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Financial Mail - Investors Monthly - - Contents - Marc Hasen­fuss

Compagnie Fi­nance Richemont

Might it be worth in­dulging in lux­ury brands owner Richemont now that the company’s shares are no longer car­ry­ing such an ex­pen­sive tag?

Richemont breached the R100 mark in June this year, stretch­ing to an all-time high of R112 in early July. But the mar­ket jit­ters ex­pe­ri­enced in Oc­to­ber rat­tled sen­ti­ment for Richemont, knock­ing the share down to a 12-month low of R87 in the weeks be­fore its in­terim re­sults.

Though the in­terim num­bers were a lit­tle shy of ex­pec­ta­tions, there was enough re­as­sur­ing for­ward-look­ing com­men­tary to see a re­bound in the share price to more than R100 … briefly.

At the time of writ­ing Richemont’s shares on the JSE had drifted back to R96. This places a 19 times earn­ings mul­ti­ple on the share, putting Richemont in a more af­ford­able rat­ing cat­e­gory than other “in­ter­na­tional” JSE list­ings like Naspers, SABMiller and Aspen.

There is an ar­gu­ment that pun­ters, des­per­ate to un­cou­ple their port­fo­lios from the dour eco­nomics drag­ging on SA-based com­pa­nies, are putting far too much store in the prospects of in­ter­na­tional list­ings. Pre­mi­ums, some mar­ket watch­ers are ar­gu­ing, on JSE-listed global gi­ants are dan­ger­ously large and not a re­al­is­tic re­flec­tion of growth prospects.

Oth­ers would ar­gue that the com­pa­nies jus­tify pre­mium rat­ings based on the se­cu­rity of­fered in their strate­gies.

Fun­da­men­tally there are two is­sues in Richemont’s in­terim re­sults that might weigh on sen­ti­ment. First, the company’s op­er­at­ing mar­gin dropped to 24.1% — the low­est level in three years — as ex­penses rose faster than sales. Sec­ond, cash flows, al­beit still over €1bn, were around €280m lower than the in­terim pe­riod in 2013. Free cash flow was €397m, down by €452m.

But ar­guably the big­gest worry for in­vestors will be the iffy per­for­mance by Richemont in the key Asia Pa­cific mar­kets (in­clud­ing China), a ge­o­graphic re­gion that in the in­terim pe­riod in 2011 saw 60% growth in sales.

The Asia Pa­cific mar­kets ac­count for 38% of Richemont sales, which makes it alarm­ing to see the top-line fig­ure flat for the first time since Septem­ber 2009.

Sales in China were down by 4% in the first half (com­pared with 10% in the first half of 2013) — partly off­set by dou­ble-digit growth from Tai­wan, Korea and Aus­tralia.

Another nig­gle for Richemont is the un­der­per­for­mance of the broader “fash­ion” or “other” seg­ment, which lost €21m. In this seg­ment, im­prov­ing re­sults at writ­ing in­stru­ments spe­cial­ist Mont­blanc, on­line fash­ion re­tailer Net-a-Porter and the un­branded watch com­po­nent man­u­fac­tur­ing were negated by de­te­ri­o­rat­ing per­for­mances at the other fash­ion and ac­ces­sories maisons.

Ad­mit­tedly the out­look for the short term does not look com­pelling. But Richemont has proved a re­silient counter in tough(er) times, thanks mainly to brands like Cartier, Van Cleef & Ar­pels, Pi­aget, Pan­erai, Lange Baume & Mercier, Vacheron Con­stantin and Roger Dubuis.

It is sig­nif­i­cant that de­spite the softer re­sults Richemont’s cap­i­tal ex­pen­di­ture was broadly in line with the pre­vi­ous year

Richemont direc­tors are look­ing through the cur­rent trad­ing cy­cle and press­ing ahead with ef­forts to re­in­force brand strength and mar­ket po­si­tion. In­vest­ment in the brand net­work and man­u­fac­tur­ing ca­pac­ity un­der­lines direc­tors’ long-term con­fi­dence.

De­spite the softer re­sults, Richemont’s cap­i­tal ex­pen­di­ture was broadly in line with the pre­vi­ous year. It in­vested €260m (about 5% of sales) in the in­terim pe­riod in man­u­fac­tur­ing fa­cil­i­ties, bou­tique net­works and e-com­merce plat­forms.

The most no­table project was 13 new stores for spe­cial­ist watch­mak­ers like Vacheron Con­stantin and Roger Dubuis in Korea, Lange in New York, and Pi­aget in Los An­ge­les.

Van Cleef & Ar­pels has also opened a new lo­ca­tion in Wuhan, China. There have also been ma­jor bou­tique ren­o­va­tions in New York, Tokyo and Dubai.

Th­ese ef­forts could pay off sooner than ex­pected. The company dis­closed Oc­to­ber sales grow­ing 4% on a re­ported ba­sis with for­eign ex­change start­ing to look favourable.

Asia Pa­cific re­mains un­der pres­sure, but Richemont’s mar­kets in the US and Mid­dle East con­tinue to trade ro­bustly. Richemont will also bank an ex­tra­or­di­nary profit from the sale of St Regis re­tail space in New York. There will be an op­er­at­ing gain of some €226m in the sec­ond half of the year, which should in­crease net in­come by around €126m.

The sec­ond half should also show the ben­e­fits of mea­sures aimed at pro­tect­ing cash flows. Richemont has in­sti­tuted a hir­ing freeze, slowed the growth of op­er­at­ing ex­penses and ex­pects sell­ing and dis­tri­bu­tion ex­penses on a con­stant rate ba­sis to be 7%-8% for the full year. Watch pro­duc­tion is be­ing slowed to limit build-up of in­ven­to­ries.

All things con­sid­ered, Richemont — at cur­rent lev­els — may be lux­ury you can af­ford…

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