Rémy Cointreau: Hangover Continued in FY24, Shares Near COVID Trough

Company Update (RCO FP) (Buy): Results on June 6 will likely look worse than they are, with a collapse in U.S. Cognac sales that is likely temporary.

Highlights

• Value depletions grew LSD in FY24, but sales look worse with a 19% decline.

• EMEA and APAC both grew slightly; China depletions up 75% since FY20.

• U.S. Cognac volume depletions fell 21% to be 23% lower than pre-COVID.

• Shares are now at 26x FY19 EPS and earnings have grown since.

• With shares at €84.85, we see a total return of 79% (38.2% p.a.). Buy.

Introduction

We revisit our Buy rating on Rémy Cointreau (“RCO”) ahead of FY24 (ending March 31) results scheduled for June 6. RCO shares have hit a new multi-year low this week, back to levels last seen in the COVID crash of March-April 2020:

RCO Share Price (Last 5 Years)

Source: Google Finance (29-May-24).

We have made a significant mistake on RCO. Since we first published our research on RCO with a Buy rating in December 2019, shares have lost 18.8% (in Euros, after dividends), including 21.0% since our last article in December 2023. While RCO has never been part of our “Select 15” model portfolio, our bullish view on the overall Spirits sector means we have included Diageo since the portfolio’s inception at the start of 2023, and the position currently shows a loss of 17.9% (in Pounds; 16.3% in Euros). In real life, RCO is a sub-1% position but one that has close to halved.

We believe there is significant potential upside in RCO stock. The share price is now at ~26x pre-COVID FY19 earnings and was once 152% higher. Reported FY24 EPS will likely show a 35% decline, but this was made worse by U.S. destocking, and we believe “real” earnings have grown since FY19. However, our thesis requires a belief in strong long-term cognac demand that is only weakly supported by recent data, but upside is unlikely to materialize in the near term.

RCO has reported a 19.2% organic decline in sales, and EBIT is likely to fall by 30%. However, reported sales were made worse by destocking in the U.S., and group value depletions actually grew low-single-digits organically, including a low-single-digit growth in China, a low-single-decline in EMEA and a mid-teens decline in the U.S.

(The rest of this article is for paid subscribers only, but unlocking it costs just $10; a bottle of entry-level Hennessy VS Cognac currently sells for ~$40 at Costco in the U.K.)