UOB Kay Hian analyst Llelleythan Tan has initiated coverage on Emperador Inc with a “hold” call and a target price of 53 cents.
Emperador is the largest liquor producer in the Philippines and the world’s top brandy producer by volume.
Primarily listed in the Philippines, Emperador began its secondary listing on the Singapore Exchange (SGX) on July 14.
In his report dated Oct 11, Tan sees several positives on the stock which includes its rich heritage and portfolio of diverse brands across multiple price points.
“The portfolio encapsulates products that range from accessible to luxury and caters to all sorts of consumer preferences. The group also constantly innovates to address shifting consumer preferences, as evident in the recent launch of Emperador Double Light,” says Tan.
In the analyst’s view, the premiumisation of Emperador’s offerings, where its premium single malt whiskies are priced at 10 to 15 times higher than accessible Scotch whisky brands, is a “key competitive advantage”.
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“The strategic move was made in response to existing market trends whereby consumers are becoming increasingly well-versed in drinking and appreciating the value of premium liquor. Hence, they are willing to fork out a premium for better quality,” Tan notes.
Further to his report, Tan sees that Emperador is “well-positioned” to capitalise on growth opportunities in China. The group’s offerings are already well received in Europe and have early success in its expansion into the Middle East and China. With the latter, the group is seeing “robust growth” as it credits its success to its Asian identity. This, says Tan, would “allow for better future market penetration in Asia”.
Emperador’s internationalisation in high-growth markets has also given the group better margins.
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“Currently, the company has a huge following in high-growth markets such as China and the Middle East. Its premiumisation strategy has allowed Emperador to enjoy higher margins as compared with most of its peers in the industry,” says Tan. “For instance, Emperador was able to achieve a net margin of 17.8% in 2021 vs 20.9%, 14.8%, 10.5% and 3.6% for its closest competitors Diageo, Pernod Ricard, Ginebra San Miguel Inc and Cosco Capital Inc respectively.”
The group aims to have 50% of its sales come from outside the Philippines by 2025.
In Greater China, Tan notes that foreign spirits present a growth opportunity for the group. Baijiu or white spirits currently dominate the region’s market capturing 99.2% of the overall market in 2021.
According to the analyst, Emperador intends to increase the market share of its brown spirits category in China where Scotch whisky is the most popular type of whisky.
“According to Frost & Sullivan, Scotch whisky sales volume is estimated to have a compound annual growth rate (CAGR) of 7.4% between 2022 and 2026, with sales value estimated to grow at 7.3%,” says Tan. “Within the Scotch whisky category, single malt whiskies are relatively more popular and is predicted to have a CAGR of 9.8% by sales volume relative to 5.7% for blended scotch.”
As Tan sees Emperador enjoying robust revenue growth from contributions from its new key markets, he is expecting the group’s overall revenue from the FY2021 to FY2024 to grow at a steady CAGR of 5.7%.
Emperador's FY ends in December.
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To this end, the analyst is expecting the group’s gross margins to improve from 32.8% in FY2022 to 35.0% in FY2024 with gross profit growing at a CAGR of 7.2% from FY2021 to FY2024.
“Similar to gross margin, net margin is expected to increase from 17.9% in 2021 to 18.8% in 2024 and a net profit CAGR growth of 7.0% from FY2021 to FY2024, driven by greater expected sales of premium alcohol,” he writes.
Tan’s target price, which represents an upside of 10.4% from Emperador’s last-closed share price of 48 cents, is based on an FY2023 P/E of 30x, pegged to a 10% premium to industry peers’ 2023 average P/E.
“We opine prescribing a higher P/E multiple as compared with its peers is justified given the high pricing power Emperador’s price inelastic premium alcohol commands,” says Tan.
At its current share price, the stock is trading at an FY2023 P/E of 26.9x, in line with its peers’ FY2023 average P/E.
The analyst adds: “Also, according to Bloomberg, Emperador is trading at +2 standard deviations (s.d.) to its five-year average P/E, five-year average P/B and five-year EV/ebitda, which is considered expensive based on these valuation metrics.”
“However, we think that Emperador is fairly valued at current price levels, and a key re-rating catalyst would be the successful penetration of its key premium products into China and new growing markets,” he continues.
As at 1.30pm, shares in Emperador are trading 0.5 cent lower or 1.04% down at 47.5 cents.
