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Initiating coverage of Rémy Cointreau

  • 10 Mar 16

Recommandation and upside We initiate coverage on Rémy Cointreau (€3.06bn market capitalisation) with a REDUCE recommendation and a target price of €65.6 (4% upside). Our valuation is based on the following drivers: Business and trends Although Rémy Cointreau is a relatively small player in comparison to Diageo or Pernod Ricard, the company occupies a significant position in the spirit industry as it is believed to be the leading high-end cognac producer. Cognac (Rémy Martin) is the company’s core asset, which contributes to c. 70% of group EBIT, the rest being Liqueurs & Spirits (c.25% of EBIT), and Partner brands (c.5% of EBIT). Rémy Cointreau’s portfolio is skewed to the high-end category of cognac, i.e. most of products have been ageing for a minumum of four years. Consequently, the company has relatively high inventory levels in comparison to other cognac players, not mentioning other spirit players. Cognac is a difficult product category: on the one hand cognac prices rise with ageing, which should be seen as an advantage, on the other, the age-driven portfolio is limited in terms of innovations. Additionally, cognac consumption is subject to consumer swings, and cognac ageing costs money. Rémy Cointreau seems therefore to operate in a niche which is not really comparable with other spirits players but which has much in common with the luxury sector. The company’s objective by 2019/20 is to increase the contribution of Exceptional Spirits (the category in which one bottle is worth >$50, a market globally estimated to be $18bn) to 60-65% of the group’s sales (vs. 45% in 2014/15) and become a global leader in this category. This should be achieved via brand extensions into the upper categories and potential small acquisitions in the premium category. Need to know • The global cognac industry has become very dependent on Asian swings, although an increasing popularity in the US has been something of a counterweight to the volatile emerging markets. • The cognac industry has high barriers of entry (linked to production methods and raw materials used – appellation d’origine contrôlée, packaging and stocking which translate into the premium quality and luxury character of the products) hence the pricing power is relatively high. • Rémy Cointreau generates a significant part of its sales around Christmas and New Year’s Eve (November and December) and the Chinese New Year (January and February). As a result, any event arising during these periods may have an impact on the group’s annual results. • In FY 2013/14, the company results was hit hard by Chinese anti-corruption and anti-extravaganza laws. Rémy Martin’s sales decreased by c.23%, whereas operating profit in cognac was cut by c.42%. Since then, the company has been trying to relaunch its growth in China but visibility remains very low. • In FY 14/15, the US became Rémy Cointreau’s most important market in terms of sales, surpassing China. • The group generates c.75% of its net sales in currencies other than the euro, whereas most of the production is within the eurozone. The principal currencies to which Rémy Cointreau is exposed are: the US dollar, Chinese yuan, Hong Kong dollar, Barbadian dollar, Russian rouble and sterling.