June 7, 2018 / 5:37 AM / 13 days ago

Remy's profits climb on China's thirst for cognac

PARIS (Reuters) - Remy Cointreau (RCOP.PA) expects more profit growth this year, helped by strong demand for its premium cognacs in China and its efforts to sell higher-priced spirits to boost margins.

But Remy’s shares fell back from record highs, as concerns over the stock’s valuation and an unchanged dividend offset the strong earnings and upbeat outlook.

The maker of Remy Martin cognac and Cointreau liqueur said its strategy of focusing on premium products to boost profit margins was delivering strong results. It also raised its medium-term profitability forecasts.

Chief Executive Valerie Chapoulaud-Floquet said she was “very confident” about prospects in China where a new generation was very keen to test and drink imported spirits.

“We are looking for low-double digit growth in China. We may even have a bigger performance. If we are being cautious, low double digit makes sense,” she told a call with analysts, when asked about FY 2018/19 sales growth in the region.

Her remarks about China echoed upbeat comments made by rival Pernod Ricard (PERP.PA) CEO Alexandre Ricard to Reuters earlier this week.

Yet Remy shares fell 6.3 percent, although the stock is still up 4 percent so far in 2018 and close to a record high of 131.30 euros reached earlier in June.

“We like Remy’s category exposure and see upside as the CEO rolls out her vision for the company as a superpremium business. Trading at a 40 percent premium to the spirits sector, we remain at hold,” said Jefferies analysts said in a note.

Investec and Liberum kept their “sell” recommendations, echoing Jefferies’ caution over Remy’s valuation.

JP Morgan analysts, which have a “neutral” rating on Remy Cointreau, said: “We believe the earnings upgrade momentum is diminishing and current valuation reflects the strong growth.”

Remy Cointreau’s stock market valuation is closer to luxury good companies, rather than food and drinks stocks.

Its shares trade at 38.6 times on their 12-month forward earnings (P/E), compared to P/E ratios of 23.4 for Pernod and 21.9 for Diageo (DGE.L).

RAISING MARGIN TARGETS

Remy’s annual operating profits rose to 236.8 million euros ($279.4 million). This translated into a margin of 22 percent of sales at constant exchange rates and scope, marking a gain of 1.3 percentage points from the previous year.

Remy Cointreau also said it now expected a cumulative increase of 2.4-3.0 percentage points in current operating margin on a like-for-like basis, up from a previous target of 0.8-1.8 points, for the financial years up to 2020.

Remy’s finance chief Luca Marotta added he was “OK” with the market consensus for 12-13 percent growth in current operating profit for the financial year that started on April 1.

He said the impact from a rise in the euro would knock 17.7 million euros off annual operating profit, broadly in line with the 18.5 million euros lost in FY 2017/18.

Remy has been focusing on selling spirits priced at $50 a bottle or more, as part of a strategy that has benefited from a rebound in Chinese demand. The group reiterated it expected high-end spirits to make 60-65 percent of its sales in the medium-term against 53 percent now.

Its strategy has differed from that of rival Pernod Ricard, which has launched less expensive brands in China.

Drinks and spirits consumption has been recovering in China, offsetting the impact from the country’s anti-corruption crackdown over the past few years which had hit sales of premium brand drinks.

Reporting by Dominique Vidalon; Editing by Sudip Kar-Gupta and Jane Merriman

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