Summary
- Pernod Ricard's H1 FY23 results on Thursday were strong as we predicted, and shares finished the day up 3.4%.
- Organic Net Sales growth was 11.5% globally, including 5% in the U.S.; Gross Margin rose slightly, while Operating Margin was stable.
- China, India and Travel Retail should be near-term tailwinds, offsetting lower U.S. growth as it normalizes back to pre-COVID trends.
- PR shares are at 20.7x CY22 EPS and have a 2.1% Dividend Yield. Buybacks are now expected to be the top of the previous range.
- With shares at €195.80, we expect a total return of 49% (12.8% annualized) by June 2026. Buy.
Introduction
Pernod Ricard SA ( OTCPK:PRNDY ) (PDRDF) (referred here as "PR") reported H1 FY23 results on Thursday (February 16), which were strong as we predicted in our review last Friday. Pernod Ricard shares finished the day up 3.4% in Paris.
In H1 FY23, PR Net Sales grew by 11.5% organically year-on-year, including by 5% in the U.S. Organically, Gross Margin rose slightly despite cost inflation, and Operating Margin was stable year-on-year. Recurring EPS grew 22.8% in euros thanks to currency. U.S. growth is normalizing back to pre-COVID trends, but China, India and Travel Retail should provide near-term tailwinds. Management expects good growth for FY23 overall. PR shares are at 20.7x CY22 EPS and have a 2.1% Dividend Yield. FY23 buybacks are now expected to be at the top end of the previous range. Our forecasts indicate a total 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 ( H 1 FY23 vs. Prior Year) |
Asia / Rest of the World Net Sales grew 18.2% organically, helped by double-digit growth in both India and Japan, as well as strong rebounds in South East Asia and Taiwan “on low basis of comparison”, though China only grew 4% due to disruption from COVID-19. Korea and Turkey also showed “excellent” growth and momentum.
Americas Net Sales grew 7.2% organically, with strong double-digit growth in Mexico, high-single-digit growth in Canada and “excellent performance” in Brazil. Net Sales in the U.S. grew 5%, though depletions only grew 3%.
Europe Net Sales grew 6.0% organically, with double-digit growth in Spain, “good” growth in Germany, growth in the U.K. and “modest” growth in France. Price discussions are currently taking place in Germany and France, where these are legally mandated and can only take place once a year.
Pricing was an important driver behind Net Sales growth, at 10% globally, including low-double-digits in Asia / Rest of the World and Europe, and high-single-digits in Americas (implying small volume declines in the latter two regions). Overall volume growth was +3%, which implies a small negative shift in mix.
While PR’s U.S. Net Sales growth was 2 ppt ahead of its depletions growth, the effect on group sales is limited. Management stated that, adjusted for inventory level changes in both the U.S. and China, organic Net Sales growth would still be 11% in H1 FY23, only 1 ppt lower than reported.
H1 FY23 Net Sales represented a 9% CAGR from pre-COVID FY20 (June-December of 2019), including a 9% CAGR in both Americas and Asia / Rest of the World, and a 7% CAGR in Europe. We believe these are mostly reasonable growth rates relative to underlying market growth, given PR’s focus on Premium and higher segments (which have been growing faster), and PR’s own market share gains in these segments.
Near-Term Sales Trends in Key Markets
PR’s Net Sales growth rates in its four “must win” markets for H1 FY23 and the preceding years are as follows:
PR Net Sales Growth - "Must Win" Markets (H1 FY2 3 vs. Prior Years) |
The U.S. may be a detractor on sales growth in the near term. PR’s 7% Net Sales CAGR in the U.S. may be slightly above trend, as management views the underlying growth in the U.S. as 4-5%, and the PR’s 3% growth in depletions in H1 FY23 was described by CEO Alexandre Ricard as part of a normalization back to historic trends; he said he expected further normalization but was uncertain about its duration.
Competitive intensity in North American may be rising. PR has raised its Advertising & Promotion (“A&P”) cost margin by 224 bps year-on-year in H1 FY23, the main part of an €1bn investment in A&P, and this likely was the reason Americas EBIT shrank 1.5% organically. Diageo ( DEO ) reported a similar 2% organic decline in its North America EBIT in its H1 FY23, also citing investments. PR has a stated goal to expand in the U.S. market and increased its investment in and partnership with Sovereign Brands last October, after first taking a stake in September 2021. For now, we expect competition to remain rational and both companies to remain highly profitable in the U.S.
China and India are likely to help drive further sales growth in the near term. PR’s 10% Net Sales CAGR in both China and India for the past 3 years are slightly below management’s historical targets of “low-double-digits” growth in India and “high-single-digit to low-double-digits” growth in China. China, was disrupted by COVID-19 from early December, with a “soft” Chinese New Year in January. Since then management has observed some recovery in the “on” trade, with traffic picking up in Western-style bars and KTV venues, though nightclubs remain impacted.
Travel Retail has a 3-year Net Sales CAGR of -7% and remains 20% below pre-COVID levels, and therefore has further room to recover. PR sees the return of Chinese tourists as key to this, and we are already seeing signs, with Ctrip ( TCOM ) reporting a 640% rebound in out-bound Chinese travel bookings over the Chinese New Year.
Pernod Ricard H1 FY23 Results Headlines
In H1 FY23, PR’s Profit from Recurring Operations (“PRO”, equivalent to EBIT) also grew 11.5% organically, in line with Net Sales; including currency, PRO grew 21.2% year-on-year in euros:
PR Net Sales by Region ( H 1 FY23 vs. Prior Year) |
Gross Margin rose 5 bps organically, with “price/mix and volume offsetting high COGS inflation”. PRO Margin was flat organically after a 6 bps rise in Structure Margin offset the better Gross Margin. In euros, PRO grew 21.2%.
Recurring Net Profit grew 21.2% year-on-year, in line with PRO, while Recurring EPS grew 22.8%, helped by a 1.3% lower share count (after buybacks).
Pernod Ricard FY23 Outlook
Management has not provided specific FY23 targets, but has guided to overall FY23-25 targets of 4-7% annual Net Sales growth (“aiming for the upper end of the range”) and PRO margin expansion of 50-60 bps annually.
With H1 FY23 results, management has provided qualitative comments that support the FY23-25 targets, including expectations of “dynamic, broad-based Net Sales growth albeit in a normalizing environment” and “sustaining Operating Margin”. Currency is expected to be a benefit for the full-year as well:
PR FY23 Outlook |
Buybacks in FY23 are now expected to be €750m, at the top end of the previous €500-750m range, and is equivalent to 1.5% of the current market capitalization.
CEO Alexandre Ricard also expects pricing to be in the “high-single-digits”, lower than the 10% seen in H1 FY23, as prior-year comparables start to move into periods of higher price rises.
Pernod Ricard Stock Valuation
At €195.80, relative to CY22 financials, PR stock is at a 20.7x P/E and a 2.8% Free Cash Flow (“FCF”) Yield:
PR Earnings, Cashflows & Valuation (FY19-CY22) |
FCF Yield is lower in CY22 due to increased investments and working capital flows (including the normalization of payables after COVID-19). Management also plans to increase CapEx to 7% of sales in FY23 (from 4.5% in FY22), with much of the increase to come in H2.
The current Dividend Yield is 2.1%, based on total FY22 dividends of €4.12 (up 32% year-on-year).
Net Debt / EBITDA was 2.6x at December, up 0.2x from June.
Illustrative Pernod Ricard Stock Forecasts
We keep the assumptions in our forecasts unchanged:
- FY23 Net Profit growth of 2%
- Net Profit to grow at 7.5% each year thereafter
- Share count to fall by 1.5% each year
- Dividends Payout Ratio of 50%
- FY26 year-end P/E of 25.0x
We are intentionally conservative on FY23 to reflect the possibility of a U.S. recession later this year.
Illustrative PR Return Forecasts |
With shares at €195.80, we expect an exit price of €275 and a total return of 49% (12.8% annualized) by June 2026.
Is Pernod Ricard Stock A Buy? Conclusion
We reiterate our Buy rating on Pernod Ricard SA stock.
For further details see:
Pernod Ricard: Strong H1 FY23 Results, Still 21x P/E