Time to buy as sparkling cash flow to shine;
* What's changed
Richemont shares are –3% since FY15 results. Results were in-line with expectations but the market has focused on slower current trading (-8% cFX in April), global price adjustments and conservative margin guidance, in our view. We believe this overlooks the multiple underlying positive signals (both cyclical and structural): April-May trading run-rate unchanged vs. 4Q15, continued tight cost management, €900mn cash generated.
* Implications
Richemont is still generating exceptional cash flows (22.7% CROCI FY15 +170 bp yoy) in spite of slower trading and currency-induced margin declines. Retail revenue has accelerated (April +4% vs. +1% FY15) indicating healthy end demand and Cartier continues to perform in the fast-growth jewellery market (+7% cFX). Richemont is also the most
exposed to wealth-led growth (as opposed to middle class income-led demand growth) and global equity markets are +8%-16% ytd which should boost global demand, especially due to cyclicality of wholesale books in HK. We expect +5% cFX group revenue growth in FY16E. We see 65% constant FX gross margin guidance as conservative given the pricing
power of Richemont’s brands, positive channel mix and easing FX pressures. We adjust FY16-18E EBIT –2%-3% to reflect Net-A-Porter in discontinued operations and opex guidance but are still 6%-15% ahead of IBES consensus. We therefore see a clear opportunity in Richemont: 1) 13% EBIT growth pa to FY20E, 2) FCF doubling in FY16E to €2bn, and 3) trading at a 5% discount to luxury (15x 2016E P/E ex. cash) and same market-relative multiple as the Financial Crisis. We reiterate our CL-Buy.
* Valuation
Our 12m PT falls to SFr109.5 (SFr111.8), reflecting our estimate changes. We still apply a 13.5x target 12m forward lease adj. EV/EBITDAR multiple.
* Key risks
Slower than expected demand, unfavourable FX moves and dilutive M&A.