Uncovering a hidden gem – Richemont
Compagnie Financiere Richemont SA (CFR), through its subsidiaries, manufactures and retails luxury goods. Richemont produces jewelry, watches, leather goods, writing instruments, and men’s and women’s wear. It is the second largest luxury company worldwide.
CFR runs a multi-brand online luxury facility under the name Net-a-Porter. The company does not disclose any specific figures for this entity but it is estimated that about 5% of CFR’s total sales are online based. The online presence in the luxury segment is still relatively low, hence the upside potential for this sales channel is substantial.
Investment case
CFR has significantly underperformed the market during the past 12 months; two primary reasons for this are: a) Hong Kong based hard luxury sales declined dramatically in 2014, and b) Exports to mainland China have stagnated since April 2012. We believe that the company’s management is addressing these issues, as it has in the past, with corrective actions which should show up in the 2015 operating figures.CFR is cheaper and better organized than the direct and indirect competition.
Additionally, the company is leading the competition in terms of its a) brand diversification, b) growth resilience during periods of economic slowdowns, c) category lead and defensive moat, d) growth headroom potential (through various IOT opportunities), e) mid-class potential, and f) digital downstream potential (IOT).
The company has a highly attractive risk-adjusted investment profile: the stock currently has a P/E for 2015 of 16.8, and the operating working capital cycle has been constant for the last 14 years at around 170 days.
Revenue/business triggers
- Lower raw material costs could positively impact net margins to the upside,
- CFR has one the cheapest valuations in the sector,
- Adjusted to the sector average valuation, there is upside potential of over 15%,
- The use of some disruptive technologies could provide the share price with upside potential of over 30%.