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The value of the day in Paris PERNOD RICARD: smooth Tuesday

(AOF) – No “dry January” for Pernod Ricard which progressed by more than 2% to 166.10 euros, supported by Jefferies. The latter confirmed his recommendation to buy and its target price of 182 euros on the world number two in wines and spirits in view of the half-yearly results on February 13. Overall, the broker, like the market, expects sales growth and operating profit to slow down. Nothing serious as the basis of comparison is unfavorable.

The first half of 2019 for the family group had been excellent. “The best semester in eight years,” said the boss, Alexandre Ricard, at the time. A boon linked to the thirst found of Chinese and Indians after a period of, relative, abstinence.

These two key countries have now regained their cruising consumption rate. Thus, the consensus expects organic growth in EBIT of 3% (+ 3.1% at Jefferies) after + 12.8% in the first half of 2019.

For the full year, observes the broker, the market is more cautious than before since it aims for organic growth in Ebit of 6.2% against + 7.9% at the end of September. Pernod Ricard, for its part, anticipates growth of between 5% and 7%.

In the framework, the consensus like Jefferies foresees an acceleration of the results in the second half, even if, recognizes, the analyst, an increase in American customs taxes, legally possible from February 17, would change the situation. Jameson's sales in the United States represent 5% of its sales.

However, the main thing is elsewhere. Jefferies, like some other analysts, believes that the transformation plan “Transform & Accelerate” initiated almost a year ago will allow the group to achieve its objectives.

Faced with criticism from the activist fund Elliott, owner of 2.5% of its capital, the French flagship has set itself the ambition of achieving annual growth of between + 4% and + 7%, with an operational improvement of 50 at 60 basis points per year.

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Pernod Ricard – Points to remember

– World co-leader with Diageo of wines and spirits;

– Strong positions in white alcohols, rums and aniseed (world number 1), in whiskeys and liqueurs (world number 2), cognacs, brandies and bitters (world number 3);

– Activity of 9 billion euros, balanced between Europe (30% of sales), the 2 Americas (30%) and Asia (40%, divided equally between China, India and the rest of the Asia);

– Upmarket strategy called “premiumisation”: leader in the “super” and “ultra-premium” category with 13 strategic brands (Absolut, Chivas Regal, Ballantine's, Ricard, Jameson, Havana Club, Malibu, Beefeater, Martell, Glenlivet, Royal Salute, Mumm and Perrier-Jouët) which contributed 8/10 of sales;

– Segment little dependent on household consumption, acclaimed in Asia, in particular Martell cognac, and growing in strength in mature countries;

– Strong “pricing power” (ability to impose prices on its customers), giving upward visibility to profits and good ability to preserve margins;

– Strategy based in particular on operational excellence, talent management, and social responsibility;

– Very sound financial structure, the activity generating a cash flow of more than € 1.4 billion;

– 2020 objective of raising the dividend to 50% of the result, compared to 41% in 2018.

Pernod Ricard – Points to watch

– Image risk linked to alcohol, the consumption of which is increasing among young people;

– Stronger exposure than Diageo to exchange risk with the British pound;

– Threats from American legal proceedings due to the group's presence in Cuba;

– Disappointing sales in Europe and, in particular, in Germany;

– Value dear to its historic highs;

– Strong seasonality: two thirds of the activity carried out in the first half (July-December), a quarter in December;

– Market sensitivity to forecasts and comments from competitors Diageo and Remy Cointreau;

– Sensitivity of profits to sales in Asia and the Americas, two regions with a strong contribution to operational profitability;

– Strategic plan “Transform & Accelerate” with the objective of consolidating the acceleration of our growth;

– Evolution of parities, including the dollar (55% of debt) with a strong impact on profits;

– Rumors of the sale of the wine branch, less profitable than spirits;

– Evolution of the directors' relations with the activist fund Eliott (2.5% of the capital) which claims 500 ME in cost reductions and recommends the merger with another group of spirits;

– Broken capital, the founding family holding nearly 16% of the securities (nearly 22% of the voting rights) and managing the group, with Danièle Ricard as chairman and her nephew Alexandre as general manager.

Food

In a sector undergoing profound change, for which better eating is a growing concern of consumers, players are renewing themselves. They are evolving their portfolio to reduce their exposure to controversial categories. Mondelez (brands Lu, Côte d'Or in particular) is therefore positioning itself on “snacking made right”, combining pleasure and good eating. Nestlé (Guigoz, Nesquik, or Kit-Kat) has sold its American confectionery division. PepsiCo, the first to question itself, continues to review its recipes and launches healthier innovations. As for Fleury Michon, he has invested in a range of nitrite-free cured meats.

On the other hand, Kraft Heinz, which has not been able to adapt to the evolution of eating habits, had to depreciate the value of its Kraft cheeses or its Oscar Mayer hot dogs. It thus recorded a net book loss of 10.2 billion dollars in 2018.

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