Pernod Ricard SA (RI)

Source: RI website

I am back after a travel hiatus and this post is dedicated to the readers who are following my blog since I do get pangs of guilt that I am not posting often enough.

I hesitated doing analysis of Pernod Ricard SA ("RI") as I have already covered Diageo ("DGE") previously. I picked DGE instead of RI simply because the price of DGE was irresistibly low and I was confident that we can make some happy money out of it. We did thus I decided that RI was worth a look as well since they are the 2nd largest global distiller and our fees would be lower too.

With a new CEO and Chairman Alexandre Ricard starting in early 2015, I was not too sure what changes he would bring to RI. Although he is part of the Ricard family and has been in the company since 2003, yet I hesitate as it is human nature to want to put your stamp on how things are done when you are in charge. It also bothers me that he will take up both the CEO and Chairman role which basically means checks and balances are lower and a whole lot of responsibility on the shoulders of one man. Maybe it's because they adhere to the AFEP-MEDEF code of corporate governance which differs from the Cadbury code.

People are what companies are made of. If the founding family is still running the show, I am all for it as long as they have the required expertise, practices remain fair and transparent and minority shareholders are not being taken for a joyride to nowhere.

I should be doing some comparison between the two and I will, although I must say that in terms of stock charts, they tend to mirror each other. Both companies were also rejigging their portfolios through acquisitions and disposals and this sector remains highly competitive with fine tuning expected to continue albeit at a slower pace. But with boutique vodka being all the rage, Absolut could be facing some nibbling away of its sales by such young upstarts.

DGE and RI are slugging it out in India, now that China is out of the picture and while it seems that DGE has the advantage through its ownership of United Spirits Ltd (USL), there have been reports that RI seems to be making some headway. DGE and RI do have some brands going head on such as RI Absolut vs DGE Smirnoff, RI Chivas Regal vs DGE Johnnie Walker, RI Martell vs Hennessy etc. My bet is on DGE coming out tops in this bloody battle, by using volume of USL to entice and at the same time stuffing the market with their premium brands.

I think DGE still makes more sense to me due to its product coverage which includes beer and it has both hands into China and India which would give them much room for growth in the future. ACCICB was bugging me about SABMiller much earlier before DGE but I wasn't keen. But if I am going to continue this slippery slope of sector analysis, I would probably do a post on it later, maybe even  throw in Remy Cointreau for the sake of it.

RI has many good brands in its stable such as Chivas Regal, Martell, Absolut, Kahula, Jacob's Creek etc. Interestingly, Absolut tops the charts for having the highest volume sold (2013/14: 11.1 million) and trailing behind in 2nd place was Ballantine's that sold 5.9 million of 9-litre cases. I was hunting high and low for profitability numbers for each brand so that I can co-relate the profitability and volumes shipped but nope can't find the information in its annual report.

Currently Asia/Rest of the World is the Group's biggest region in terms of net sales (2013/14: 38%) and recurring profit from current operations (2013/14: 43%). Even then, they reported negative growth due to China and while India delivered strong results, that was negated by the weakening of the rupee against the euro. Overall, numbers are down and with 6 months to go before its next annual report, I wonder whether results will get better.

Since the last quarter of the calendar year is where they make about a third of their sales due to the string of festivals, it would look really bad for them if they don't improve their results. They have quite a lot of bond debts as well (2014: 7,773) which is almost equivalent to their net revenue (2014: 7,945). In fact, they have so many bond issues in the past few years, sometimes more than once a year, that I was thinking that buying the bonds could be much better.

Ordinary shares in RI have double voting rights if they have been nominally registered to the same shareholder for an uninterrupted period of ten years starting from 12 May 1986. I am pretty sure that the Ricard family which currently owns 13.14% of shares has fulfilled that condition since it allows the transfer following the division of an estate or liquidation of assets between spouses and even through donations to a spouse or close relatives. That translates to 19.17% of voting rights and this is before we add in shares held by directors, management and employees of RI. What bothers me is how this tilts the balance to majority shareholders who intend to hang around like say forever and obviously institutional shareholders don't belong to that crowd.

The current stock price is at 92.10 and at this level, I hesitate to enter and even if it drops, I doubt it will drop as quick or as deep as DGE or bounce back as strong for that matter. I think I would put this into my KIV list of stocks to watch.  


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