Raising Our FVE of Pernod on Strong First-Half Performance in Fiscal 2023

Pernod Ricard continued the trend of beverage large caps reporting better-than-expected performance, with Europe being the standout region in the first half of fiscal 2023. We are raising our medium-term margin assumption and our fair value estimate to EUR 185 per share from EUR 167 because of the valuation impact of the strong performance of the year, and because we think medium-term margins may be structurally higher than we had previously assumed. Nevertheless, with the stock trading at 20 times fiscal 2024 earnings, we believe Pernod is currently slightly overvalued.

First-half organic net sales growth of 12% year over year was very strong, driven by 10% price/mix. Across regions, familiar trends were apparent, consistent with other beverage companies’ performance this period. Asia contributed the most to sales growth with 18% organic growth, as tourists returned to several markets. This is likely to continue for the remainder of the fiscal year because China has abandoned its zero-COVID-19 policy and there is likely to be pent-up demand in the on-premises channel. Europe was also strong, with 6% organic sales growth being well above our 4% forecast and an acceleration from the 4% growth reported in the first quarter. We believe tourism is supporting the growth rate in Europe, which we expect to soon revert to its historical mean in the low single digits.

First-half gross margin expansion of 5 basis points was impressive in light of the severe cost inflation that was passed through. It is also remarkable that this growth was achieved without a step up in marketing spending, which remained at 16% of sales. Management has guided to a similar level for the rest of the fiscal year, although we note that Heineken has increased its brand investments, and competition could increase in the remainder of the year. Our valuation assumes some increase in customer acquisition costs next year, but we still believe a 29% operating margin is achievable in the medium term.