* Source of opportunity
We reiterate our Buy rating and add Richemont to the Conviction List on 16% underperformance vs. the retail sector ytd. We see concern about slower growth as overdone, and our estimates are above consensus. Richemont remains a luxury goods leader, offering global consumer exposure against a favourable global macro backdrop (low interest rates and inflation), high CROCI (FY14 21% vs. sector avg. 17%) and a strong balance sheet. Cyclical catalysts (global wealth creation) should support a return to growth and a rerating, with the shares on the same sector- and market-relative multiples as during the financial crisis. Our 12-month price target implies 33% upside.
* Catalyst
FY15 results are on May 22, 2015 (headline financials have already been reported). We expect the focus to be on April trading (pre-announcement on April 22, 2015 showed no slowdown in growth for the period up to March) and cost guidance for FY16. We expect management to give a positive update on the business, highlighting the continued growth potential and margin upside from organic opportunities (e.g. channel mix shift to retail), as well as cost control in spite of FX headwinds from Swiss franc appreciation. In our view, this should underline Richemont’s credentials as one of the highest-quality assets in luxury; in addition, delivery of compound top-line, bottom-line and cash flow growth with balance sheet optionality should catalyse upgrades to consensus estimates (our FY16-17 EBIT forecasts are 9/11% above I/B/E/S consensus) and a re-rating
* Valuation
We cut FY15E EPS to reflect losses on financial instruments announced on April 22, and FY16/17E EPS for FX. Our unchanged 12-month price target of SFr111.8 is still based on a lease adj. 12m fwd EV/EBITDAR multiple of 13.5x.
* Key risks
Key risks to our view and price target include slower than expected demand, unfavourable FX moves (Swiss franc strength) and dilutive M&A.