Our EUR68 target price is set using an equally weighted combination of a discounted cash flow analysis and P/E multiple. In our three-stage DCF, we assume a risk-free rate of 3.2%, an equity-risk premium of 4.0%, and a WACC of 6.7%. We assume an improving ROIC trajectory over the next 20 years driven by an improvement in margins over the explicit period as the group's premium strategy and firm pricing drive higher gross and EBIT margins. We fade ROIC back to the cost of capital over the last 20 years in our model. In our P/E multiple implied valuation, we assume a c.40% PE valuation premium to wider Staples, closer to its long-run average.

For Remy in particular, we highlight the following risks to our investment thesis and target price:

Modest diversification – Remy derives c.85% of group profit from cognac and c.30% of group profit comes from cognac in the US. While cognac appears to be a very attractive category with high barriers to entry, consumer trends could change. Remy is investing to diversify the business, but a material slowdown in cognac demand would likely have a significant impact on group profit.  

China: Cognac sales in China have recovered post the government crackdown on extravagant consumption. We expect sales and profit to continue to grow double-digit medium term, but growth could turn out to be worse or better than we expect.

FX: Remy has transactional and translational exposure, predominantly through its exports of cognac and Cointreau. A rise or fall in RMB or USD vs. euro has a marked impact on earnings.

Excise tax: Possibility of excise change in its key markets.

Regulations: Possibility of harsher anti-alcohol laws.

If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.