Special Sit: Luxury – Our thoughts following YTD performance + pair trading recommendation
Luxury – our thoughts following YTD performance + pair trading recommendation
Ø 2016 was a challenging year for the luxury sector. After five years of strong performance and accelerating growth rates, in 2016 most of the companies experienced slower revenue growth and operational de-leverage. This was strongly felt in the first half of 2016 which was the weakest since 2009 in terms of growth.
Ø The overall deceleration in 2016 was led by numbers of factors. The first and most obvious one was weaker Chinese consumption, specifically in Mainland and HK which were tough markets with declining revenues. Another negative factor was the strong dollar which resulted in declining tourist spending. To that, external events such as terrorist attacks in Europe and the uncertainty surrounding the UK Brexit and US election also didn’t help to improve the sector’s sentiment.
Ø However, in 3Q16 many luxury companies showed improved performance supporting a better second half and positive outlook for 2017. Last week Hugo Boss raised its guidance for 2016 after better-than-expected sales for 4Q16. Burberry also reported good growth in revenue and comps, beating analyst estimates. Both companies stated they have benefited from an improving environment in China. This echoes to Cucinelli, Richemont and Tiffany’s recent updates that Asia is returning to growth. This is clearly a bullish signal for the sector that may suggest that the negative trend in China is reverting, setting the stage for another uptrend in the industry. Next page we discuss what we expect will drive the sector in 2017.
Ø On the back of the positive sentiment, estimates were upgraded and the market now expects the luxury sector to return to mid-single digit growth in 2017, and to renewed operating leverage. This is supported by better consumption trends globally and favorable y/y numbers.
Ø The renewed estimates upgrades have boosted valuation multiples in recent weeks (the sector had a very strong start to the year with most of the companies significantly outperforming the market). Though there are encouraging signs of recovery, we believe that investors should also keep in mind that the recovery seen in 3Q16 is still fragile, and could be proved short lived.
Ø On a relative value basis, we recommend the following pair trade: Long - SFER: IM + MONC: IM /Short – CFR: VX + TOD:IM (see more details on page 4).
Full report attached!
Regards,
Dafna Yagur | Head of Research (Israel)
Makor Capital
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