INVESTMENT ADVISES ON BUYING REMY COINTREAU SHARES

Remy Cointreau logo

Rémy Cointreau (RCO FP): Premium Growth but Premium Valuation

Source: Jefferies International Limited

Edward Mundy, ACA

June 11, 2018

Rating HOLD

Price Target $120.00 (from $105.00)

Price $122.90

Key Takeaway

We like Remy's category exposure (80% cognac) and see upside as the CEO rolls out her vision for the company as a super-premium business. Fundamentals in the Cognac Division remain strong which should support EBIT growth 12-13% in F19. While we like Remy, trading at 33.3x CY19E (vs staples 18.9x), the shares need upgrades to perform. Remain at HOLD.

Attractive category exposure... With 80% of the business cognac, rising further if other brown spirits Metaxa, St Remy, Mount Gay, Islay Spirits are included, Remy offers a highly attractive brown spirits portfolio that is well positioned to capitalise on the spirits premiumisation trend.

...with a vision as a super-premium business... Remy does not have the financial superpower to compete head-on with spirits majors. Instead, the business will borrow from the CEO's experience in luxury goods, relying more on digital and direct to consumer sales than traditional FMCG marketing.

Premiumisation strategy on-track - co is making good progress with the premiumisation model with 53% of the portfolio now over $50 a bottle vs 45% in F15. The move to 60%-65% over the next three to five years should be feasible given that 80% of sales are over $40. Given that it is unlikely that Cointreau can be sold for >$50 a bottle, the conversion of this 27% of the portfolio ($40-$50 a bottle) is likely to take place across cognac (1738), gin (Botanist), Mount Gay (xo) and higher variants of Metaxa.

Margin outlook - positive trends. Given the stronger than expected margin growth in F18, the company has raised its margin guidance to 240-300bps F18-20E. With 130bps captured in F18 (22.0%), this argues for between 50-85bps org margin expansion p.a. F19 and F20. Although the company is investing ahead of growth in A&P, margins should be driven by continued GM expansion given the company's premiumisation strategy.

What are the risks? Key risk for an investment in Remy is concentration risk in cognac & that consumers move away from cognac towards other brown spirits. However, we see an attractive outlook for the cognac industry with scarcity of inventory helping to drive a robust pricing environment.

What's changed? We increase F19 EPS c2% and our price target to $120 (from $105) to reflect the upgrade and the roll-forward of our DCF by one year.

MILLENIAL REVIVAL FOR COGNAC WILL SHORT COGNAC STOCKS

Cognac Sales

Cognac shortage deepens as crops destroyed

Source:

http://www.drinksbulletin.com.au/

Alana House

June 04, 2018

A little more than six months after Hennessy announced "constrained" supplies of Cognac, the industry has been plunged into crisis following devastating hailstorms in France.

More than 10,000 hectares of vineyards were damaged in late May, as pebble-sized hail stones pelted the region. Around 14% of the brandy-producing vines of Cognac were affected, with many vineyard owners saying that they had lost all hope of harvesting any grapes.

The storm hit areas not affected by this type of weather damage for more than 40 years, with just under 1000 farms suffering the ravages of the hail.

The Bureau National Interprofessionnel du Cognac (BNIC) the Cognac interprofessional organisation that acts on behalf of all Cognac growers and firms of the region said in a statement on May 26: "Our vineyards were again hit by a violent episode of hail.

"In this difficult moment, the BNIC, its elected officials and its teams express their greatest support to the winegrowers of Charente-Maritime and Charente whose vines were destroyed or damaged.

"Our services are currently in the field to evaluate the precise impact of this episode on our vineyards."

The president of the General Union of Cognac Winemakers, Christophe Véral added that it had been a "catastrophe" and a crisis meeting was likely to take place.

Two years ago, the Cognac region was also hit by hail storms. The extent of the economic impact of poor weather in Cognac for three straight years is not yet known, but is expected to be crippling.

It comes as Cognac is having a millenial-fuelled revival.

BNIC reports that cognac's three largest markets are the United States (78.7 million bottles), Singapore (23.6 million bottles) and China (22.6 million bottles).

As a large proportion of Singapore's imports are shipped on to China, it's likely that China is now the world's largest market for cognac by revenue.

According to Reuters, Hennessy owns around half of the global Cognac market.

However, the category's booming growth was already under strain due to the lack of supply Hennessy has in reserve.

In January, the wine & spirits arm of LVMH, Moet Hennessy, announced a solid jump in 2017 sales, with strong volumes growth for Hennessy Cognac (+8%), which came despite supply constraints that Moet Hennessy said slowed growth in the second half of the year.

It said supply issues, which the company highlighted throughout last year, were likely to continue in 2018, with supplies remaining "relatively constrained".

Hennessy has been planting more vines, but new vineyards will take up to six years to start producing usable grapes - even Hennessy's youngest Cognac is aged between two and eight years.

It's expected the shortage will really begin to bite in late 2019 to early 2020. Experts are suggesting that Cognac lovers stock up on more expensive bottles of Hennessy, such as the V.S.O.P., the X.O. and Hennessy Black.