* We expect Q4FY to remain heavily impacted by Chinese destocking
Remy reports 2014FY sales on 17 April. We expect Remy's Cognac organic sales to
decline -25% in Q4FYE y/y (-32% in Q3FY y/y). This performance will still be heavily
impacted by China destocking (China c35% of EBIT), and we do not believe that the
Chinese New Year has shown a meaningful inflection point in trend. However, Remy is
holding pricing firm in China. In the US, the high end on-trade is proving more resilient
than casual dining, but we expect Remy's shipments to run somewhat below depletions
in Q4FYE. UBSe -9.7% group organic sales decline for 14FY (-10.6% for Q4FYE)
compared with -7.5% previously.
* We now assume -33% organic EBIT decline for 2014FYE
Remy's former CEO indicated that 14FYE organic EBIT could be -20/-25% in November
2013. However, given greater than expected China destocking in Q4FY we lower our
assumption from -22% to -33%. Remy has indicated that every extra month of
destocking in Greater China (all depletion trends alike) impacts 14FY group EBIT by 8-
10%. In addition we believe A&P spend will remain high in 14FY in addition to higher
distribution costs (Remy is opening owned distribution in the UK on 1 April).
* Remy remains at the sharp end of the China anti-extravagance initiatives
While we remain positive on global Cognac mid to long-term, Remy's recovery will
likely lag its peers in China given that it over-indexes those channels impacted by antiextravagance
in China (35-40% of its China sales), and lacks the global distribution of
Pernod or Moet Hennessy to diversify demand as rapidly. While we expect 5% organic
sales growth for Cognac in 15FYE, we expect H115FY to see continued destocking.
* Valuation: Neutral, some valuation support from Cognac inventory value
We cut px EPS by -16% in 14FY (organic downgrade and higher tax rate of 33% on
country mix) and -17% in 15FY. We lower our DCF-based PT to €60, seeing some
support in the value of Remy's Cognac inventory (market value of 2-3x the book value
of €946m in 13FY), the potential to resume the buy back or make acquisitions given
1.7x net debt/EBITDA for 14FYE. Next catalyst is Pernod Asia seminar on 27 March.