Emperador Inc - UOB Kay Hian 2022-10-10: Lifting Spirits Since 1990


Emperador Inc - Lifting Spirits Since 1990

  • Emperador (SGX:EMI) is the largest liquor producer in the Philippines and the world’s top brandy producer by volume, with a strong brand portfolio spanning various price points. After its acquisition of Whyte & Mackay in 2014, it has reaped synergies in procurement and operations while benefitting from the world’s booming alcohol market, especially in Asia.
  • Emperador has a planned dividend policy of at least 40% payout. Initiate coverage with a HOLD recommendation.

Emperador - Investment Highlights

Rich heritage and innovative portfolio across multiple price points.

  • Emperador’s diversified brand portfolio includes well-recognised global brands spanning a broad range of price points for both its Scotch whisky and brandy segments. These brands range from accessible to luxury, catering to all sorts of customer preferences.
  • Emperador also constantly innovates and refreshes its portfolio according to evolving consumer tastes. Some recent offerings include Emperador Double Light for younger health-conscious drinkers and Terry White Brandy, the first white-coloured brandy in Spain.
  • For Emperador’s more luxury brands, centuries-old brands with a rich history such as The Dalmor stablished and and Fundador are hard to replicate and have entrenched Emperador’s leadership position in these respective markets, creating high entry barriers in the luxury spirits segment.
  • Read also background of Emperador's management team in the report attached below.

Premiumisation of its offerings a key competitive advantage.

  • Emperador has implemented a premiumisation strategy in response to existing market trends whereby more consumers are becoming well-versed in drinking and appreciating the value of premium liquor. Hence, they are willing to fork out a premium for better quality liquors.
  • For its Scotch whisky segment, branded single malt whiskies have been Emperador’s main focus ever since it acquired Whyte & Mackay (WM) in 2014.
    • Single malts such as The Dalmore, Jura and Tamnavulin are among the top 20 single malts in the world with Jura clinching the top place in the UK. Tamnavulin and Jura are also the world’s fastest and second fastest growing single malts respectively in the past two years.
    • On the other hand, there is strong demand for The Dalmore, largely led by increasing demand from China. Hence, Emperador’s premium single malt whiskies, which are priced 10-15x higher than accessible Scotch whisky brands, have enjoyed strong growth in t e past few years and management expects growing demand for its premium scotch whiskies.
  • For its brandy segment, Fundador Supremo is a product line that was born out of innovation and premiumisation.
    • This super-premium range costs 5-15x more than the accessible range. Fundador brandies are aged in Sherry casks such as Pedro Ximenez, Amontillado and Oloroso. Most importantly, Fundador held the position of a Brandy de Jerez (Sherry Brandy) and is thus protected by the Regulatory Council of Jerez Brandy. This means that it is one of the rare three regulated brandies in Europe – similar to Cognac and Armagnac.
    • Furthermore, Emperador believes that as the orld becomes more knowledgeable about Brandy de Jerez, its Fundador brandy will be the one to lead the premiumisation of brandy.

Well-positioned to capitalise on growth opportunities in China.

  • Emperador was one of the largest brandy producers globally in 2021 and the fifth-largest Scotch whisky maker in 202 . Its offerings are well-received in Europe and have seen early success in its expansion into the Middle East and China. More specifically, the Asian identity of Emperador has paved the way for future market penetration in Asia, specifically in China.
  • Give the large market size that China offers, Emperador entered the country’s Scotch whisky and brandy markets in 2015 and 2018 respectively. Through cooperation with reputable Chinese distributors and leveraging their local market knowledge, Emperador has established a presence in 33 cities (20 Tier 2 cities) across the country. As a result, China’s sales of The Dalmore products grew at a CAGR of 110% from 2019-21 while sales of Claymore grew at a CAGR of 38% over the same period. From 2015-21, sales of single malt products grew at a CAGR of 76% and 108% in Greater China and Mainland China respectively.
  • Emperador’s dominance in Asian markets is evident in its recent 1H22 financial performance. Despite geopolitical issues, logistic hiccups and COVID-19 lockdowns, Emperador’s 1H22 revenue from China has been resilient relative to 1H21 numbers. Demand for its products, specifically The Dalmore and Claymore, continues to grow and management is confident that this trend would continue.
  • Emperador has also embarked on programmes that would strengthen its visibility in China, with an upcoming JV for its whisky business.
  • Emperador was able to achieve greater success than other Western whisky brands in just a few years. W&M’s branded business for Scotch whisky in APAC saw sales increase from 6% to 30% between 2015 and 2021. In the APAC region which contributes 30% of Scotch whisky revenue, 80% of the sales are from China. Thus, Emperador is likely well-positioned to capitalise on the opportunities in this region which has the largest growth potential.
  • Continue to read the report attached below for detailed analysis on Emperador's business outlook.

Internationalising into high-growth and emerging markets, backed by sound acquisitions.

  • Through its strategy of internationalising its business and undertaking overseas acquisitions, Emperador aims to generate 50% of its sales from outside the Philippines by 2025. Emperador has already established a growing presence in high-growth markets such as China and the Middle East while it has seen robust growth in emerging markets such as Japan, Korea, Singapore and Malaysia.
  • With successful launches in several key markets along with increased post-acquisition synergies, Emperador has been able to grow its revenue and PATMI over 2019-21 at a CAGR of 2.6% and 14.1% respectively. Furthermore, we reckon net margins would start to expand as premiumisation trends continue to gain traction, especially in China.
  • Emperador enjoys higher overall margins compared with most of its peers in the industry. 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 main competitors such as Diageo, Pernod Ricard, Ginebra San Miguel Inc and Cosco Capital Inc respectively, driven by the high retail value of its products.
  • The internationalisation strategy focuses on high-growth markets. Both the Middle East and China have considerably larger middle-age populations, which means large addressable markets for Emperador’s products relative to other countries.
  • According to Emperador, the Chinese market has started shifting its focus from white spirits to brown spirits, specifically single malt whiskies. Chinese consumers are also purchasing Emperador’s premium spirits such as The Dalmore and Jura, which provide higher margins for the group. Emperador has realised greater net profit across both the whisky and brandy segments in 2017-21, which are growing at a CAGR of 8.6% and 14.2% respectively. Refer to the report attached below for detailed analysis on Emperador's earnings outlook.
  • Moving forward, we expect net margins to expand due to a more favourable higher-margin product mix.

Emperador – Valuation & Investment Recommendation

  • Initiate coverage on Emperador with a HOLD rating and a target price of S$0.53. This is based on 30x 2023F P/E, pegged to a 10% premium to industry peers’ 2023 average P/E. Read also SGX market update: Emperador Joined The Straits Times Index (STI) w.e.f 19 Sep 2022.
  • 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. Also, according to Bloomberg, Emperador is trading at +2 standard deviation to its 5-year average P/E, 5-year average P/B and 5-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.
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  • While it may be difficult to compare Emperador with premium brands in the automobile and luxury goods industries such as Ferrari and Hermès, we point out that Emperador’s premium single malt Scotch whiskys (e.g. The Dalmore, Fettercairn and Jura) share similar characteristics with high-end automobiles and luxury goods in that such products have high retail value, are collectible and sometimes difficult to procure, and exhibit price inelasticity. As a result, such high-end goods trade at a large price premium to their peers – this is also applicable to a number of Emperador’s single-malt Scotch whisky brands.
  • We also point out that Emperador’s premium products are perishable in that once they are consumed, they are gone while unperishable luxury goods. Continue to read the report attached below for complete analysis on Emperador.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-10
SGX Stock Analyst Report HOLD INITIATE HOLD 0.53 SAME 0.53