PICK OF THE MONTH
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…