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Trade view / 10 June 2016 at 9:17 GMT

#SaxoStrats: Remy Cointreau's undeserved valuation premium

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: RCOP:xpar
Price target:
Market price:
saxostrats
 
Background

Remy Cointreau delivered FY16 (ending 31 March) results yesterday showing 8.9% y/y revenue growth with only 1.7% y/y organic growth. Net profit was up 10.6% y/y, but despite decent results investors were not satisfied as the company did not deliver revenue guidance due to volatility in all regions. Zero revenue visibility does not warrant a 20% valuation premium to global peers in our book and as a result we believe the probability of more negative surprises has gone up.  

The low organic growth in the industry also makes the corporate strategy all about buying brands to show mid-single digit growth rates to justify the high valuation. While management is confident they can move the brands upmarket to $50 or more per bottle of spirits, this increases business execution risk.

Valuation

Remy Cointreau is valued at 12-month forward EV/EBITDA 16.5, around 100% premium to STOXX 600, and 20% premium to its global peers. The high valuation is driven by its safe haven status and very predictable cash flows. However, with zero revenue visibility the current consensus forecasts on revenue are likely overshooting the actual underlying trend. This means lower EBITDA and lower revenue growth should impact the valuation level negatively over coming quarters.

Parameters

Sell Remy Cointreau (RCOP:xpar) and hedge with CAC (FRA40.I) with exposure 1:1 – so EUR neutral. Holding period is expected to be the rest of 2016.

Key Risks

Global economy accelerating in H2. Better Chinese and Nigerian markets fuelling top line growth again.

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— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more

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