Upgrading to Outperform - 10 reasons to buy
Our view: We are moving from cautious to positive on Richemont
shares ahead of 1H results thanks to a combination of: (a) self-help
growth levers (jewellery, Cartier innovation, lower raw material costs), (b)
diminishing fears on opex deleverage risks, (c) more reasonable consensus
expectations post downgrades in L12M, (d) compelling valuation ex-cash.
Key points:
Upgrading Richemont to Outperform (from Sector Perform) with a new
target price of CHF90 (from CHF87). We are increasing our FY16-17E EPS
forecasts by c3% following better than expected Jun-Aug sales figures and
positive read-across for margins ahead of 1H results on 6 November.
Positives outweigh the negatives - 10 reasons to buy: We have been
cautious on the stock so far on the back of weakness for high-end watches
(its biggest category) in Greater China (its biggest market) and persisting
Chinese macro concerns. After material stock underperformance year-todate,
we now see more positives than negatives in the next 6-12 months
1. Jewellery surprising on the upside driven by strength in all price points,
from bijoux to high-end jewellery, where Cartier’s investment in precious
stones is paying off. Van Cleef is sustaining its impressive multi-year run.
2. New Cartier watches: potential greater contribution from Cle (more
models supported by A&P) and Croisiere Ronde (more accessible line).
3. Easier comparatives in Hong Kong (from Oct'15 onwards)
4. Estimated raw material cost tailwind of €150m (+130bps) in FY16E
based on gold & diamond spot price evolution with a 20-month lag.
5. Diminishing fears of opex deleverage impact to margins with c.6%
organic growth in Jun-Aug'15 driven by positive surprises in Europe/Japan.
6. FX to support EBIT growth (hedging effects are booked below the line)
7. ROIC to stabilize in FY16E (at a level above its multi-brand peers)
8. Strong management and focus on the right KPI's (cash flow and ROA)
9. Reasonable consensus expectations post material downgrades in L12M
10. Compelling valuation ex-cash at 13x cal. 2016E NOPAT, the most
attractive in our coverage (with Swatch). Richemont looks also relatively
attractive on EV/Invested Capital vs. its 2018E lease-adjusted ROIC of 19%.