Laurent Perrier is a French company specialized in champagne, which is a luxury product. Laurent Perrier manages both the production and the distribution of its champagne and wines. The Group owns its distribution network (through restaurants, hotels, bars, retailers and direct sales). This is a force for the Group since it can capture margins and reduce sales volatility. Laurent Perrier is considered to have the best growth potential in the beverage sector. The Group tends to export more and more where bottle prices do not stop to increase. The company also has the highest percentage of self-grown grapes on the markets, which allows it to have a strong balance sheet, with an expected decrease of the gearing more important than the competitors' one. Nowadays Laurent Perrier is considered to be the best group on the champagne market and has the best growth of share price. Société Générale is one of the leading banks worldwide. The SG note we chose to study was released in May 2007. Consequently, in our analysis, we tried as much as we could to have a critical look on the broker's valuation assumptions but yet, taking into account that it dated of more than 6 months ago.
[...] The main assumptions we made are listed below: - The volume of bottles sold increases until 2011e to reach 14.9 million and remains equal to 14.9 for the end of the forecasts since we consider that Laurent Perrier reaches its maximum production capacity - The bottle price increases regularly over the concerned period, at a rate - The grape price has been determined, considering that it represents 68% of the costs of good sold; it increases at a rate per year - For the other production costs, we computed a rise, to reflect inflation - In the last three years of our business plan, from 2035e to 2037e, we followed the broker's approach which assumes the end of operations after 30 years. [...]
[...] Its share price has been decreasing for one month now and yesterday, Laurent Perrier's shares traded at 2nd Method The second method we studied was to calculate our multiples on the basis of SG's estimates for Laurent Perrier in 2007/08e and 2008/09e. Thus we obtained quite higher share price for the years 2007/08e and 2008/09s, which is normal as these estimates include growth assumptions. However, this method allows more room for approximation as there are hypothesis made for the coming years' financial results Sensitivity analysis Grape prices As we already stated, Champagne is a geographically limited area and the appellation covers almost 34,000 hectares of which more than 95% are planted. [...]
[...] The current gap between the average prices charged by LVMH and Laurent Perrier shows the strong potential of price growth. As a conclusion, there is of course a strong sensitivity to the proportion of grape price increase that Laurent Perrier manages to transfer to its customers. (Please see the above table for more detailed figures) Growth in sales' volume As the supply of grapes is limited in volume, Laurent Perrier is also limited in its sales volume growth strategy. Once the grape production has reached its limit, Laurent Perrier will have to implement an external growth strategy. [...]
[...] Valuation of Laurent Perrier To valuate Laurent Perrier, we used both a DCF method based on Société Générale's forecasts and our own assumptions and a peer comparison multiples method. Concerning our DCF method, we followed two ways to implement it: first, as the broker did, we computed a DCF based on a 30- years period without calculating any terminal value and second, a more “classical” DCF method based on SG's estimates until 2011e and then decreasing those estimates, in a cash flow fade manner, until ROCE equals WACC. [...]
[...] However, as Laurent Perrier incurs heavy costs, it seems more relevant to look at its exploitation ratios rather than at its sales. Hence, we decided to retain the EV/EBITDA, EV/EBIT. We also integrated the P/E ratio in our valuation. Hence, we presented the output showing both with and without EV/Sales multiple. Eventually, the one that does not include EV/Sales valuation seemed to be more relevant. As presented in the above table, we obtained a share value in a range between 97.5 and 125.8 1st Method The first step of our multiple analysis was to examine the implied equity value when we computed the average sector multiples together with the last historical data available for the company. [...]
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