2023-10-11 04:25:45 ET
Summary
- Richemont acquires a majority stake in Gianvito Rossi, diversifying its businesses in the luxury market.
- European Union antitrust authorities will decide on the Farfetch/YNAP merger.
- Richemont's stock price decline presents a buying opportunity with an attractive valuation (vs. the sector) and growth projections, given the company's upside on a more aggressive pricing policy for 2024.
Today, we are back to comment on Richemont ( OTCPK: CFRHF ) ( OTCPK: CFRUY ) ahead of the H1-24 report scheduled for 10th November . Before analyzing our H1 estimates, it is important to recap the latest M&A news and the short-term catalyst. In the last quarter, these were busy days in the Italian luxury market; after the Valentino minority acquisition by Kering Group , Richemont announced Gianvito Rossi's majority stake bolt-on. The founder, who is also the company's creative director, will retain a minority stake (30%) and will continue to work on the brand development. Although the operation transaction value was not disclosed, here at the Lab, we estimate an enterprise value of at least €200 million, given that Gianvito Rossi's 2022 results achieved €100 million and 23 million in sales and EBITDA, respectively.
Gianvito Rossi represents an " exceptional Maison, with a unique savoir-faire in the world of footwear ." We positively view this transaction as diversifying Richemont's businesses. Looking at the press release, this deal remains subject to regulatory approval and will not directly impact the operating result for the fiscal year group results.
In ten days, the European Union antitrust authorities will decide whether to authorize Farfetch's acquisition of YNAP (Yoox Net-a-Porter), which Richemont now owns. YNAP is an online fashion retailer founded in 2000, and as a reminder, in 2018, the Swiss giant acquired €2.7 billion. Last year, the Group announced that the British platform Farfetch and the businessman Mohamed Alabbar, head of the real estate company Emaar in Dubai, would acquire respectively 47.5% and 3.2% of YNAP's shares, and following certain conditions, Farfetch would acquire 100% of YNAP by 2028. The European Union competition authority will have to decide whether to approve the transaction with or without conditions or open a four-month investigation in case of abuse of dominant position. Despite that, both Farfetch and YNAP are not experiencing good times. Looking at the latest quarter, Richemont illustrated how YNAP, defined as a " discontinued business, " recorded an 8% reduction in sales. Valuing Farfetch today and a potential combined entity is not an easy task. However, in our estimates, aligned with Richemont's latest update, we already wrote off the YNAP investment.
Why is Richemont a buy?
- The company's stock price has been hit hard and underperformed its closest peers, with a decline of 26.5% (Fig below) compared to a sector average of minus 13% . Even if we recognized that the company is not immune to macroeconomic challenges, we could not justify this valuation discrepancy given its attractive branded jewelry segment and quality asset portfolio. In numbers, Richemont's current P/E is at 15.8x vs. Tod's, Prada, and Zegna above 20x (and LVMH and Hermes above 40x); therefore, there is at least a 38% discount on the current valuation;
- Even considering the risk of fewer purchases by Chinese consumers, who are the only ones to have shown a certain resilience in spending, we increased our sales projection by 9% at a constant currency rate, arriving at Q2 revenue of €5 billion. In our estimates, we are modeling a higher growth in the Jewellery Maison at plus 11% given the summer season and a 5% growth in the Specialist Watchmakers division, which is usually more impacted by consumer demand slowdown. Going down to the P&L analysis, our H1 core operating profit target is set at 28%, lowering a gross margin by 20 basis points. This is based on headwinds from currency development as the euro and CHF have strengthened vs other currencies. In numbers, our adjusted EBIT profit reached €2.9 billion in H1;
- Even if we project a positive growth rate, there is a clear deceleration compared to the Q1 results (the previous top-line sales increase was up by 19%). In addition, the company will be one of the last to report, so we will have time to judge the sector's performance. In this scenario, Q3 results will be decisive to understand what are the 2024 prospects and visibility;
- Again, to support our buy rating, we should recall that Richemont is planning price increases for the next year and beyond, given that the company had a less aggressive pricing policy than its closest competitors.
Going to the valuation, although we are more cautious within the luxury sector, ex-cash Richemont trades at a 2024 P/E of 12x. Given that the company's stock price is significantly down, we decided to conservatively lower our 2024 and 2025 EPS estimates by 3% to account for a slowing sector growth and unfavorable FX, which might impact Richemont's profits. Last time, we derived a target price of CHF 150 per share with a neutral valuation. Being patient was a key advantage in our investment view, and today, applying a 2024 sector average multiple of 21x, we arrived at a valuation of CHF 147 per share, moving our rating to a clear buy.
For further details see:
Richemont: Time To Enter (Rating Upgrade)