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

FILE PHOTO: Oak barrels are stored in a cellar for storing rare and old cognac at the Remy Martin factory in Cognac, southwestern France, November 6, 2015. REUTERS/Regis Duvignau/File Photo

PARIS (Reuters) – Remy Cointreau 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.

The maker of Remy Martin cognac and Cointreau liqueur, which reported higher-than-expected annual profits on Thursday, said the strategy of focusing on premium products to boost profit margins was delivering strong results. It also raised its medium-term profitability forecasts.

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

Remy shares were down more than 4 percent in early session trading, although the stock is still up 6 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.

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 .

RAISING MARGIN TARGETS

Under the leadership of CEO Valerie Chapoulaud-Floquet, 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.

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

The private consumption of drinks and spirits 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.

Remy Martin cognac, which makes 86 percent of group profits, achieved a margin of 26.9 percent of sales, representing an organic increase of 1.3 percentage points.

Demand was strong in Greater China, Singapore and Japan as well as the United States, Russia, and in travel retail outlets.

Operating profits for the year ended March 31 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 said it aimed to increase operating profits on a like-for-like basis in the current financial year that started on April 1.

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.

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