EUR 850.00 For Business Accounts Only

Morningstar | Strong Start to the Year for Pernod; Raising Medium-Term Growth Forecasts and Valuation

Pernod Ricard reported a strong start to its fiscal year, with organic revenue growth of 10.4%, although this was artificially inflated by early shipments in some regions. We anticipate mild headwinds this fiscal year in the form of rising commodity costs, as well as a potential slowdown in travel retail in Asia, and we are maintaining our near-term assumptions. We have raised our longer term growth forecast, however, and we are raising our fair value estimate to EUR 124 per share from EUR 117. We admire Pernod's narrow economic moat and the company's strong recent execution, but we regard the current multiple of 19 times fiscal 2020 earnings as pricing in the opportunities ahead.

First-quarter sales growth was driven by 23% organic growth in the Asia/Rest of World segment. Within the region, China was up 27% and India was up 34%. These numbers are staggering, but were boosted by shipments into the channel, particularly around the timing of festivals in China. The underlying sales growth was not disclosed, but we believe the depletion rate in the region is running at a mid- to high-single-digit rate, and positive price/mix means that the region probably grew at a low-double-digit rate in the first quarter. If this is the case, we would expect sales to smooth out to this level over the course of the year. Double-digit growth is impressive, however, and shows that in Asia, Pernod is firing on all cylinders. Still, the weak Chinese yuan poses a threat to Chinese outbound tourism, and we remain comfortable with our estimate of almost 6% divisional organic growth this year and 4% in the medium term.

Elsewhere, sales growth appeared much more sedate, although technical issues negatively affected the headline numbers. In the Americas segment, 2% organic growth underperformed the market at the retail level, although this was also distorted by channel inventory movements, and we still expect Pernod to match the market depletion rate of around 4% this year.

We have raised our medium-term growth rate assumptions for Pernod because we have slightly higher conviction in Pernod's price/mix drivers. First, we have added 30 basis points to our steady state sales growth rate, and now forecast 3.7% organic growth. Second, we have increased our stage 2 EBI growth rate assumption from 4% to 4.5%, to be in line with our assumption for Diageo. We think this is a reasonable assumption, and it will likely be achieved by a modest amount of operating leverage on sales growth of almost 4%. These changes account for EUR 5 of the EUR 7 increase in our fair value estimate, with the remainder caused by the time value of money.