Exane BNP Paribas equity research : Rémy Cointreau (-):
FY 08/09 sales on 16 April

TP: EUR20 . Upside: 1%

Beverages (-) . France . Price (08 Apr. 09): EUR19.7

Falling organic sales set to continue: we forecast -4% for the full year

We forecast organic sales to decline by 12.7% in Q4, leading to a full-year decline of 4.0%. Across all of its divisions, Rémy Cointreau suffered from a significant deterioration in its performance in Q3, with organic sales falling 9.2% following 7.1% growth in Q2. Approximately half of this collapse was due to de-stocking in Russia and the US, but the underlying weakness was clear. We expect the company's issues to intensify in Q4.

The company is very vulnerable to trading down

Rémy Cointreau has significant exposure to Europe (48% of group sales) and to North America (31%). These mature markets are increasingly suffering from trading down, particularly in the spirits and champagne categories. This issue is being compounded at Rémy Cointreau due to the very high-end focus of its brand portfolio - over 70% of Rémy Cointreau's portfolio is in the premium and ultra premium categories. Furthermore, the company is continuing to maintain focus on its premium pricing strategy rather than looking to ease the pressure on volumes. This policy may be revised as we head into the new financial year.

Organic EBIT growth guidance may require further downward revision

With its Q3 statement, management reduced organic EBIT growth guidance to -15%. It is not inconceivable that the continued deterioration of sales in its core markets could push this guidance down further on 16 April. Also, we calculate a year-end March 2009e net debt/EBITDA of 3.8x - we understand Rémy Cointreau's banking covenant is at 3.5x. Given the potential lack of EBIT profit growth this year and, importantly, the risk to next year, we could see the group edge perilously close to its covenant limit. We retain our Underperform rating ahead of the numbers.