Pair Trade: Long P. Ricard - Short Heineken

Tuesday, October 16th 2012

Investment Case

Technical Comment

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Companies Description

Analysts Recommendations:

Source: Bloomberg

Market Price Data

Pernod Ricard (RI FP)

Last Price (€) 88.17

YTD Change 23.04%

Mkt Cap (€ bn) 23.392

Heineken (HEIA NA)

Last Price (€) 48.85

YTD Change 36.55%

Mkt Cap (€ bn) 28.135

Source: Bloomberg

Market Multiples

P/E

2013 EPS

2011/13 DY

2013 Net Debt/

Est. CAGR Est. Est. EBITDA

Est. 2012

PR (*) 16.88 12.33% 2.02% 3.87

Heineken 15.06 9.47% 2.02% 1.99

(*) FY ends in June

Source: Bloomberg

Next Report Date

Pernod Ricard Q1 IMS and FY Guidance

October 25th

Heineken Q3 - Trading Update

October 24th

Source: Bloomberg

Pernod Ricard (RI FP) has probably one of the highest growth po-

tential in European staples sector, thanks to its geographic footprint.

Nearly 1/3 of its revenues are derived from Asia. The Asia/ROW

region that the company reports (40% of total revenues) grew for a

second year running at a double-digit growth rate. This is not only

China and India, but also includes mature markets such as Japan and

Australia. A key advantage of Spirits versus other Staples is the abil-

ity to drive margin expansion. Last FY, Pernod Ricard’s EBITDA

margin increased, even after considering a small hike in marketing

spending.

The current gearing of c4x Net Debt/EBITDA should prevent the

company from being a part of any major acquisition for the foresee-

able future. Pernod Ricard´s earnings are sensitive to the US$/€ ex-

change rate given that c20% of group operating profit is from the US.

Heineken (HEIA NA) is still having adverse mix trends in Europe.

Nonetheless, Volume and Pricing seems to be improving. Cost bene-

fits have been able to offset higher input cost inflation.

Acquiring Asia Pacific Breweries increases Heineken’s exposure to

“growth markets”. It seems to have been decisive for the recent re-

rating. However, an improvement in European macro-economic en-

vironment will probably be needed for the company to increase its

organic profit growth. Its short-term outlook could continue to be

challenged by weaker trends in Europe, higher COGS and upfront

costs for the new cost cutting program.

The Pernod Ricard (RI FP) / Heineken (HEIA NA) ratio current

value is 1.805. We’ll define as our target ratio 1.92 and as stop-loss

ratio 1.75.