Pernod Ricard: Strong H1 FY23 Results, Still 21x P/E

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Pernod Ricard SA (OTCPK:PRNDY) (OTCPK:PDRDF) (referred present arsenic "PR") reported H1 FY23 results connected Thursday (February 16), which were beardown arsenic we predicted successful our reappraisal past Friday. Pernod Ricard shares vanished nan time up 3.4% successful Paris.

In H1 FY23, PR Net Sales grew by 11.5% organically year-on-year, including by 5% successful nan U.S. Organically, Gross Margin roseate somewhat contempt costs inflation, and Operating Margin was unchangeable year-on-year. Recurring EPS grew 22.8% successful euros acknowledgment to currency. U.S. maturation is normalizing backmost to pre-COVID trends, but China, India and Travel Retail should supply near-term tailwinds. Management expects bully maturation for FY23 overall. PR shares are astatine 20.7x CY22 EPS and person a 2.1% Dividend Yield. FY23 buybacks are now expected to beryllium astatine nan apical extremity of nan erstwhile range. Our forecasts bespeak a full return of 49% (12.8% annualized) by June 2026. Buy.

Pernod Ricard H1 FY23 Sales Growth

In H1 FY23, PR Net Sales grew by 11.5% year-on-year organically, and by 19.4% including currency:

PR Net Sales by Region (H1 FY23 vs. Prior Year)

PR Net Sales by Region (H1 FY23 vs. Prior Year)

Source: PR results merchandise (H1 FY23).

Asia / Rest of nan World Net Sales grew 18.2% organically, helped by double-digit maturation successful some India and Japan, arsenic good arsenic beardown rebounds successful South East Asia and Taiwan “on debased ground of comparison”, though China only grew 4% owed to disruption from COVID-19. Korea and Turkey besides showed “excellent” maturation and momentum.

Americas Net Sales grew 7.2% organically, pinch beardown double-digit maturation successful Mexico, high-single-digit maturation successful Canada and “excellent performance” successful Brazil. Net Sales successful nan U.S. grew 5%, though depletions only grew 3%.

Europe Net Sales grew 6.0% organically, pinch double-digit maturation successful Spain, “good” maturation successful Germany, maturation successful nan U.K. and “modest” maturation successful France. Price discussions are presently taking spot successful Germany and France, wherever these are legally mandated and tin only return spot erstwhile a year.

Pricing was an important driver down Net Sales growth, astatine 10% globally, including low-double-digits successful Asia / Rest of nan World and Europe, and high-single-digits successful Americas (implying mini measurement declines successful nan second 2 regions). Overall measurement maturation was +3%, which implies a mini antagonistic displacement successful mix.

While PR’s U.S. Net Sales maturation was 2 ppt up of its depletions growth, nan effect connected group income is limited. Management stated that, adjusted for inventory level changes successful some nan U.S. and China, integrated Net Sales maturation would still beryllium 11% successful H1 FY23, only 1 ppt little than reported.

H1 FY23 Net Sales represented a 9% CAGR from pre-COVID FY20 (June-December of 2019), including a 9% CAGR successful some Americas and Asia / Rest of nan World, and a 7% CAGR successful Europe. We judge these are mostly reasonable maturation rates comparative to underlying marketplace growth, fixed PR’s attraction connected Premium and higher segments (which person been increasing faster), and PR’s ain marketplace stock gains successful these segments.

Near-Term Sales Trends successful Key Markets

PR’s Net Sales maturation rates successful its 4 “must win” markets for H1 FY23 and nan preceding years are arsenic follows:

PR Net Sales Growth - "Must Win" Markets (H1 FY23 vs. Prior Years)

PR Net Sales Growth - "Must Win" Markets (H1 FY23 vs. Prior Years)

Source: PR institution filings.

The U.S. whitethorn beryllium a detractor connected income maturation successful nan adjacent term. PR’s 7% Net Sales CAGR successful nan U.S. whitethorn beryllium somewhat supra trend, arsenic guidance views nan underlying maturation successful nan U.S. arsenic 4-5%, and nan PR’s 3% maturation successful depletions successful H1 FY23 was described by CEO Alexandre Ricard arsenic portion of a normalization backmost to historical trends; he said he expected further normalization but was uncertain astir its duration.

Competitive strength successful North American whitethorn beryllium rising. PR has raised its Advertising & Promotion (“A&P”) costs separator by 224 bps year-on-year successful H1 FY23, nan main portion of an €1bn finance successful A&P, and this apt was nan logic Americas EBIT shrank 1.5% organically. Diageo (DEO) reported a akin 2% integrated diminution successful its North America EBIT successful its H1 FY23, besides citing investments. PR has a stated extremity to grow successful nan U.S. marketplace and increased its finance successful and business pinch Sovereign Brands past October, aft first taking a liking successful September 2021. For now, we expect title to stay logical and some companies to stay highly profitable successful nan U.S.

China and India are apt to thief thrust further income maturation successful nan adjacent term. PR’s 10% Net Sales CAGR successful some China and India for nan past 3 years are somewhat beneath management’s humanities targets of “low-double-digits” maturation successful India and “high-single-digit to low-double-digits” maturation successful China. China, was disrupted by COVID-19 from early December, pinch a “soft” Chinese New Year successful January. Since past guidance has observed immoderate betterment successful nan “on” trade, pinch postulation picking up successful Western-style bars and KTV venues, though nightclubs stay impacted.

Travel Retail has a 3-year Net Sales CAGR of -7% and remains 20% beneath pre-COVID levels, and truthful has further room to recover. PR sees nan return of Chinese visitors arsenic cardinal to this, and we are already seeing signs, pinch Ctrip (TCOM) reporting a 640% rebound successful out-bound Chinese recreation bookings complete nan Chinese New Year.

Pernod Ricard H1 FY23 Results Headlines

In H1 FY23, PR’s Profit from Recurring Operations (“PRO”, balanced to EBIT) besides grew 11.5% organically, successful statement pinch Net Sales; including currency, PRO grew 21.2% year-on-year successful euros:

PR Net Sales by Region (H1 FY23 vs. Prior Year)

PR Net Sales by Region (H1 FY23 vs. Prior Year)

Source: PR results merchandise (H1 FY23).

Gross Margin roseate 5 bps organically, pinch “price/mix and measurement offsetting precocious COGS inflation”. PRO Margin was level organically aft a 6 bps emergence successful Structure Margin offset nan amended Gross Margin. In euros, PRO grew 21.2%.

Recurring Net Profit grew 21.2% year-on-year, successful statement pinch PRO, while Recurring EPS grew 22.8%, helped by a 1.3% little stock count (after buybacks).

Pernod Ricard FY23 Outlook

Management has not provided circumstantial FY23 targets, but has guided to wide FY23-25 targets of 4-7% yearly Net Sales maturation (“aiming for nan precocious extremity of nan range”) and PRO separator description of 50-60 bps annually.

With H1 FY23 results, guidance has provided qualitative comments that support nan FY23-25 targets, including expectations of “dynamic, broad-based Net Sales maturation albeit successful a normalizing environment” and “sustaining Operating Margin”. Currency is expected to beryllium a use for nan full-year arsenic well:

PR FY23 Outlook

PR FY23 Outlook

Source: PR results position (H1 FY23).

Buybacks successful FY23 are now expected to beryllium €750m, astatine nan apical extremity of nan erstwhile €500-750m range, and is balanced to 1.5% of nan existent marketplace capitalization.

CEO Alexandre Ricard besides expects pricing to beryllium successful nan “high-single-digits”, little than nan 10% seen successful H1 FY23, arsenic prior-year comparables commencement to move into periods of higher value rises.

Pernod Ricard Stock Valuation

At €195.80, comparative to CY22 financials, PR banal is astatine a 20.7x P/E and a 2.8% Free Cash Flow (“FCF”) Yield:

PR Earnings, Cashflows & Valuation (FY19-CY22)

PR Earnings, Cashflows & Valuation (FY19-CY22)

Source: PR institution filings.

FCF Yield is little successful CY22 owed to accrued investments and moving superior flows (including nan normalization of payables aft COVID-19). Management besides plans to summation CapEx to 7% of income successful FY23 (from 4.5% successful FY22), pinch overmuch of nan summation to travel successful H2.

The existent Dividend Yield is 2.1%, based connected full FY22 dividends of €4.12 (up 32% year-on-year).

Net Debt / EBITDA was 2.6x astatine December, up 0.2x from June.

Illustrative Pernod Ricard Stock Forecasts

We support nan assumptions successful our forecasts unchanged:

  • FY23 Net Profit maturation of 2%
  • Net Profit to turn astatine 7.5% each twelvemonth thereafter
  • Share count to autumn by 1.5% each year
  • Dividends Payout Ratio of 50%
  • FY26 year-end P/E of 25.0x

We are intentionally blimpish connected FY23 to bespeak nan anticipation of a U.S. recession later this year.

Illustrative PR Return Forecasts

Illustrative PR Return Forecasts

Source: Librarian Capital estimates.

With shares astatine €195.80, we expect an exit value of €275 and a full return of 49% (12.8% annualized) by June 2026.

Is Pernod Ricard Stock A Buy? Conclusion

We reiterate our Buy standing connected Pernod Ricard SA stock.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Librarian Capital floor plan picture

Global, long-term, fundamentally-oriented & concentrated investing. With much than 10 years' buy-side experience, I look astatine stocks globally and crossed industries, pinch a attraction connected nan U.S. and U.K.. My investing style tin champion beryllium described arsenic "Quality Growth" aliases "Growth At a Reasonable Price". (previously penning nether nan sanction "Blue Sky Capital" until December 2019)

Disclosure: I/we person a beneficial agelong position successful nan shares of DEO either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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