UOB Kay Hian analyst Llelleythan Tan has kept his “hold” call on Emperador Inc EMI after the brandy and whisky group reported a set of “weak” results for the 2QFY2023 ended June 30. Tan has also lowered his target price to 45 cents from 57 cents previously.
For the three-month period, Emperador’s earnings fell by 22.9% y-o-y to 2.42 billion pesos ($57.7 million) while its revenue fell by 1.3% y-o-y to 15.5 billion pesos. The lower revenue and earnings were due to higher operating costs and a decline in earnings from the group’s brandy segment.
“Increased promotion activities and inflationary cost-push continue to pressure brandy margins,” notes Tan.
Emperador’s whisky segment saw earnings grow by 1.4% y-o-y to 1.4 billion pesos on higher average selling prices (ASPs) and demand and offset by higher spending on advertising and promotion to support its newly-launched product lines in the 2QFY2023.
For the 1HFY2023, Emperador’s earnings, which fell by 9.5% y-o-y to 4.7 billion pesos, also performed below Tan’s expectations, forming 40.2% of his expected FY2023 earnings. The group’s 1HFY2023 revenue, which grew by 10.9% y-o-y to 31.1 billion pesos, formed 45.2% of Tan’s FY2023 estimates.
Looking ahead, the analyst is expecting the group’s elevated operating expenses (opex) such as distillation costs to soften in FY2023 with “significant moderation” by the 4QFY2023 as guided by the group’s management.
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“Given that domestic revenue contributes to 90% of Emperador’s brandy revenue, the group plans to continue advertising and promotion spending in the Philippines, implementing its premiumisation strategy to support falling margins. However, as inflation still remains double that of 2QFY2022 levels, we expect to see continued advertising and promotion spending in 3QFY2023, which may keep overall brandy margins depressed till 4QFY2023 when opex starts to stabilise,” he writes.
In the group’s whisky segment, Tan sees room for its ASPs – as well as its market presence – to grow.
“Given the price inelasticity of Emperador’s Scotch whisky products, we expect the implemented ASP hikes to continue supporting revenue growth and expand margins, with the possibility of additional ASP hikes in 2HFY2023,” he writes.
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Based on the improved revenue contribution from its high-growth markets, Tan now expects the whisky segment to overtake the group’s brandy segment in terms of overall earnings contribution in FY2023, surpassing his initial FY2023/FY2024 expectations.
However, on the back of lower margin assumptions, Tan has lowered his earnings estimates for the FY2023 to FY2025.
“Our FY2023 to FY2025 patmi forecasts are 9.1 billion pesos (from 11.8 billion pesos previously), 11.9 billion pesos (from 14.2 billion pesos previously) and 15.2 billion pesos (from 17.3 billion pesos previously) respectively,” he says.
At its share price of 50.5 cents as at Tan’s report on Aug 25, Emperador is trading at expensive valuations which is slightly under 2 standard deviations (s.d.) of its long-term average P/E and ev/ebitda.
“We think that Emperador is fairly valued at current price levels despite its premium market positioning and strong growth potential in key markets. With margins expected to compress, we reckon that lower sequential earnings may cap Emperador’s share price performance,” he says.
Shares in Emperador closed flat at 50.5 cents on Aug 29.
