Emperador Inc (EMI SP)

Emperador, Inc operates in the beverage industry producing and marketing brandy as well as an extensive portfolio of globallyrecognised, market-leading whisky brands distributed in over 100 countries.

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. EMI has a planned dividend policy of at least 40% payout.

INITIATE COVERAGE

Rich heritage and innovative portfolio across multiple price points. Emperador Inc's (EMI) diversified brand portfolio includes well-recognised global brands spanning a broad range of price points for both its Scotch whisky and brandy segments. 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.

Premiumisation of its offerings is a key competitive advantage. 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. This is evident in EMI's premium single malt whiskies being priced 10-15x higher than accessible Scotch whisky brands.

EMI is well-positioned to capitalise on growth opportunities in China. EMI's offerings are well received in Europe and have seen early success in its expansion into the Middle East and China. In China, EMI has seen robust growth as the company grabs more market share. EMI has credited its success to its Asian identity which would allow for better future market penetration in Asia.

Internationalisation in high-growth markets delivers better margins. EMI targets to have 50% of its sales coming from outside of the Philippines by 2025. Currently, the company has a huge following in high-growth markets such as China and the Middle East. Its premuimisation strategy has allowed EMI to enjoy higher margins as compared with most of its peers in the industry. For instance, EMI 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.

STOCK IMPACT

Huge potential in Greater China. Baijiu (white spirits) dominates the market in China, capturing 99.2% of the overall market in 2021, whereby foreign spirits presents a growth opportunity. EMI 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 CAGR of 7.4% between 2022 and 2026, with sales value estimated to grow at 7.3%. 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.

EARNINGS REVISION/RISK

Robust revenue growth from new market contributions. Driven by EMI's premiumisation strategy along with increased penetration into new key markets, EMI's 2021-24 overall revenue would grow at a steady CAGR of 5.7%, in our view. We expect gross margins to also improve from 32.8% in 2022 to 35.0% in 2024 with gross profit growing at a CAGR of 7.2% from 2021-24. 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 2021-24, driven by greater expected sales of premium alcohol.

VALUATION/RECOMMENDATION

Initiate with a HOLD and a target price of S$0.53. This is based on 30x 2023F PE, pegged to a 10% premium to industry peers' 2023 average PE. Prescribing a higher PE multiple as compared with its peers is justified given the high pricing power EMI's priceinelastic premium alcohol commands. The stock is trading at 26.9x 2023F PE, in line with peers' 2023 average PE. Also, according to Bloomberg, EMI is trading at +2SD to its fiveyear average PE, five-year average P/B and five-year EV/EBITDA, which is considered expensive based on these valuation metrics. However, we think that EMI 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.

SHARE PRICE CATALYST

- Higher revenue contribution from Greater China and the Middle East.

- M&As.