Company Overview
Pernod Ricard SA is a France-based worldwide producer of wines and spirits. It operates through three geographical segments: America, Europe and Asia/Rest of the World, which account for 29%, 29% and 43% of FY23 net sales respectively. It has a wide portfolio of >240 wine and spirits brand and has a presence in >160 countries, including 75 with its own sales force. It is the global leader in premium spirits and number two in spirits & wine. Its brands can be classified into strategic international brands (Martell, Chivas Regal, Royal Salute, The Glenlivet, Jameson, Ballantine’s, Absolut, GH Mumm, etc), strategic local brands (Kahlua, 100 Pipers, Seagram’s Gin, etc), specialty brands (Monkey 47, Jefferson’s, Malfy, etc), and strategic wines (Jacob’s Creek, George Wyndham, St Hugo), which contribute to 63%, 18%, 6% and 4% to FY23 net sales respectively.
Investment Overview
Strategic bolt-on brand acquisitions to increase its share in the lucrative North America market and fast-growing categories. Some notable examples of bolt-on acquisition success stories include (i) Monkey 47, premium gin brand, acquired in 2016 and grew sales from 30k cases to 140k cases in FY23, (ii) Lillet Aperitif, used in Taylor Swift’s favourite cocktail (French Blonde), acquired in 2008 and grew sales from 40k cases to 1.3m cases in FY23 and (iii) Jefferson’s, premium bourbon brand, acquired in 2019 and grew volume at >20% CAGR (FY20-23) with US$250m new distillery expected to be operational in 2025. In addition, it recently acquired Ace Beverage (Ready-to-drink cocktails), Codigo (tequila), and Skrewball (flavoured whisky) to increase exposure in fast growing spirits categories in the US.
Guided for flattish FY24 ending Jun-24 with catch-up in 2H24. With the growth super cycle in US ending, its US business saw -7% organic y-o-y growth in 1H24. The company expects the US market to normalize in the coming months and return to +4-5% growth in the long-term. Whereas for China business, which saw -9% organic y-o-y growth in 1H24, due to soft consumer demand, the company remains uncertain on overall outlook given volatile macroeconomics conditions. We believe weakness in US and China will likely be offset by strong growth in India and global travel retail segments, a result of strong consumer demand and continued travel recovery respectively.
Strong cash flow generation to support investments to support long-term growth while maintaining a shareholder friendly dividend distribution policy. Despite growth headwinds in FY24F, the company remains focused on the longer-term growth prospects. It has committed to invest ~EUR500m on strategic inventories (similar to FY23) and EUR800m on capex (vs. EUR600m in FY23) to fund capacity expansion with new distilleries in Ireland and US and maturation warehouses. We believe despite likely slow free cash flow generation on higher capex spend, the company will continue its record of growing dividend in FY24F.
Revised TP to EUR166 (from EUR203); maintain BUY. The company has derated due to continued macroeconomics headwinds in its key China market (contributed 11% to net sales in FYE Jun 23). Valuations are now at -2SD of its average 5-year 12m forward PE which is also the same level as during the onset of COVID-19 back in March 2020, making it look attractive. Share price could have already priced in a weaker outlook. Given its leading position in the premium spirits space and solid acquisition growth track record, we believe it deserves a reasonable valuation of 19.1x, -1 standard deviation (S.D.) of its 5-year forward PE ratio, on a lowered FY25F earnings given weak Chinese consumption headwind.
Risks
Key risks include sustained poor macroeconomics conditions in key markets like China and slower than expected market recovery in US.
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