Richemont

Stock price: SF37.8
Conclusion: Both operating margin and cash were better than expected last year. EPS should rebound, driven by organic growth in Asia and the US combined with a positive forex impact. We raise our valuation target to SF46-SF48 per share.

Richemont proved to be resilient last year.
-Sales fell by only 5%, despite its exposure to the hard luxury segment, supposed to be more cyclical than soft luxury items. Richemont has clearly gained share in both jewellery and watches (down only 4%) last year. Richemont’s key brands, notably Cartier but also Piaget, Vacheron or Montblanc have weathered the recession quite well.
-Margin resisted well (down to 16% vs 17.9%) helped by 21% fall in communication expenses, while selling, distribution and administrative expenses remained under control.
-Cash flow surprised us (FCF €1.9bn vs 682m in 2008) benefiting from a positive swing in working capital (€686m) and lower capex.

We feel confident on balance for 2010
-We do not ignore some headwinds. Unemployment and fiscal tightening should continue to impact consumers in Europe, while demand for luxury goods in Japan remains depressed. On the forex front, a stronger SF is expected to increase cost of goods in watches. As to costs, communication spending will rebound from a low base.
-However, we see key positives: good growth visibility (high teens) in Asia Pacific based on positive macro factors and a return to growth in America in H2 last year (+8%) which bodes well for 2010. We look for +7.5% organic growth this year, assuming a further decline in Japan (-5%) and only 3% growth in Europe. Forex impact could be strongly positive this year (7%+) based on current spot rates. Gross margin should improve helped by increased volume, while administrative costs and selling costs should increase at a lesser rate than sales.
-We expect sales to increase to €5.9bn (+15%), Ebit to achieve €1070m (implying 18% margin) and net earnings to reach €910m. Last year, net earnings were impacted by €132m currency translation losses, with no effect on cash.

Longer term, Richemont seems to be well positioned
-Strong brand equity (Cartier,Van Cleef, Montblanc,Jaeger, IWC, Piaget..) H2 last year shows that Richemont could increase sales by around 7% while continuing to cut communication spending, which speaks for the strength of its portfolio.
-Strong presence in Asia Pacific (34% ofs sales). China (including HK and Macau) accounts for almost 30% of the retail network with 389 boutiques, which bodes well for future growth. Richemont is under-represented in the US (only 10% of sales) and in Latam.
-Retail (46% of sales with 817 stores) will further expand in jewellery but also in watches where Richemont needs to invest in stores, notably in China. We expect square footage to boost retail sales by 5% pa.
-Very solid balance sheet with a net cash position of €1.9bn.

Richemont trades at 18xP/E based on 2010 calendar estimates. Our DCF suggests SF48 per share. We look for 25%+ potential return.

Long Richemont at time of writing.

Richemont

Stock price: SF37.2
Conclusion: December sales in jewellery and watches better than expected, helped by some re-stocking. We are upgrading our valuation range to €39-€41 per share. The stock looks close to our fair value.

Q3 sales up 2% reported to €1.6bn, +7% like for like. 9month sales down 9% reported to €3.9bn, down 11% like for like. No guidance given for the year.

Despite a 10% fall in sales in October, Richemont managed to end third quarter with +7% growth which is much better than expected. We are revising up our sales forecast from €4.8bn to €5bn, implying 7.4% decline like for like and 1% positive exchange rate impact. We expect EBIT to decrease by 21% to €770m and EPS to fall by 12% to €1.18.
2010 outlook remains uncertain “in the context of a generaly difficult environment”. Nevertheless, we assume a return to 6-7% growth, helped by easy comparison in H1, coupled with positive re-stocking impact in wholesale. Although Asia Pacific (31% of sales in Q3) is expanding strongly, Europe and Japan should continue to hold back growth while the recovery in Americas has be confirmed. Forex could turn negative for the year based on current exchange rates.
We expect EPS to resume growth helped by positive leverage (+17%) to €1.38 per share next year.

Richemont trades at 18.5xP/E and 12.6xEV/EBITDA, based on 2010 calendar estimates. Our DCF based valuation suggests SF41 per share. The stock looks fairly valued.

Richemont

Stock price: €32.1
Conclusion: We feel that the stock looks fairly price in light of an expected “long recovery process”. We stick to a valuation range between €31-33 per share.

H1 results (end of September): Sales down 15% to €2.4bn (-20% like for like), EBIT down 39% and net profit down 36% to €344m. October sales down 10%. No guidance given for the rest of the year (end of March).

Operating expenses in H1 ? not so variable excluding communication spending. We find slightly disappointing that operating expenses (excluding marketing) increased by 1% in H1 as we were looking for tighter control over administrative and selling expenses. It is all the more surprising as the internal retail network increased by only 2 stores to 798 units during the period . The 7% decline in net operating costs stems from a 30% cut in communication costs, which won’t be sustainable in H2. As Johann Rupert said, “it is all about brand equity” and in order to maintain its relative pricing power Richemont will have to invest more into marketing spending. Therefore, we are not counting on a significant margin recovery in H2.
In addition, the dollar and the yen will turn negative and we expect sales to fall by 6.5% in H2 (-2% organic and -4.5% forex)
Net earnings could retreat by 30% to €534m.

The good news came from the cash flow from operations which was up from €224m to €321m in Sept 09. Capex halved from €124m to €50m, helping to boost free cash inflow to €356m. Inventory were slightly down (-2%) thanks to 18% lower work in progress. However, the inventory rotation rate slowed to 20 months.

Richemont seems confident in the medium term thanks to the pricing power of its brand portfolio, its exposure to growth market clientele (50%+ according to management) and also the expected return to growth in the US. Short term however, we feel that the visibility is reduced by the expected reduction in disposable income, the impact of higher savings and the trend towards less show off.

Richemont trades at almost 19xP/E and 12xEV/EBITDA based on our calendarised F10 estimates, implying a slight premium to LVMH. Our valuation range (€31-33 per share) suggest little upside.

Richemont

Stock Price : SF29
Conclusion: Richemont gained 38% since our last comment ( May 14). We believe it is now fairly priced around SF30.

Trading statement first 5 months: Sales down 16% reported, 21% like for like, according to management profitability will be “significantly below” that seen in the period to September 2008.

As expected, sales went down double digit during the period, with America being the worst performer (-36% reported) while European sales were also 22% lower. Asia grew 5%, helped by China and a stronger yen.
-Based on current spot rates, we expect the positive forex impact (+5% first five months) to fall to +1% by March 2010.
-As a result, reported sales coul fall by around 15% to €4,6bn in fiscal 2010 (vs -13% our previous assumptions), as easier like for like comparison in H2 will be offset by deteriorating currencies ( dollar impact falling to zero and only +8% from the yen).
-Margin could fall more than 400bp to 13.8% of sales, net earnings could decline by around 40% (€465m).
-The good news came from the cash flow which remained neutral based on the broadly maintained cash position.

We remain convinced that Richemont will be among the first to benefit from the economic turnaround, thanks to its unique porfolio of brands in watches (Jaeger-Le Coultre, IWC,Vacheron Constantin..) and jewellery (Cartier, Van Cleef). In addition, Richemont can rely on very solid balance sheet with €800m net cash.
The question is when ? The stock has strongly rerated in the last three months (20x P/E and 11.5x EBIDTA based on 2009 calendarised estimates) and we expect it to stay at this level as long as the trading environment does not improve.

Richemont

Stock price : SF 21
Conclusion: Notwithstanding short term negative newsflow, our estimated value of SF25 per share suggests 19% upside.

Full year 2009 results: Sales up 2% to €5,4bn ( reported and like for like), EBIT down 12%, reported net profit down 31%, luxury profit down 22% to €750m. No guidance given for fiscal 2010.

The second half of last year has been impacted by lower sales down 12% like for like in Q3 (ending December) and 10% in Q4 (ending March). Fiscal 2010 will have a difficult start with April sales down 26% and 19% reported. Assuming 18% decline in underlying sales for the year partly offset by positive forex, we forecast sales to come down by 12,6% this year. As to margins, we expect them to decrease by 410bp to 14%. Such a downfall compares with -590 bp change in H2 last year excluding non operating items. We believe that the cost control measures taken by management (hiring freeze, reduced capex, 62 store closure, renegociated fees) should prevent results from deteriorating further. We also expect free cash flow to fall by 26%, less than net earnings (-35%), thanks to tighter control over working capital. Balance sheet remains strong with a net cash position of €822m end of March.

Richemont trades at 16x P/E fiscal 2010, slightly above peers, while EV/EBITDA multiple is lower (8x vs 8,5x). Our DCF leads to SF25 per share, using 10% wacc and 3% terminal growth. Although, we know that the stock will not be helped by the short term newsflow, we feel that the current stock price discounts the bad news. Fiscal 2011 could post a sharp rebound depending on the extent of the economic recovery in 2010. Our forecast based on €1,28 EPS in Fiscal 11 vs €0,87 EPS in fiscal 10, implies 10,9x P/E.