A couture gem but conglomerate discount likely to widen
We initiate coverage of Christian Dior with a Hold rating, a target price of €182 and a TSR
of 8%. We highlight five key considerations: 1) the resilience of its two assets, Dior Couture
and LVMH, given the current uncertainties; 2) Dior couture has one of the strongest top-line
growth rates in the sector; 3) ongoing margin expansion; and 4) a proven management
team; but 5) a holding company discount that has shrunk materially recently.
A well positioned name with regard to current uncertainties Dior Couture in our view is
in a position to face the current EM uncertainties with more ease than some competitors
thanks to: 1) a smaller contribution from EM, 2) exposure to the less cyclical soft luxury
segments, and 3) its proactive DOS expansion strategy in the region.
Financials are set to improve Guidance is for sales of €2bn in 2016. CEO, Mr Toledano,
has informally mooted €4bn for 2021, which we find too ambitious (implying a 14.6%
CAGR vs SGe at 11.7%). However, we do think a scale effect from revenue growth will
boost the EBIT margin through better absorption of fixed costs (A&P at 16.2% in FY14 and
14.8% in FY17e, vs 6-7% at peers). This takes the margin from c.13% to 18% over time.
A below-average holding company discount The recent all-time low in the holding
company discount (at c.5-10%) and current equity market volatility lead us to adopt a
cautious stance. In particular, we don’t see any structural changes in the stock’s catalysts:
1) no short- to medium-term change in the shareholding structure; and 2) market multiples
are at an all-time high since 2003-2004.
We value the stock at €182 Our target price is based on SOP calculations: 1) We value
the commercial Christian Dior operations on DCF (WACC at 9.5% and LT growth at 4%);
2) we value the 40.9% stake in LVMH both at the average of our €182 LVMH TP and the 1m
stock price average of €152 (and average them); 3) We value its 6,000sqm of real estate at
€240m and treasury shares at €495m (combined c.2% of our EV); and 4) we apply a 15%
discount to EV to reflect the last three years’ average discount.
The main risks to our TP Upside: 1) change in the holding structure; 2) upgrade to LVMH
estimates. Downside: 1) slowing demand among EM consumers; 2) lack of operating
leverage; 3) downgrade to LVMH estimates; and 4) strong equity market volatility. The main
catalysts Newsflow on EM, margin levels and rationalisation of the shareholding structure.