CFA Institute Research Challenge Hosted by CFA Society France Team P

Transcription

1 CFA Institute Research Challenge Hosted by CFA Society France Team P 1

2 j-15 a-15 j-15 o-15 j-16 a-16 j-16 o-16 j-17 a-17 j-17 o-17 Pernod Ricard - Student Research. Target Price: Recommandation: BUY Pernod Ricard STUDENT RESEARCH TEAM P Agro-Food Industry Euronext Paris Valuation date January 12th 2018 Current Price Target Price Sector Beverages Upside 17% Recommandation BUY Figure 1: Company data Ticker Bloomberg RI.FP Ticker Reuters PERP.PA Ticker S&P Capital IQ ENXTPA:RI Shares O/S (m) Float % 45.8% Closing Price Avg 3M Dly Vlm (mm) wk High / Low / Gap (% Low) 128.6% Market Cap (bn ) Net debt 2017 (m ) Price Earning Ratio Price to Book Ratio 2.55 Earnings Per Share 5.28 Dividend yield 2016 % 1.53% Source: S&P Capital IQ Figure 2: Share price 3y Pernod Ricard CAC 40 Base 100 Source: S&P Capital IQ Figure 3: Share price data Source: S&P Capital IQ Market Data (12/01/2018) Share price data % change 1m 3m 1y 3y Pernod Ricard 1.1% 7.6% 25.7% 35.3% Eurostoxx % 0.2% 9.9% 17.1% CAC % 2.9% 13.4% 30.5% Diageo -0.3% 2.8% 21.3% 44.1% Summary Pernod Ricard is ranked number 2 in the wine and spirits market since 2005 and its acquisition of Allied Domecq (Ballantine s, Beefeater and Malibu among iconic brands). The group produces and distributes a large range of spirits such as Vodka, Whiskey, Gin, Tequila and Cognac but also wine. Given its geographic positioning, its wide range of brands and a dynamic market in the spirits premium segment, we initiate coverage with a BUY rating on Pernod Ricard supported by target price of and a potential upside of 17% over a 1 year period. The main drivers that bring us to stand with this recommendation are as follows: A significant rebound in Asian markets: the group is market leader in China and India, which are the two most significant spirits markets. Pernod Ricard will benefit from the sharp improvement in these countries that mainly consume whiskey, boosted by a notable increase in volume and a positive pricing/mix. An upward perspective in the high margin Whiskey and Cognac markets: underlying trends on these markets are strongly positive, fuelling growth for its whiskey and cognac brands, whose exposure in the total group revenues has been continuously growing since Whiskey and Cognac will contribute to improve the EBITDA margin, especially in China, India and the US. Targeted acquisitions of ultra-premium brands: the group achieved strategic local spirits acquisitions over the past years in ultra-premium brands. These type of alcohols (Mezcal, Gin, Bourbon) are forecasted to grow at a high CAGR. Hereby, we expect the group to create value thanks to its recent acquisitions at sensible multiples. Recent news: December 20th 2017: Fitch Ratings decided to upgrade Pernod Ricard s rating to BBB. This decision reflects the strong efforts made by the company to deleverage over the past two years as well as solid operating performances and improving profitability. November 15th 2017: the UK Supreme court decided to implement a minimum price for alcohol in Scotland. As of May, a 70cl Whiskey bottle will be sold at a min. GBP14. June 7th 2017: Pernod announced the purchase of a majority stake of the Mexican Del Maguey Single Village, which is ranked n 1 in Mezcal spirits production in the US. This investment is consistent with its vision of selling ultra-premium spirits. January 31th 2017: NBV Investment, a subsidiary of Pernod, acquired American spirits producer Smooth Ambler. The portfolio embraces Contradiction Bourbon and Old Scout Single Barrel Bourbons in addition to Gins and Vodkas. Key financials Historical Projected FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenue (in m ) Revenue growth 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% 3.3% 3.1% 3.0% EBITDA (in m ) EBITDA margin (in %) 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% 30.7% 31.5% 31.7% Net income (in m ) Net margin (in %) 10.28% 14.5% 15.8% 16.2% 16.8% 17.8% 18.5% 19.2% 19.5% Free Cash Flow (in m ) FCF yield (in %) 4.3% 5.3% 5.1% 5.2% 5.2% 5.5% 5.9% 6.3% 6.4% Net debt (in m ) Net debt / EBITDA 3.7x 3.5x 3.0x 2.9x 2.5x 2.2x 1.8x 1.5x 1.2x EV / EBITDA 13.5x 14.8x 14.9x 17.7x 16.8x 15.9x 15.0x 14.2x 13.7x Dividend yield 1.3% 1.4% 1.4% 1.6% 1.7% 1.8% 2.0% 2.1% 2.2% 2

3 Sales Figure breakdown 4 : Sales by breakdown strategic poles by strategic poles (2017) 6% 19% 13% 62% Strategic International Brands Strategic Local Brands Premium Wines Others Source: Annual report Figure 5 : Geographic breakdown (2017) 30.9% 29.5% 39.6% 1 Business description The group was created in 1975 following the merger of two French anise-based spirits producers Pernod and Ricard. Pernod Ricard, world s second largest producer of wines and spirits after Diageo, enjoyed a turnover of 9.01bn as of June 2017 (+3.8% YoY). Specialized in spirits, the group is present in a large range of alcohols from white alcohols, whiskeys, cognac and other liqueurs to champagne and wines (although minor as of today). The following three well-timed acquisitions performed in the first decade of the 2000 s led the group to become the second market leader in wine and spirits: In 2001, it acquired, jointly with Diageo, in a complex deal, the wine and spirits division of Canadian group Seagram, with mostly whiskeys and cognacs, for 3.7bn. In 2005, the group purchased the British Allied Domecq which produced premium international spirits brands and premium wines for 10.7bn. In 2008, the group made its latest large acquisition by purchasing Vin&Spirits, owner of the Absolut Vodka brand, for 5.6bn. An international and decentralized group: Pernod Ricard is well implanted internationally with a presence in three major geographical regions (Europe, Americas and Asia). However, its main markets remain Asia and the United States. The group owns more than 85 affiliates, 18,000 employees and 100 production plants worldwide. The group has adopted a decentralized organization. All subsidiaries respond to one holding, each of them being specialized in a given brand (eg. development, specific strategy and the production of each brand of alcohol) or in a specific market (eg. handle the development and distribution of the products at a local level). Asia/ROW Americas Europe Source: Annual report Figure 6: Spirits brands portfolio Vodka Cognac Wiskeys Strategic International Brands Absolut Martell Jameson Chivas The Glenlivet Ballantine's Royal Salute Strategic Local Brands Polish Wyborowa Blenders Pride JP Whisers Royal Stag Imperial Blue 100 Pipers Imperial Passport Scotch Clan Campbell Anisee Ricard Pastis 51 Gin Beefeater Seagream's Gin Rum Ready-to-drink Champagne Local alcohols Tequila Source: Annual report Havana Club Malibu Perrier-Jouet Mumm Armenian Ararat Koffee Liqueur Kahlua Amaro Ramazzoti Olmeca The group has split its products and strategies into four main poles: Strategic International Brands: gathers the 14 most prestigious and internationally renowned brands of the group (12 spirits and 2 champagnes). This division is the main contributor to the group s growth for last fiscal year (+4%), mostly driven by whiskey brands such as Jameson, the Martell cognac and the Perrier-Jouët champagne. Strategic Local Brands: embraces the 15 local brands, mainly exploited to penetrate emerging markets. This segment is strongly decelerating with a 1% growth in 2016/17 compared to 5% last year. This slowdown is mainly due to the negative impact of regulations in India. Premium Wines: an expanding pole composed of 4 premium wines. Last year was the second consecutive year of solid performance for the segment (+4% and +5% respectively). Other: this diversified segment gathers all products innovation (from innovative products to the by-products of Strategic International Brands) but also accounts for the resulting growth from new acquisitions, synergies and the premiumization strategy. The group s business model: Pernod Ricard is continuously focusing its portfolio on strategic local and international brands by withdrawing from non-key assets. Last divestitures included non-strategic local assets such as the Vodka Frïs or Distillery Glenallachie. Alongside with the development of its premium wines, Pernod Ricard is also surfing on the strong growth of Whiskey consumption worldwide (especially in the US and India) with 50% of its strategic portfolio being Whiskeys. Additionally, the group is specialized in premium brands which account for 76% of SIB (Strategic International Brands) volume sales. The group leans on a premiumization strategy that is evidenced by: (1) Organic Growth through innovation and development of new premium products (2) External Growth through acquisitions of premium trendy alcohols (3) A strong presence with a top-quality image worldwide through heavy R&D investments 3

4 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% Figure 7: GDP per year (%) Industry overview and competitive positioning Industry overview: From a macroeconomic point of view, the main demand drivers in the alcoholic beverages industry are: 1/ an increasing GDP, which often translates into higher consumption expenditures; 2/ income class redistribution, leading to rising purchasing power of consumers; and 3/ global population growth (predominantly in emerging countries), ultimately meaning an increasing consumer base. Regional growth dynamics for Pernod Ricard are therefore obviously specific for each of its geographical groups: Americas, Europe and Asia/Rest of the World. Source: OECD India USA China Eurozone Figure 8: Income class distribution in China (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Bloomberg Figure 9: Income class distribution in the US (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Poor Source: Bloomberg 120% 100% Upper middle class Mass middle class Affluent Poor Middle class Upper middle class Affluent Figure 10: estimated change in population ( ) 80% 60% 112% 40% 19% 23% 20% -3% 0% Asia & Africa Europe Americas -20% Oceania Source: The United Nations, Department of Economics and Social Affairs: The 2017 revision GDP growth: We notice positive trends for the overall economic health of Pernod Ricard key strategic markets. China remains one of the fastest growing economies around the world, having its GDP growth at a still remarkable 6.5%/7% in 2016 and 2017e. India s economy is also confidently growing at attractive rates of ca. 7%. The US. is expanding gradually with the latest figures for Q2-Q reaching 3.2%, the fastest pace over the last couple of years. Michigan consumer sentiment index (MCSI), as a result, is very high, hitting a 95.9 estimate. Thus, people are expecting favorable economic conditions, leading to an increase in real personal consumption expenditures, which certainly stimulates demand for the group s products. Income class redistribution: The key driving force of future growth for Pernod Ricard is an emerging middle class in China and an increasing high income class in group largest market - US In China, the upper middle class, i.e. people earning $15,000 to $35,000 per year, is projected to expand from 20% in 2012 to 33% of total population in Those are the people who can now afford a bottle priced between 15 and 20. Thus, due to emerging middle class, Pernod Ricard has now an opportunity to expand its premium route to market in the region. In the US we observe an increasing number of high income population, that is people earning more than $100,000 and comprising the upper middle and affluent classes. If in 2012, these two income classes combined represented 38.3% of population, Bloomberg projections suggest that by 2021 this figure will increase to 42.5% of total population. Thus, group ultrapremiumization across whiskey, tequila and cognac categories is a sensible strategy in the region in our eyes. Population growth: Emerging markets are characterized by rapid population growths that ultimately will lead to an expanding consumer base target and an expansion of future demand for Pernod Ricard. Asia/Rest of the World is therefore a leading region as far as population growth indicators are concerned, with India and Africa being at the forefront. Each year the population of drinking age in India increases by 15 to 20 million people. In Africa, on the other hand, according to United Nations estimates, the change in population from 2015 to 2050 will be 112%, which is strongly exceeding growth indicators in any other region. Competitive positioning: The wine and spirits market is characterized by a moderate competition (Herfindahl index of 451), represented by large multinational groups. We have determined the four Pernod Ricard s main competitors in accordance with several criteria: Diageo plc [D]: the market leader in the wine and spirits market; Diversified brands. Brown-Forman [BF]: corporation manufactures; Specialized in whiskey. Constellation Brands [CB]: specifically focused on the American market, a wine and spirits segment. Rémy Cointreau [RC]: specialized in cognac; international presence. 4

5 A B C D E Figure 11: Positioning matrix PR Source: Team estimates D CB BF RC Figure 12: Spirits market share in % 16% 1% 8% 11% 3% Broad range of products [A]: Pernod Ricard has the largest range of wine and spirits brands, producing 36 alcohols, that is to say 7 more than Diageo. These two companies differ from the others which are mostly focused on one spirit. For instance, note that Jack Daniels and Remy Martel represent respectively 65% of the groups sales, while the wine division of Constellation Brands accounts for 88% of its total sales in As a result, Pernod Ricard is the most diversified in the spirits market, which allows it to reach a larger base of consumers and avoid the risks linked to product concentration. Consistency with trendy products [B]: Whiskey: It is currently one of the most dynamic markets, accounting for 33% of global spirits sales as of Pernod Ricard stands out against Diageo thanks to its better positioning in such market. As a matter of fact, whiskey represented 38% of the group s sales in The very positive dynamic in China benefitted to it, as well as Brown Forman (reported growth of 4.9%) and Rémy Cointreau (organic growth of 7,9%). Constellation Brands appears to be the worst positioned with only one brand of whiskey (less than 3% of its 2017 sales). Ready to drink (RDT): Pernod Ricard shows some lag behind Diageo in this market with only its range product "Malibu", as opposed to its competitor Diageo that owns 6 RTD brands. However, note that the RTD category does not know an overall great success from consumers since it represents a very limited fraction of total sales (e.g. 6% of 2017 sales for Diageo). Premium positioning [C]: The premiumization strategy of Pernod Ricard aims at targeting a new range of consumers able to afford high-end brands. This strategy places the company behind the long-established ultra-premium competitor Rémy Cointreau but successfully places it ahead of the others peers. This strategy counts on the rising consumption of ultrapremium brands. Nevertheless, we observe that premium positioning is correlated to a lower EBITDA margin as it is more arduous to perform economies of scale. Presence in emerging market [D]: Diageo PLC Brown Forman Rémy Cointreau Source: Market research Pernod Ricard Constellation Brands Others The French group has achieved a better penetration in Asian emerging markets compared to all of its peers by positioning itself as the leader in India and China, which are currently the most dynamic markets with respective growth rates of 6.9% and 6.7% in Its competitors Constellation Brands, Brown Forman and Diageo remain mainly present in the US and Europe. As a result, Pernod Ricard enjoys an important comparative advantage considering that these markets show the best perspectives for evolution. Size [E]: 37.5% 35.0% 32.5% 30.0% 27.5% 25.0% 22.5% Figure 13: EBITDA margin (%) Pernod Ricard relies on its size effect as the second largest company in the wine and spirits market to obtain better margins than its French competitor Rémy Cointreau, which represents only 16% of Pernod Ricard s market capitalization. Constellation Brands can be likened to a local actor (93% of its 2017 sales were in the USA). Moreover, Brown Forman and Rémy Cointreau are not front competitors to Pernod Ricard in terms of size. Thanks to its size and its internationalization, the Pernod Ricard group benefits all the more from a comparative advantage enabling the company to have a strong negotiation power. 20.0% 17.5% 15.0% FY 2014 FY 2015 FY 2016 LTM Brown Forman Diageo Remy Cointreau Constellation brands Pernod Ricard Source: S&P Capital IQ Company name (local currency) Brown Forman Constellation Brands Diageo Pernod Ricard Remy Cointreau Country US US UK FR FR Total revenue Reported growth (%) 4.9% 12.0% 14.9% 3.8% 4.0% EBITDA Net Income FCF Total debt Enterprise value

6 3 Investment summary Figure 14: Global spirits consumption (2017) 8% 7% 33% 9% 43% White alcohols Whiskey Liqueur Cognac Source: Company data Others Figure 15: Price range in 2017 (growth %) Ultrapremiupremium Super- Prestige Premium Standard > $84 $42-84 $26-$42 $17-$26 $10-$17 Source: Company data Figure 16: Whiskey vs. other SIB (growth %) 5.3% 2.6% 7.40% -1.3% 9% -1.3% -1.3% 6.80% 3.8% 4.3% 3.5% 1.90% 1.0% Other Strategic brands sales Source: Company data 5.1% -6.8% 4.5% Whiskey sales 3.40% 1.20% We issue a BUY recommendation on Pernod Ricard with a target price of and a potential upside of 17%. Our valuation is computed by using a combination of the Discounted Cash-Flow model and relative multiple analysis. Our recommendation is underpinned by the following key drivers: Drivers of the investment case Growing market in Asia (China/India): strong growth has made a come-back in the region, with China gaining momentum in FY 2016/17 (+2% vs. -9% last year), as well as overall in Asia in Q1 2017/18 (+7% in Asia/ROW). The Asian market accounts for 30% of group total revenues, China and India being the two most important division markets. Strong growth in these markets will necessary support Pernod Ricard s sales, due to its premium positioning that will allow it to catch the emergence of a middleclass and the increasing per capita consumption. Strong upward perspective in the whiskey market: we expect Pernod Ricard to benefit from the very positive dynamic of whiskey production, according to IWSR reports that predict volumes should increase by 52.6m 9-litre cases over the next five years, especially in India and China, where the group is the market leader, and in the US. Note that Indian local whiskey is the most consumed alcoholic beverage in the country, fully in line with the Pernod Ricard portfolio which includes three major ones. In addition, we observe that the whiskey exposure of Pernod Ricard has substantially grown, from 35.2% in FY 2015 to 38.3% for FY 2017 and we expect such exposure to be at 40% at the end of this year. Volume sales skyrocketed in FY 2017 by +15% for Jameson, +3% for Ballantine s and that the group is increasing its advertising costs in China for Chivas Regal. As a result, we do think Pernod Ricard will remain able to outperform the industry over the coming years. Strategic acquisitions in Ultra-premium brands and innovation: we observe that Pernod Ricard is slowly shifting its strategy upmarket by acquiring ultra-premium local brands (42$ - 84$ for a 75cl bottle) with great potential, such as Del Maguey (Mezcal, which is expected to grow at +17.8% CAGR Future Market Insights), Smooth Ambler (Bourbon) and Ungava (Gin). Group s growth is also driven by Innovations brands, which accounted for 1/3 of the top line growth last year. These strategies aim at targeting the rise of the upper-class in the US, whose income trends an upward evolution allowing them to afford ultra-premium spirits. Such a strategic positioning is corroborated by data on consumption evolution like the CAGR , which stands at 9% for ultra-premium brands, as opposed to 3.4% for premium brands. Limits of the investment case Low organic growth in Western Europe: Pernod Ricard is impacted by the slight positive environment in Western Europe, with an average organic growth of 1.6% the last three years in Europe, which includes the positive dynamic in Eastern Europe. For instance, the group only achieved a 1% growth in France last year. The Western Europe market is mature and pricing remains challenging in the region. Hereby, the group will necessary have to increase its advertising and promotion expenses to remain the market leader in Europe. The vodka market is shrinking: Absolut is the most important brand of Pernod Ricard, accounting for 23.1% of its international brands sales. Still, the brand is facing difficulties as the vodka market shrank by 4.3% last year. The US is the Absolut s most important market, which is challenging (+0.4% LTM), partly due to the negative pricing effect on the brand and changing consumer preferences. 4 Financial Analysis We forecast total revenue of 9,196m in the course of 2018, with organic sales growth of 4.2% driven by the awakening of growth market in Asia and its strong market position. Furthermore, margins and earnings should continue in the years ahead thanks to costs containments efforts and a better control of non-recurring items. 6

7 Net Debt/EBITDA EPS EPS growth (%) Pernod Ricard - Student Research. Target Price: Recommandation: BUY Figure 17: ROE vs. ROCE forecasts 10.5% 9.5% 8.5% 7.5% 6.5% 5.5% 6.5% 9.1% 8.8% 8.8% 10.0% 10.0% 10.1% 9.2% 9.2% Source: Company data, Team estimates Figure 18: Evolution of EPS Source: Company data, Team estimates 9.6% e 2019e 4.68 ROE ROCE e 2019e 12% 10% 8% 6% 4% 2% 0% Analysis overview Regarding many of Pernod Ricard s operational and financial characteristics, we believe the group has the financial ability to both foster value creation in its existing operations and continue to grow through an acquisition strategy. The group benefits from a more than adequate liquidity and cash flows for future investments. The company should be able to reduce its leverage, and the capital structure is solid enough to support future strategic plans. Key Metrics Performance measurement We used the DuPont analysis to separate the components affecting the return on common equity, as it leads to assess the drivers of Pernod Ricard s performance. Our projections highlight a progressive improvement in the ROE over the next three years through enhancements in the company s profitability (driven by organic and external growth). The significance of the investment in associates is limited (associates contribution to ROE is weak). Expanded Dupont Analysis Capital structure analysis Historical Projected FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Revenue Growth 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% EBITDA Margin 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% EBIT Margin 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% ROCE 8.8% 8.8% 9.2% 9.2% 9.2% 9.6% ROE 6.5% 9.1% 10.0% 10.0% 10.1% 10.5% ROA 3.0% 4.0% 4.6% 4.8% 5.1% 5.5% Net Debt / Equity 94.3% 93.9% 92.1% 91.0% 90.5% 88.5% EPS DPS Historical Projected FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Tax Burden 78.2% 74.3% 74.9% 76.0% 76.1% 76.3% Interest Burden 49.6% 73.5% 78.1% 79.8% 80.9% 83.7% EBIT Margin 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% Net Profit Margin 10.1% 14.2% 15.5% 15.9% 16.5% 17.5% Total asset turnover 29.5% 28.5% 29.7% 30.4% 31.1% 31.6% Leverage Return on equity (ROE) 6.9% 9.2% 10.2% 10.3% 10.4% 10.8% The Company has sought to secure its capital structure over the last three years. As of September 2017, Pernod s total debt amounted to 8,547 million, representing 38.1% of the capital structure, as opposed to 42% in 2015, while the proportion of equity financing increased. Furthermore, we notice that the liquidity ratios improved more than modestly, providing a cushion to the cash generation that has been decreasing. Figure 19: Net debt forecasts e 2019e 2020e Source: Company data, Team estimates Working Capital Accounts and Ratios Cash flow relationships Historical Projected FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Current Ratio Quick Ratio Defensive Interval Ratio Days sales outstanding (DSO) Days on hand of inventory (DOH) Number of days payables Cash conversion cycle Since Pernod Ricard has made a number of acquisitions, we analyzed the relationship between operating cash flow and its resource allocation over time. Cash flows cover reinvestment needs by a factor of 3.9x, and the trend should improve in the next years. The cash flow relationship with debt and interest indicates that the group should be able to handle more debt should profitable investment opportunities arise. 7

8 DPS DPS growth (%) Pernod Ricard - Student Research. Target Price: Recommandation: BUY 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Figure 20: Evolution of DPS 1,88 2,02 2,05 2,20 2, e 2019e Source: Company data, Team estimates Figure 21: DCF valuation 8% 7% 6% 5% 4% 3% 2% 1% 0% Historical Projected Ratio of Operating CF to Reinvestment and Debt (m ) Ratio of Operating CF to Reinvestment and Debt FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Cash generated from operations Total reinvestment spending Ratio of cash flow to reinvestment Total Debt Ratio of cash flow to total debt 15.3% 14.5% 19.6% 21.7% 23.2% 27.2% Cash interest paid Interest coverage ratio Ratio of cash flow to interest coverage Dividend policy In light of the dividend compound annual growth rate of 5% over , we expect the CAGR of Dividend/Shares to follow the same trajectory over the period. We remain confident about the Company s ability to maintain this ratio during the upcoming years. However, since caution is still the watchword in today s financial environment, we decided to run our analysis with the current dividend payout ratio of 37%. Source: Team calculation DCF valuation (as of 12th of January) Hypothesis WACC 6.4% Terminal growth 1.5% Tax rate 22.5% Terminal value Discount factor 0.57 Present value of Terminal value Present value of cash-flows Entreprise value (-) Net debt (-) Minorities Equity Value Outstanding shares (in m) Target price Current price Upside (in %) 11.9% Figure 22: Unlevered FCF forecasts e 2019e 2020e Source: S&P Capital IQ, Team estimates Historical Projected Dividend policy FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Dividend policy FY 2020 Dividend Dv / Shares Dividend Yield Valuation We use two valuation methods in order to issue a target price for Pernod Ricard. Firstly, we employ the DCF method. Secondly, we also compute peer valuation multiples using the EV/EBITDA ratio. DCF method: target price (+12% upside) We applied the Discounted Cash Flow model, since Pernod Ricard is characterized by strong free cash flows, which we expect to remain robust over the following years. It allowed us to predict the intrinsic value of Pernod Ricard due to its market position in the wine & spirits industry, as well as the stability of the company in this sector. We came to the conclusion of a target price, driven by the following main assumptions: Growth of organic sales, EBITDA: we expect Pernod Ricard to generate an organic growth of 3.5% in the coming years (CAGR ), mainly due to its positioning in the Asian and North American markets that are still substantially growing (sound growth in Whiskey, Cognac); ii/ the developing market in Africa where Pernod Ricard has increased presence since 2012; iii/ due to its cost-containment efforts over the last three years and its wish to provide stable Advertising and Promotion costs, we expect the EBITDA to grow at a rate of 2.5% CAGR with the EBITDA margin reaching 30% by FY 2020/21. Capex, working capital and M&A: i/ we assume Capex will remain at 4.0% of revenues, in line with management guidance during the IR Presentation and in line with historical level; ii/ we put into practice a normative approach to estimate the changes in working capital requirements which exhibits negative changes; iii/ we adjusted net debt by assuming that Pernod Ricard will continue strategic targeted acquisitions in ultra-premium brands which will account for 7% of the group net income, in line with historical outflows. Free cash flow: A sales-weighted WACC of 6.4%: As Pernod Ricard is diversified all around the world, we decided to first estimate a WACC per region (i.e. Europe, North America and Asia), then weighted in accordance with the revenues generated in these areas. We came to the conclusion of: 8

9 Pernod Ricard - Student Research. Target Price: Recommandation: BUY Figure 23: Sensitivity analysis Sensivity analysis Growth in perpetuity WACC 1.00% 1.25% 1.50% 1.75% 2.00% 5.90% 6.15% 6.40% 6.65% 6.90% Beta: a weighted average beta of 0.8. We used a one-year regression between the firm s stock return and a European market index, which is the most consistent market index. Damodaran public data have been used to determine betas in Asia/RoW and Americas. Risk free rate: for Europe, we decided to adopt the Euro area yield curves delivered by the ECB, that indicate a 10 years risk free rate of 1.10%. North American risk free rate has been implemented by using the 10 years US Bill (2.5%) and we decided to equally weigh the 10 years free rate of China and India for RoW, which gave a rate of 5.5%. Source: Team calculation Expected return: expected return has been computed by using: i/ the S&P 500 Beverages 10-year average return of 9.5% in North America; ii/ the CAC 40 5-year average return of 8.2% in Europe; iii/ the STOXX Asia/Pacific 600 Food & Beverage 3-year average return of 11% in Asia/RoW. Figure 24: Monte-Carlo simulation Cost of debt: we relied on the average cost of debt expected by Pernod Ricard (3.8%) for this year and decided to apply it to all areas. WACC estimation break-down Areas % of total sales E/ (E+D) D/ (E+D) β Rf Cost of equity Cost of Corporate Regional debt tax rate WACC Asia / ROW Europe Americas % % % 62.6% 62.6% 62.6% 37.4% 37.4% 37.4% % 1.2% 2.6% 9.9% 5.0% 10.3% 3.8% 3.8% 3.8% 22.0% 23.0% 22.5% 7.3 % 4.2 % 7.6 % Total % % 8.5 % 3.8 % % 6.4 % Sensitivity analysis: Source: Team calculation Figure 25: EV/EBITDA valuation We took care to check that our result was not too sensitive to the growth rate at perpetuity and the WACC. We came to the conclusion that our DCF model was more sensitive to the WACC than the terminal growth for a 0.25% change. This result is consistent because mature companies are logically less sensitive to the terminal growth. Monte Carlo Simulation: EBITDA 2017/18e Metrics Multiple applied 19.5x Enterprise Value (-) Net Debt (-) Minorities (=) Equity Value Average shares out. (m) Implied share price ( ) Current Share price Upside (in %) % We implemented a Monte Carlo simulation to see if our result is realistic with our DCF valuation. We started a draw of 50,000 iterations to assure the relevancy of the results. The Monte Carlo simulation supports our result, affirming there is more than a 50% probability that the company achieve more than a 12% upside. Relative valuation methods: Target price (+22.9% upside) We decided to focus on all listed sector companies that could be compared to Pernod Ricard. But we didn t equally weigh the companies because of strong differences with Pernod Ricard portfolio, their geographical positioning and their size. Indeed, all these characteristics have an impact on the EV/EBITDA multiple and led us to determine a synthetic multiple. We use an EV/EBITDA multiple, driven by the assumptions that EBITDA is less sensitive than EBIT to accounting manipulations regarding the D&A, and that EBITDA is the most reliable metric to compare companies operating income. The set of comparables chosen drive us to an average synthetic EV/EBITDA of 19.5x that we applied to Pernod Ricard without taking into account any drop in value that the group has been experiencing since We obtain an implied share price of and a 22.9% upside. Source: Team calculation ,0% ,5% ,0% 29,5% ,0% ,5% ,0% Source: S&P Capital IQ, Team estimates EBITDA Margin (%) Figure 26: EBITDA forecasts Company Diageo Brown Forman Constellation Brands Remy Cointreau Davide Campari Country Market cap. local currency (in m) Enterprise value local currency (in m) UK US US France Italia Average / Weighted average Likeness to EV / EBITDA Pernod Ricard 2017 LTM weighting 17,7x 20,3x 17,6x 23,9x 20,0x 100% 60% 50% 50% 40% 19,9x 19,5x 9

10 Figure 27: Final valuation Valuation conclusion DCF Relative multiple Weighting (in %) 50% 50% Target price 146,5 160,9 Weighted targ. price Current share price Upside Equity value (in m ) (+) Minorities (in m ) (+) Net debt (in m ) Entreprise value Source: Team calculation Figure 28: Shareholding structure (2017) MFS IM 10% CGC 10% Groupe Bruxelles Lambert 7% Inst. Inv. 11% Source: Registration document 153,7 131,0 17,4% Societe Paul Ricard + board 16% Floating 46% Figure 29: Voting rights (2017) Groupe Bruxelles Lambert 11% Inst. Inv. 11% MFS IM 7% CGC 9% Societe Paul Ricard + board 16% Results: Target price (+17.4% upside) We equally weighted the DCF and relative valuation methods. The DCF method allowed us to analyze the group s capacity to create value through its brands portfolio shift and geographic positioning. The relative valuation method helped us understand that Pernod Ricard currently suffers from an undervaluation compared to its peers that should disappear thanks to the significant EBITDA increase we predict in the coming years. As a result, we set a BUY recommendation with a target price of (+17.4% upside). 6 Management and Corporate Governance Management Team: The General Management of the group is carried out by Alexandre Ricard, CEO and Chairman of the Group since the 29 th of August 2012, following the passing of Patrick Ricard, and Gilles Bogaert, Managing Director, Financial & Operations. Both have been working for Pernod Ricard for a cumulative total of 37 years. Executive Board: The Executive Board prepares and approves all decisions related to the functioning of Pernod Ricard and submits these decisions to the Board of Directors. Board of directors: The Pernod Ricard Board of Directors is composed of 14 members, whom half are independent members and 42% are female directors, while the attendance rate is at 97%. The governance consists of the following committees: the strategic committee directed by Alexandre Ricard; the audit committee directed by Wolfgang Colberg; the nominations, governance and CSR committee directed by Nicole Bouton; the compensation committee also directed by Nicole Bouton. Each of these committees is at least composed of 50% independent members and 100% attendance is required. Shareholder rights: We decided to split the shareholding structure into six blocks. The Société Paul Ricard (family holding co) remains the main investor in the company with a total of 16%, increasing by 7% in two years its holding in the group. The free-float is currently accounting for around 46% of the company shares while it accounted for 41.5% two years ago. Voting rights did not change very much in the recent years. The Société Paul Ricard has a total of 22.4% of voting rights while the free-float is at 41.8%. Thus, the company is becoming more sensitive to changes in financial markets while remaining stable over the time, allowing to perfectly employ its strategy as decided by the board of directors. Social responsibility: The group has renownedly built a strong social responsibility in the past years. According to an inquiry launched by independent survey company Towers Watson, 85% of its employees declare that they are encouraged to act responsibly. The group committed in 2010 to following a roadmap to 2020 under which Pernod Ricard aims to reduce by 30% its CO2 emissions by The group almost fulfilled this goal as it has already reduced its carbon emissions by 27%. 7 Investment risks Source: Registration document Floating 42% Operational risks: Digital (OR1): the group is trying to surf on the digital trend with, for example, the through the «lesnouveauxcavistes.com» e-commerce website initiative. However, group is timid compared to competitors like Diageo, that have partnerships with Amazon Prime to make cocktails tutorials or Deliveroo that can home deliver Diageo s alcohols at all times of the day. 10

11 Probability Pernod Ricard - Student Research. Target Price: Recommandation: BUY Figure 30: Risks matrix Source: Team estimates 20% 15% 10% 5% 0% -5% -10% -15% OR3 OR1 ER1 Impact OR2 ER2 Figure 31: Growth breakdown (%) e2019e2020e FX change External growth Organic growth Source: Company data, Team estimates FR2 FR1 Figure 32: Appreciation of vs. other currencies ( m) Impact on net sales (in m) +1% +2% +3% +4% +5% +6% EUR/USD EUR/CNY EUR/GBP Source: Team estimates How to mitigate: Develop partnerships, especially in China where e-commerce is booming. Online sales only represent 8% of the group s turnover. Severe competition and absence from essential markets (OR2): entry barriers in the beverage market are high but there is already unrelenting competition between the international and local actors. Consumers can easily substitute brands, which forces the group to anticipate the consumer s future needs to remain among market leaders. For example, Pernod Ricard is not present in the beer nor RTD segments, which are thriving and may favor the penetration in emerging markets. How to mitigate: acquire a local beer or baijiu brand in China, India or Africa but we do think this is not consistent with the group s premiumization strategy. Continue expanding in the wine industry is also an option, more likely. Raw material pricing (OR3): the group is threatened by several external matters regarding the fluctuation of raw material prices, such as wheat, potatoes (used is the production of Vodka), corn or rye (used in the production of whiskey), etc. Climate change and pricing pressure could negatively impact the COGS so that the margin would significantly affect EBITDA margin. How to mitigate: by hedging (short term) or partnering with suppliers if necessary (long term). If raw materials were to increase, the group would not be able to increase prices in developed countries where pricing remains challenging due to suppliers control. However, to compensate for the decreasing margin, it should increase prices in emerging countries (supposed to generate organic growth). Financial Risks Exchange rate risk (FR1): as the group has an important international activity (70% of the TO is not European) and produces 72% of its alcohols in Europe, it is strongly exposed to exchange rates fluctuations (both transaction and conversion risk). For instance, a 5% appreciation of the Euro vs. the Dollar would have a negative impact of ca. 130m on turnover. A 5% appreciation of the Euro VS the Yuan would have a less negative, which remains nonetheless significant (- 55m). How to mitigate: the group hedges with currency swaps but not consequently enough compared to the risk. Plus, as we mentioned, the group cannot easily increase the prices. Indebtedness and interest rate (FR2): Pernod Ricard remains consequently indebted even if it is quickly deleveraging. As indebted companies are more sensitive to interest rate changes, the group is dependent to the changes in the interest rate when rolling its debt or re-leveraging. In terms of target price, it increases the WACC and reduces the enterprise value. How to mitigate: increase the cash or improve the management of debt issuances to decrease the net debt and increase debt average duration. Short term, group could also hedge with an interest rate swap for the variable part of its leverage. Context and External Risks Decreasing global alcoholic consumption (ER1): the alcoholic global consumption is declining at a faster rate this past years (e.g. -1.3% in 2016). This slowdown is mainly due to the decreasing consumption in China, Russia and Brazil caused by economic or political issues. Awareness campaigns also tend to lower the consumption in Western Europe. How to mitigate: Pernod Ricard should concentrate in the economic and social environments where consumption is booming and margins are more favorable. Government or tax policy risk (ER2): a change in the government policy or a new law against alcohol consumption would affect the group s growth. For example, the Highway Ban in India dragged the group growth in country to 1% vs. 12% in 2015/16. Another example is the anti-extravaganza campaign in China. How to mitigate: focus on neighbor s countries and travel retail. 11

12 APPENDIX 12

13 Distribution of Pernod Ricard in wine and spirits (%) Pernod Ricard - Student Research. Target Price: Recommandation: BUY Appendix 1 Business description - History 1975 Merger of Pernod&Ricard 1989 Acquisition of Orlando Wyndham 2001 Acquisition of the W&S division of Seagream 2008 Acquisition of Vin&Sprit (Absolut) 2012 Asia becomes the n 1 region for the group 2014 Majority interest in ultra-premium tequila «Avión» 2016 Majoritary interests in: Premium Gin Monkey 47 and Smooth Ambler 1988 Acquisition of Irish Distillers 1993 Creation of Havana Club International s joint-venture 2005 Acquisition of Allied Domecq to become n 2 worldwide 2011 Launch of the Responsib ALL day (for societal responsability 2013 The group fastens its position in Africa 2015 Alexandre Ricard appointed CEO 2017 Acquisition of Del Maguey Single Village, n 1 Mezcal in the US Source: Company data Appendix 2 Brand positioning For a 75cl bottle Standard ($10 - $17) Premium ($26 - $42) Super-premium ($26 - $42) Ultra-premium ($42-84) Prestige (> $84) Vodka Whiskey Source: Company data Absolut Polish Wyborowa 100 pipers Jameson Chivas Chivas Chivas Blenders Pride Ballantine's The Glenlivet The Glenlivet Royal Salute Royal Stag JP Wiser"s Imperial Imperial Blue Passport Scotch Clan Campbell Cognac Martell Martell Martell Anisee Pastis 51 Ricard Gin Seagram's Gin Beefeater Rum Havana Club Havana Club Ready-to-drink Malibu Champagne Perrier-Jouet Perrier-Jouet Mumm Perrier-Jouet Mumm Tequila Olmeca Mum Other spirits Strategic International Brands Strategic Local Brands Kahlua Amarro Ramazzotti Armenia Ararat Vodka Whiskey Wine 30.57% 30.56% 27.29% 27.59% 27.57% 28.57% 28.98% 20.24% 19.75% 19.66% 19.34% 18.98% 19.0% 18.1% 18.6% 18.7% 18.5% 20.0% 20.6% 18.83% 18.30% Source: Annual reports 13

14 Appendix 3 Market analysis (1/2) Main markets Market type Sales growth FY17 Main brands GDP growth rate Population growth rate Market obstacles General comments USA Mature 5% France Mature 1% Jameson, Malibu, Martell, Glenlivet, Olmeca Altos, Avion Jameson, Absolut, Chivas, Ballantine s, Ricard, Havana Club, Mumm, Perrier-Jouet 1,8% 0,69% 0,8% 0,41% Technical impact of back-office mutualisation between Ricard and Pernod on 1 July 2015 Largest market both in Americas and globally Continued strong performance of whiskey, tequila and cognac categories Value growth mainly driven by mix and operational excellence initiatives Growth drivers: a) Rising spending power of population, b) Spirits is the fastest growing alcohol beverage segment in U.S. and it continues to take share from other alcohol beverage categories. Pernod Ricard maintains its leadership position in France with 30% market share (Nielson). UK Mature 7% Absolut, Jameson, The Glenlivet, Mumm,Chiva s, Perrier- Jouet, Plymouth Gin, Campo Viejo 1,02% 0,78% - Dynamic growth for strategic international brands as well as strategic wine portfolio Concentration on prestige part of the market, particularly in London as the number of high-worth individuals is growing. Germany Mature 4% Spain Mature 5% Lillet, Chivas, Absolut, Jameson, Ballantine s, Malibu, Monkey 47, Havana Club, Ramazzoti, Aperitivo Rosato Seagram s Gin and Beefeater, Chivas, Ballantine s, The Glenlivet, Campo Viejo 0,7% 1,19% - 3,2% -0,008% - Market leadership position of the Group Increased focus on prestige categories as Germany is one of the markets with the largest number of high-net worth individuals Key drivers of the growth are prestige portfolio (+19%) and innovation (+12%). Growth of imported brands for international categories; decline of local brands for brandies, schnapps and Colon categories. Success in the aperitif segment Market leadership with 24% market share Pernod Ricard is #1 in gin category with the most complete portfolio: Beefeater Dry, Seagram s Gin, Beefeater 24, Plymouth Gin, Burrough s Reserve, 14

15 Appendix 3 Market analysis (2/2) Poland Emerging 10% Chivas, Ballantine s, Jameson, Absolut, Wyborowa, Ostoya, Pan tadeusz. 2,8% -0,1% - Quickly growing market in Eastern Europe Price-sensitive consumer base, very competitive commercial environment Russia Emerging 16% Ararat, Jameson, Ballantine s, Chivas, Absolut -0,4% 0,18% Difficult environment linked to currency volatility Very dynamic and promising market Penetration of imported Western style spirits is still low 4-5% China Emerging 2% India Emerging 1% Martell, Absolut, Glenlivet, Ballantine s Blender s Pride, Royal Stag, Imperial Blue 6,7% 0,54% 6,9% 1,15% Antiextravaganza campaign, which has seen a crackdown on conspicuous spending and gifting Demonetisation (impact on Q1 and Q2); Highway ban (Impact on Q4 and Q1 FY18); GST (margin pressure on FY18) Return to growth for the first time from FY13 From 2000 to 2010 the growth was driven by the Absolut Chinese consumer and Prestige portfolio. Due to emerging middle class, today Pernod Ricard in China has 2 different routes to market: premium and prestige Market leadership with 45% value market share Temporary deceleration of growth in FY17 due to regulatory changes Leadership position in premium, local and international whiskey South Africa Emerging 15,7% Jameson, Martell, Chivas, Ballantine s, Absolut -1,3% 1,62% Economic difficulties across the continent related to petrol and commodity prices #1 market in Africa At the group level, the region is small, but it continues to grow double digits year by year. Growth drivers: a) fast growing consumer base; b) emerging middle class; c) fast urbanization. Source: Company data, S&P Capital IQ, team analysis 15

16 In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales In million of 9 liters box sold Share of total net sales Pernod Ricard - Student Research. Target Price: Recommandation: BUY Appendix 4 Evolution of Strategic International Brands Absolute Jameson Havana Club 12 26% 7 16% 5 9.0% % 25% 24% 24% 23% 23% % 12% 10% 8% 6% 4% 2% % 8.6% 8.4% 8.2% 8.0% 7.8% % % % Source: Annual reports Source: Annual reports Source: Annual reports Malibu % 8% 7% 6% 5% 4% 3% 2% 1% 0% Martell % 4.5% 4.4% 4.3% 4.2% 4.1% 4.0% 3.9% 3.8% 3.7% The Glenlivet % 2.0% 1.5% 1.0% 0.5% 0.0% Source: Annual reports Source: Annual reports Source: Annual reports 0.4 Perrier-Jouet 0.7% 8.0 Ballantine's 14.5% 5.4 Ricard 11.5% % 0.5% 0.4% 0.3% 0.2% 0.1% % 13.5% 13.0% 12.5% 12.0% % 10.5% 10.0% 9.5% % % % Source: Annual reports Source: Annual reports Source: Annual reports 16

17 Appendix 5 SWOT analysis S O Major international player in mature markets and in highgrowth potential markets Robust distribution network and negociation power due to its size Leading brands in each main category of alcohol Improving financials thanks to high-margin brands Suitable acquisitions at sensible multiples Sales diversified by region and type of alcohol «Brand Builder»: the group is strongly invested in the development of its new acquisitions Commitment to an environmental and socially responsible chart Strong advertising and branding of its portfolio «Drink less but drink better» trend North american market is growing durably and steadily GDP, Medium class and population growth in the emergeant regions (China, India, Africa, Eastern Europe) Premiumization policy: weak price elasticity on the demand on top-of-the-range products Increasing of the aerian international trafic and so of the travel retail sales Growth of the market for RTD and punchs Low presence in digital that can only be improved (latest to arrive = weakest) Penetration in emergent markets is not saturated yet Strong lobby (alcoholic beverages) Diminishing custom taxes in India W International group dependent on Production centralized in europe (transaction and conversion risks) economical and political fluctuation (FX risk) Not present in the beer segment Lack of presence in the market in the RTD (Malibu) Low digital presence despite efforts Rising free-float, increasing the risk of loosing control Still important indebtedness -> sensitive to increasing interest rates Negative price/mix effect (0% on the 4 first brands) Vodka and Aniseed are not trendy anymore No customer loyalty Slowing growth rate of the industry due to a slightly decreasing global consumption Counterfeiting of alcoholic beverages in China Competition, especially in india Stiffening regulations and taxation on the liqueur industry that can play on the consumption and the margins Consumer health concerns and sensibilisation campaingns mostly in Western countries lead to a maturization of the european liqueur market Being perceived as sin stocks and non-isr investments Increasing price of raw materials T Source: Team analysis Total Strenghts 5 4 Total Threats Total Weakenesses Total Opportunities 17

18 Appendix 6 Porter s five forces analysis Threat of substitute 4 products Threat of new entrants Bargaining power 1 4 of buyers Legend 0 No threat 1 Insignificant threat 2 Low threat 3 Moderate 4 Significant threat 5 High threat 2 Industry rivalry 3 Bargaining power of suppliers Rivalry among competitors: Moderate The competitors are mostly specialized in a region, brands or price range. Margins in the sector are high, meaning that the competition is not severe (Herfindahl Hirschman index of 451). Nevertheless, there is a direct competition from leading groups on the wine and whiskey segments. Threat of new entrants: Low The industry is composed by a significant share of local actors and a few main actors, holding most of the market share. Highly profitable markets tend to attract new actors. However, the strong barriers at the entry make it roughly likely. Note that local actors are continuously growing in emerging countries on specific products (Indian whiskey). Bargaining power of buyers: Significant Buyers are the final consumer, restaurants/ bars/nightclubs or distributors. They are sensitive to price changes and reputation. Therefore, they might easily redirect themselves to competition. However, as Pernod Ricard is focused on high income per capita consumers and offers premium products, the power of buyers is not that significant. Bargaining power of suppliers: Low The company produces all its alcohols. Hereby, it is sensitive to raw materials prices (corn, wheat, potatoes) To mitigate that risk, the company buys in high quantity and from several suppliers to generate economies of scale Threat of substitute products: Significant Substitutes are an non negligible threat. Water can go from indirect substitution to direct substitution (Other brands, RTD, supplier s brands, local alcohols, other types of alcohols like beer ) 18

19 Appendix 7 PESTEL analysis P Politics Influence of the politics on the alcohol distribution and taxation policies (Highway ban, Anti-extravaganza campaign) Actions from public Authorities to sensibilize to alcohol s dangers (Sensibilization campaigns) Political instability in countries where PR is implemented (Africa, Asia, South-America ) E Economy Inflationary environments can affect the mix-price of the group Unexpected and strong appreciation of vs. $ (Production in euro and sales mainly in dollars) Increasing interest rates (US 10Y and tensions in european bonds) General context of economic recovery worldwide Increasing GDP and income per capita in emerging countries -> benefiting premium products Increasing wine demand worldwide for the second consecutive year S Sociocultural Trend to consume less but better, especially in spirits: «Drink less and drink better» Youth s alcoholic consumption increasing Growing «home consumption», to savour the moment and less consumption in bars, especially among young people (PR s target) Productssubstitution: shifting from vodka to wines, whiskeys and tequila Booming population in emergings countries and especially youth -> increasing possible consumer base T Technology Innovation and new lauch of products are essentials in the industry to retain and attract the consumer, leading to significant R&D investments. Example: Fast-growing RTDs Rise of e-commerce, especially in China Manufacturingtechniques, reducing costs E Environment Increasing environmental responsability in Western countries Obligation to comply withenvironmental laws and contraints (could increase costs) Consumers tend to buy ethical brands and companies L Legal Publi-promotional restrictions (Evin Law for example) Sales restrictions for under-age people Quality control of wines in some countries. Restrictions in terms of origins designation blocking actors of the liqueur industry to expend as they wish (Irish wiskeys, champagne ) Alcohol and alcohol production is banned from certain regions of the world (some indian regions for example) Source: Team analysis 19

20 Appendix 8 Comparable companies analysis Profitability Analysis EBITDA Margin Net Income Margin Company FY 2014 FY 2015 FY 2016 LTM FY 2014 FY 2015 FY 2016 LTM Brown Forman 34.1% 34.4% 35.9% 35.0% 22.0% 21.8% 34.5% 23.0% Diageo 33.6% 31.7% 31.5% 32.2% 21.9% 22.0% 21.4% 22.1% Remy Cointreau 16.2% 18.1% 18.8% 22.5% 6.0% 9.6% 9.7% 17.4% Constellation brands 27.3% 28.8% 31.4% 36.3% 39.9% 13.9% 16.1% 23.6% Davide Campari 21.6% 23.2% 22.8% 22.5% 8.3% 10.6% 9.6% 11.4% Lanson-BCC 14.0% 12.6% 10.9% 10.1% 5.8% 4.6% 4.3% 4.0% Pernod Ricard 28.2% 28.4% 28.6% 28.8% 12.8% 10.1% 14.2% 15.5% Mean 25.0% 25.3% 25.7% 26.8% 16.7% 13.2% 15.7% 16.7% Median 27.3% 28.4% 28.6% 28.8% 12.8% 10.6% 14.2% 17.4% Solvency Analysis EBIT/Interest Exp Net Debt / EBITDA Company LTM LTM Brown Forman 44.30x 36.55x 22.47x 16.50x 0.47x 0.79x 1.14x 1.84x Diageo 4.89x 4.17x 5.13x 6.82x 2.85x 3.52x 2.95x 2.09x Remy Cointreau 5.76x 5.91x 8.34x 11.96x 2.51x 2.68x 2.32x 1.58x Constellation brands 5.79x 5.62x 5.16x 6.66x 4.45x 4.32x 4.18x 3.20x Davide Campari 4.92x 5.24x 5.07x 7.19x 3.01x 2.26x 3.19x 3.15x Lanson-BCC 4.31x 4.21x 3.73x 4.00x 12.25x 14.80x 17.69x 20.46x Pernod Ricard 4.09x 4.50x 4.89x 5.91x 3.77x 3.73x 3.54x 3.03x Mean 10.58x 9.46x 7.83x 8.43x 4.19x 4.59x 5.00x 5.05x Median 4.92x 5.24x 5.13x 6.82x 3.01x 3.52x 3.19x 3.03x EV multiples EV / EBITDA EV/Revenue Company LTM LTM Brown Forman 17.69x 21.33x 19.89x 22.86x 6.04x 7.34x 7.14x 8.00x Diageo 17.23x 20.64x 20.76x 18.64x 5.79x 6.54x 6.53x 6.01x Remy Cointreau 21.40x 20.75x 20.20x 22.78x 3.48x 3.51x 3.79x 5.13x Constellation brands 14.19x 18.40x 20.00x 18.15x 3.87x 5.30x 6.28x 6.59x Davide Campari 14.14x 15.37x 17.77x 20.38x 3.06x 3.57x 4.06x 4.59x Lanson-BCC 18.79x 21.23x 25.17x 29.80x 2.63x 2.68x 2.75x 3.01x Pernod Ricard 14.58x 13.49x 14.81x 14.95x 4.11x 3.84x 4.23x 4.31x Mean 16.86x 18.74x 19.80x 21.08x 4.14x 4.68x 4.97x 5.38x Median 17.23x 20.64x 20.00x 20.38x 3.87x 3.84x 4.23x 5.13x Per Share Analysis P/BV P/E (Diluted) Company LTM LTM Brown Forman 10.34x 10.83x 12.66x 15.74x 27.08x 32.48x 19.55x 32.19x Diageo 6.41x 5.82x 6.28x 5.99x 21.03x 24.03x 25.54x 23.13x Remy Cointreau 3.21x 2.94x 3.17x 4.01x 52.94x 34.00x 34.35x 43.53x Constellation brands 3.06x 4.04x 4.60x 5.23x 6.85x 29.83x 31.33x 23.92x Davide Campari 2.38x 2.88x 3.02x 3.89x 29.45x 29.00x 35.43x 35.94x Lanson-BCC 1.02x 0.85x 0.80x 0.90x 14.27x 17.73x 18.98x 23.76x Pernod Ricard 2.07x 1.80x 2.08x 2.25x 23.88x 27.62x 22.60x 22.22x Mean 4.07x 4.16x 4.66x 5.43x 25.07x 27.81x 26.83x 29.24x Median 3.06x 2.94x 3.17x 4.01x 23.88x 29.00x 25.54x 23.92x Source: S&P Capital IQ 20

21 Reported growth in 2016/17(%) janv.-15 févr.-15 mars-15 avr.-15 mai-15 juin-15 juil.-15 août-15 sept.-15 oct.-15 nov.-15 déc.-15 janv.-16 févr.-16 mars-16 avr.-16 mai-16 juin-16 juil.-16 août-16 sept.-16 oct.-16 nov.-16 déc.-16 janv.-17 févr.-17 mars-17 avr.-17 mai-17 juin-17 juil.-17 août-17 sept.-17 oct.-17 nov.-17 déc.-17 Voulme in k transactions (Pernod Ricard) Pernod Ricard - Student Research. Target Price: Recommandation: BUY Appendix 9 Share price performance 150 R²: CAC Pernod Ricard Source: S&P Capital IQ, Bloomberg Appendix 10 Performance positioning (Pernod Ricard vs. peers) 22% 17% Diageo 12% 7% 2% Rémy Cointreau Pernod Ricard Constellation Brands 10% -3% 15% 20% 25% 30% 35% 40% Brown Forman -8% Operating margin in 2016/17 (%) Source: S&P Capital IQ, 21

22 Appendix 11 Key financials Appendix 12 M-Score Key financial ratio e 2019e 2020e Liquidity Ratio Current Ratio 1.44x 1.47x 1.77x 1.77x 1.80x 1.83x Quick Ratio 0.37x 0.38x 0.49x 0.42x 0.46x 0.48x Cash Ratio 0.11x 0.11x 0.16x 0.07x 0.12x 0.13x Efficiency Ratio Total Asset Turnover 0.30x 0.28x 0.30x 0.30x 0.31x 0.32x Fixed Asset Turnover 4.07x 3.81x 3.87x 3.80x 3.58x 3.37x Acc Receivable Turnover 6.63x 6.43x 6.57x 6.33x 6.41x 6.52x Inventory Turnover 1.68x 1.63x 1.70x 1.68x 1.68x 1.70x Payables Period (days) Operating Cycle (days) Cash conversion Cycle (days) Profitability Ratio Gross Profit Margin 61.9% 61.9% 62.2% 62.0% 62.2% 62.5% EBITDA Margin 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% EBIT Margin 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% Net Income Margin 10.1% 14.2% 15.5% 15.9% 16.5% 17.5% ROA 3.0% 4.0% 4.6% 4.8% 5.1% 5.5% ROE 6.5% 9.1% 10.0% 10.0% 10.1% 10.5% ROCE 8.8% 8.8% 9.2% 9.2% 9.2% 9.6% SG&A/Sale 36.0% 35.8% 35.8% 35.7% 35.4% 35.1% Solvency Ratio Debt Ratio 56% 56% 54% 52% 50% 48% Debt to Equity Ratio 1.29x 1.27x 1.17x 1.07x 0.99x 0.91x Equity Multiplier 2.29x 2.27x 2.17x 2.07x 1.99x 1.91x Long Term Debt Ratio 94.8% 94.7% 94.7% 94.3% 94.0% 93.5% Interest Coverage Ratio 4.50x 4.89x 5.91x 6.06x 6.48x 6.95x Source: S&P Capital IQ, Team estimates M score = DSRI GMI AQI SGI DEPI SGAI TATA (0.327 LVGI) Inputs Variables Net Sales Costs of Goods Sold Net Receivables Current Assets Property Plant and Equiptment Depreciation Total Assets Selling general and Administrative Expenses Net Income Cash Flow from Operations Current Liabilities Long-term Debt Derivated Variables Day's Sales Receivables Index (DSRI) Gross Margin Index (GMI) Asset Quality Index (AQI) Sales Growth Index (SGI) Depreciation Index (DEPI) SG&A expenses Index (SGAI) Leverage Index (LVGI) Total Accuals to total assets (TATA) Source: S&P Capital IQ, Team estimates M-score Result: We observe that the company is unlikely to manipulate its earnings as its M-score is always <

23 Appendix 13 Income statement Income statement ( m) Historical Projected e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Total Revenue COGS Advertising and Promotion costs Structuring costs EBITDA EBITDA Margin (in %) 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% 30.7% 31.5% 31.7% 31.9% 32.1% 32.3% 32.6% D&A EBIT EBIT Margin (in %) 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% 28.2% 29.0% 29.2% 29.4% 29.6% 29.8% 30.1% Net financial income Net non current income Pretax Income in % of Total Revenue 12.9% 19.2% 20.6% 20.9% 21.7% 23.0% 23.9% 24.8% 25.2% 25.5% 25.8% 26.2% 26.5% Income Taxes Total Net Income In % of Total Revenue 10.3% 14.5% 15.8% 16.2% 16.8% 17.8% 18.5% 19.2% 19.5% 19.8% 20.0% 20.3% 20.7% Minority Interests Group Net Income In % of Total Revenue 10.1% 14.2% 15.5% 15.9% 16.5% 17.5% 18.3% 18.9% 19.2% 19.5% 19.8% 20.0% 20.4% Source: Company data, team estimates Income statement inputs Historical Projected e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Sales (% YoY growth) 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% 3.3% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% Organic growth (%YoY) 3.3% 1.8% 3.6% 4.2% 3.7% 3.6% 3.3% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% Cost of Goods Sold (% margin) 38.1% 38.1% 37.8% 38.0% 37.8% 37.5% 37.0% 36.5% 36.5% 36.5% 36.5% 36.5% 36.5% Advertising and promotion expenses (% margin) 19.0% 19.0% 18.8% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% Structuring costs (% YoY growth) 0.4% 1.0% 4.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Depreciation & Amortization (% sales) 2.5% 2.5% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Amort. of Goodwill and Intangible Assets (% sales) 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Unusual items (% sales) 7.6% 2.1% 1.8% 1.5% 1.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Tax rate (% EBT) 20.1% 24.5% 23.6% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.1% Source: Company data, team estimates Top line growth e 2019e 2020e 2021e Americas Group structure (%) 0.6% -2.1% -0.3% 0.0% 0.0% 0.0% 0.0% FX change (%) 8.2% -2.0% 0.9% -3.0% 0.0% 0.0% 0.0% Organic growth (%) 5.6% 4.0% 6.9% 5.5% 4.5% 4.0% 3.5% Reported growth (%) 14.4% -0.1% 7.5% 2.5% 4.5% 4.0% 3.5% Asia/ROW Group structure (%) -0.2% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% FX change (%) 9.9% 0.8% 0.7% -2.8% 0.0% 0.0% 0.0% Organic growth (%) 4.0% 0.8% 1.4% 5.6% 5.0% 5.0% 4.5% Reported growth (%) 13.7% 1.3% 2.1% 2.8% 5.0% 5.0% 4.5% Europe Group structure (%) -0.4% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% FX change (%) -1.4% -1.9% -0.9% -0.5% 0.0% 0.0% 0.0% Organic growth (%) 0.3% 1.1% 3.4% 1.2% 1.0% 1.3% 1.5% Reported growth (%) -1.5% -0.8% 2.8% 0.7% 1.0% 1.3% 1.5% Source: Company data, team estimates 23

24 Total amount of corporate bond issued Pernod Ricard - Student Research. Target Price: Recommandation: BUY Appendix 14 Balance sheet statement Balance sheet statement ( m) Assets Historical e 2019e 2020e 2021e Projected 2022e 2023e 2024e 2025e 2026e 2027e Intangible assets Goodwill PPE Other LT Assets + LT Inv Deferred Tax Assets Total non-current assets Inventory Total Receivables Other Cash Total current assets Total assets Equity and liabilities e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Total equity LT Debt Deferred tax liabilities Other non current assets Total non-current liabilities Accounts payable Accrued expenses Other current liabilities Total current liabilities Total equity and liabilities Source: Company data, team estimates Balance sheet inputs Historical Projected e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Days Payable Outstanding Days Sales Outstanding Days Inventory Held Prepaid and other current assets 1.7% 1.2% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Accrued Liabilities 7.1% 6.7% 6.8% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Other current liabilities 6.4% 6.4% 5.5% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% Source: Team estimates Appendix 15 Corporate bonds Source: Bloomberg 0 juin 20 avr-21 janv-22 juil-22 sept-23sept-24 mai-26 juin-26 janv-42 Maturity 24

25 Appendix 16 Cash flow statement Cash flow statement ( m) Historical Projected e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Net Income D&A Net change in WCR Other operating items Cash flow from Ops CAPEX Other investing items Cash flow from Inv FCF Dividends paid Debt issuance / (rep.) issuance / (rep.) Cash flow from fin Net change in cash flow Beginning cash balance Ending cash balance Source: Company data, team estimates Cash flow inputs e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e CAPEX (% sales) -3.8% -3.8% -4.1% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% Dividends (% earnings) -53.5% -40.2% -35.6% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% Other Operating activities (% Dep.) 0.3% 0.3% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 0.0% Purchase of financial assets (% Net Income 9.2% 8.7% 2.5% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Source: team estimates Appendix 17 Reconciliation of Equity Value Net Debt ( m) e 2019e 2020e LT Debt (+) ST Debt (=) Total Debt (-) Cash (=) Net Debt Net Debt/EBITDA Source: Company data, team estimates Enterprise Value Net debt Minorities Equity Value Source: Company data, team estimates 25

26 Appendix 18 Valuation DCF (In million) 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Sales % growth 2.1% 3.6% 3.6% 3.3% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% EBITDA % margin 28.8% 29.3% 29.9% 30.7% 31.5% 31.7% 31.9% 32.1% 32.3% 32.6% EBIT % margin 26.3% 26.8% 27.4% 28.2% 29.0% 29.2% 29.4% 29.6% 29.8% 30.1% Taxes EBIAT (+) Depreciation & Amortization (-) Capital Expenditures (-) Increase in Net Working Capital Unlevered Free Cash Flow Discount Factor Present Value of Free Cash Flow Source: team estimates Appendix 19 Monte Carlo simulation WACC by geographic area E/(E+D) D/(E+D) β Rf E(Rm) Cost of equity Cost of Debt Corporate tax rate WACC Asia / ROW 62.6% 37.4% % 11% 9.9% 3.80% 22% 7.3% Europe 62.6% 37.4% % 8.2% 5.0% 3.80% 23% 4.2% Americas 62.6% 37.4% % 10% 10.3% 3.80% 23% 7.6% Total 62.6% 37.4% % 9.7% 8.5% 3.8% 22.5% 6.40% Source: team estimates Monte Carlo simulation Inputs Stock price at T Wacc 6.40% Period 1 year Volatility 10% Trials DCF: Monte Carlo simulation outputs Statistics Gross Mean Median Standard Deviation Variance Kustosis 0.19 Skewness 0.30 Coeff of Variation 0.10 Minimum % Percentile % Percentile Maximum Monte Carlo simulation outputs EV/EBITDA: Recommendation Range Frequency SELL < HOLD BUY > Source: team estimates 26

27 Appendix 20 Governance (1/2) Board of directors Independent Female/Male Composition of the board Position at Pernod Ricard Committee Nb of years on the Board Compensation (in EUR) Number of shares End of the term Anne Lange Yes Female - Strategic Manousos Charkoft No Male Employee Director Compensation Wolfgang Colberg Yes Male - Strategic, Audit, Nomination, Governance, CSR Kory Sorenson Yes Female - Compensation, Audit Gilles Samyn Yes Male - Audit Veronica Vargas No Female Pierre Pringuet No Male Chairman of Board of Compensation, Directors Strategic Compensation, Nicole Bouton Yes Female - Nominations, Governance, CSR César Giron No Male - Strategic, Nominations, Governance, CSR Sylvain Carré No Male Employee Director Martina Gonzales-Gallarza No Female Paul-Charles Ricard No Male Representative of Société Paul Ricard Ian Gallienne Yes Male - Compensation Alexandre Ricard No Male CEO and Chairman Strategic Source: registration document 100% 90% 49.8% 3.0% 54.2% 16.3% 54.3% 80% 83.7% 70% 97.0% 60% 50% 40% 50.2% 45.8% 45.7% 30% 20% 10% 0% Brown Forman Diageo Pernod Ricard Constellation Brands Rémy Cointreau Free-float Non-float Source: S&P Capital IQ, registration document 27

28 Appendix 21 Governance (2/2) Based on ISS Governance methodology: a decile score of 1 indicates lower governance risk Board structure: 7/10 - Independency Compensation: 2/10 - Transparency Total score: 4/10 Shareholder rights: 5/10 - Double voting rights Audit and risk oversight: 2/10 - Adverse opinion - Restated financials Board structure: the AFEP-MEDEF code had considered the possibility that Ian Galienne and Gilles Samyn, administrators at Groupe Bruxelles Lambert (GBL) could be not independent when GBL crossed the 10% voting rights threshold. Note that the independency rate is at only 50% Shareholder rights: double voting rights are accorded to registered shareholder owning share since at least ten years. According to us, only 5 major shareholders own double voting rights («Société Paul Ricard», «Mr Rafaël Gonzalez-Gallarza», «Directors and Management of Pernod Ricard», «Shares held bypernod Ricard employees», «Groupe Bruxelles Lambert») Compensation: the group is transparent concerning compensation as it provides Administrators and Executive Directors compensations. Note that 2016/17 granted compensation established at 3.6bn (+33% vs 2015/16), mostly due to gaining value of group s shares. Audit and oversight: as far as we know, neither of Pernod Ricard s auditors (KPMG S.A and Deloitte & Associés) restated financials or issued adverse opinions over the past two years Source: team analysis 28