2023-08-19 10:40:00 ET
Summary
- Remy Cointreau's share price has recovered after a decrease during the COVID pandemic.
- FY 2023 showed significant improvement, with increased operating profit and net income.
- FY 2024 is expected to be a mixed bag, with a strong recovery anticipated in the second half of the year.
Introduction
Remy Cointreau ( REMYF ) ( REMYY ) is one of the world's best-known producers of cognac and liqueurs in the world and many liquor cabinets will have a bottle of Cointreau present. While the company's share price suffered during the COVID pandemic as the demand for its products decreased, it has bounced back nicely and the high-margin cash flow machine is nicely humming along. This doesn't mean Cointreau is cheap, though, and in this article I'd like to check up on the stock as its share price is now trading about 10% lower than the 164 EUR level it was trading at when my previous article was published.
Remy Cointreau has its primary listing in France where it is trading with RCO as ticker symbol . The average daily volume currently exceeds 70,000 shares per day for a total value of 10M EUR. I will use the Euro as base currency throughout this article.
FY 2023 showed considerable improvement
The company's financial year ends in March, which means the most recent detailed financial statements are the annual results for FY 2023, which ended in March. This means we are now well underway in FY 2024, which will end in March next year.
During FY 2023, Cointreau reported an 18% revenue increase to 1.55B EUR . As the Cost of Sales barely increased (by just around 8%), the gross margin expanded by about 22% while the operating profit increased by almost 29% to 427M EUR (of which 16% was on an organic basis). Needless to say it's easy to understand why Cointreau's press release was touting ' a record year '. The margins remain vastly superior and the gross margin in FY 2023 came in at 71.3%, which is about 4% points higher than in FY 2020, the pre-COVID year.
The net income jumped to just over 293M EUR and this represented an EPS of 5.79 EUR. At the current share price of approximately 146 EUR, the stock is trading at about 25 times earnings. That definitely isn't cheap but it's more reasonable than the multiple of in excess of 50 times earnings the company was trading at during its COVID years.
The strong margins are obviously very intriguing, and as Cointreau's sustaining capex is usually pretty low, the cash flow result tends to be very strong as well.
As you can see below, the operating cash flow was 124M EUR but this includes a 195M EUR investment in the working capital position while the company also paid 140M EUR in taxes although the income statement indicates only 116M EUR was due. This means the underlying operating cash flow adjusted for these items was 343M EUR.
Interestingly the capex was relatively high at 76M EUR. This resulted in an underlying free cash flow result of 267M EUR or 5.27 EUR share. That's lower than the reported net income as the total capex was almost twice as high as the depreciation and amortization expenses recorded during FY 2023. The capex will likely remain elevated in the next few years as Cointreau is investing in additional growth as it continues to expand its operations. The management confirmed on the FY 2023 conference call the company has been investing in additional manufacturing and storage capacity .
The company will pay a total cash dividend of 3 EUR per share . The yield obviously isn't high, but Cointreau shouldn't be seen as a dividend stock anyway.
FY 2024 will be a mixed bag - don't expect too much
While FY 2023 was an excellent year, Cointreau is definitely less upbeat about the current financial year. It expected its revenue to show a ' strong decline ' in the first half of the year as the first semester of last year was particularly strong in the United States. However, Cointreau expects the situation to revert in the second half of the year wherein it expects to observe a strong recovery.
Based on that guidance, we probably shouldn't expect too much from Cointreau this year and keeping the earnings flat would likely already be a good achievement. This also means the 35% organic revenue decline experienced in the first quarter of this year was widely expected. And when it released the Q1 trading update, the company confirmed the full-year guidance.
Investment thesis
Remy Cointreau offers an interesting dilemma. I'm usually very reluctant to pay 25-28 times earnings for a stock, even if it is a company that has proven the resilience of its business model in the past. That being said, the analyst consensus estimates are pointing towards a resumption of the earnings growth from FY 2025 on with an anticipated EPS of 6.04 EUR in FY 2025 and 6.79 EUR in FY 2026. Of course those are just estimates but those assumptions appear to be pretty fair given the company's ambitions.
And this type of high margin stocks rarely gets cheap. Paying about 20 times forward earnings is not unreasonable and a potential strategy could be to write out of the money put options. The option premium for a P120 expiring in March 2024 is approximately 3.5 EUR and that provides a nice trade-off: either one is able to buy the stock at 17 times the forward earnings for FY 2026 or the 3.5 EUR option premium could just be pocketed.
For further details see:
Rémy Cointreau: Quality Comes At A Price