Lacking visibility in China but valuation getting easier to swallow
- Source of opportunity
Remy’s share price has fallen 20% in the last month amid rising concerns over
the macro outlook in China and overall health of the EM consumer. While we
too have become more bearish on the near-term outlook in China, we believe
recent share price underperformance vs. the market is overdone. We expect
strength in the US (30% of sales) to offset weakness in China (20% of sales)
and see FX tailwinds from €:$ weakness benefiting FY16 earnings. Valuation
looks increasingly attractive on a P/E and inventory value basis. Furthermore,
we continue to view Remy as a potential M&A target given its strong brands
and access to cognac inventory.
- Catalyst
Remy Cointreau will report 1H FY16 sales (March-September) on October
16, 2015, where the company will provide an update on current trading,
with focus likely to continue to be on China. Remy will announce 1H FY16
results on November 26, 2015, where we expect better visibility on the
profitability outlook for the FY. The company has guided for positive growth
in operating profit for the FY (our estimates indicate flat growth).
- Valuation
We value Remy on a 26x June 2017E P/E (based on a three-year average P/E
and EV/stock value implied multiple) and include a 30% weighting for an
M&A-based valuation, as we view Remy as an attractive acquisition target
(Remy ranks 1 in our M&A framework). Our new 12-month price target of
€69 (vs. €75 previously) reflects 4%/10% cuts to our FY16/17 EPS estimates
for latest FX movements and our more negative outlook for China in the
near term.
- Key risks
(1) Further deterioration in the Chinese cognac market; (2) adverse FX
movements (notably, the strengthening of the € and/or weakening of the
CNY); (3) value-destructive M&A; and (4) adverse regulation.