder, with a 7.6% shareholding
▪ The Board, Management and employees hold 2.5% of the capital
KEY HIGHLIGHTS
Alexandre Ricard
Chairman and CEO since 2015
▪ Joined Pernod Ricard in 2003
▪ Previous roles: MD of PR
Asia Duty Free, CEO of
Irish Distillers and COO
Hélène de Tissot
CFO since 2018
▪ Joined Pernod Ricard in 2002
▪ Previous roles: Group
Strategy and M&A Director
and CFO of the Asia region
18,776
Employees(1)
94
Production sites(1)
160+
Countries with distribution
€41.8bn
Market Capitalization
#1
for Premium/Prestige Spirits
€8,448m
FY20 Sales
€
#2
for Wine and Spirit
16 Brands
amongst the world’s Top 100
Sources: Company Website, Investor Relations, Broker Reports
Note: (1)as of 30-Jun-20
2
Industry Snapshot and Competitive Positioning
▪ Market fragmentation in the wine & spirit industries is increasing every year with innovation and new
brands creating more offer whilst new sales and communication channels are increasingly used by
customers
▪ To succeed, it is critical to address the right brand in the right place at the right price to the right
customers; firms must master new technology and data to digitize the route-to-consumer and provide
seamless and direct interactions
KEY SECULAR TRENDS
Spirits companies generate +30% of sales from premium products (pre Covid-19)
Spirits companies generate +25% of sales volumes on-trade(1) (pre Covid-19)
Spirits companies generate between 22% and 32% EBIT margin (pre Covid-19)
72%
52%
75%
60%
25%
45%
23%
29%
2%
Pernod Ricard Campari Diageo Remy Cointreau
Off-Trade On-Trade Travel Retail
63% 69% 64%
19%
37% 31% 36%
81%
Discount & Mainstream Premium & above
28%
22%
32%
24%
Pernod Ricard Campari Diageo Remy Cointreau
Sources: Company Website, Investor Relations, Broker Reports
Note: (1) On-Trade sales correspond to B2B (e.g. bars, restaurants) while Off-Trade is B2C (e.g. customers buying in a supermarket
3
Industry Snapshot and Covid-19 Focus
COVID-19 IMPACT
▪ There was significant demand impact from COVID-19, due to both travel-retail and on-premise
channels’ weakness given travel restrictions, social distancing and bar/restaurant closures. We still
expect negative impact from the pandemic in the coming months;
▪ Spirits look more vulnerable in the current environment, where social distancing measures radically
reduce on-trade consumption, while a weaker macro and rising unemployment are likely to depress
consumers' disposable income and eventually lead to downtrading(1);
▪ The lockdown measures did not only impact Europe and the US abut also Emerging Markets; we are
particularly cautious about the demand and the pace of recovery in emerging markets – and it would
be misleading to extrapolate consumer behavior in markets like the UK and US to EM.
Spirits companies had lower leverage compared to 2009
EBIT margin remained resilient during the previous crisis
Recovery to pre Covid-19 level expected to take place in the next 2-3 years
Sources: Company Website, Investor Relations, Broker Reports
Note: (1) downtrading occurs when customers switch from expensive brands to cheaper alternatives
5.4x
2.4x 2.4x
3.2x
2.4x
1.6x
2.9x
1.3x
Pernod Ricard Campari Diageo Remy Cointreau
2009 2019
23%
21%
29%
20%
24%
21%
28%
19%
26%
24%
28%
18%
25%
24%
29%
18%
Pernod Ricard Campari Diageo Remy Cointreau
2007 2008 2009 2010
2019 2024202220212020 2023
Covid-19
4
Investment Case
FASTER RECOVERY THAN THE INDUSTRY
▪ We think Pernod Ricard's premium portfolio (~40% of sales) means it could be vulnerable to downtrading in the
near term, as is the case for most companies in the Spirit industry;
▪ However, in relative terms, we think Pernod Ricard might recover more quickly than peers if consumption starts
improving in China (~10% of net sales);
▪ We do not expect Pernod Ricard to cut costs too significantly, as management focus remains on long-term growth,
but we see a higher margin opportunity in the longer term and a potential to eventually catch-up Diageo’s EBIT
Margin (32%);
▪ In the long term, we highlight that Pernod has some catching up to do to match Diageo's ROIC (7% vs. 12% in
FY19);
▪ The speed of recovery will depend on the pace of normalization in China, growth in Travel Retail, the
extent to which consumers trade-down globally and the impact of the cost-saving measures the company
initiated a few years ago;
▪ We expect a full recovery by 2022 to pre Covid-19 levels and return to growth in the following year.
ACQUISITION STRATEGY PAYING OFF, MORE TO COME
In the next few years, a large acquisition could be the next catalyst for the stock. This could drive synergies as well as
complete the portfolio gaps such as Tequila. If this transaction were to take place, Pernod Ricard could restructure
some of the route-to-market in key geographies such as the United Sates where it has been consistently
underperforming Diageo.
SUCCESFUL PURSUIT OF PORTFOLIO TRANSFORMATION
Pernod today has an enhanced portfolio as a result of a profound transformation over the past five years. Through
numerous bolt-on deals, Pernod has solidified its portfolio with very limited portfolio gaps compared to peers and
further enhanced its global footprint. Pernod enjoys a leading position in Cognac, Vodka and Irish Whiskey, with
identified weakness in the booming Tequila category.
Sources: Company Website, Investor Relations, Broker Reports
Mainstream Scotch
Premium Scotch
US Whiskey
Canadian Whiskey
Irish Whiskey
Indian Whiskey
Mainstream Vodka
Premium Vodka
Cognac
Rum
Gin
Tequila
Baijiu
Liqueurs and others
Wines
Champagnes
5
Financial Performance Analysis
Pernod Ricard’s financial statements are prepared in accordance with IFRS (International Financial
Reporting Standards) as adopted by the European Union. The Group’s financial year runs from July 1st to
June 30th.
The company applies the following accounting principles:
▪ Revenue recognized when control of the product is transferred to the customer;
▪ Inventory stated at the lower of their cost or their net realizable value;
▪ Depreciation of PP&E determined using the straight-line method based on estimated useful life;
▪ Intangible assets (brands) are subject to impairment tests at least once a year;
▪ Research and Development costs are expensed as incurred.