Richemont: Solid Results Ahead, Buy Confirmed

seekingalpha05-28

Richemont saw growth in all regions and business areas, with the strongest performance in the retail channel and the Asia-Pacific region.Richemont is moving on with a bolt-on M&A strategy and revenue ...

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In the past years, following M&A diversification, Richemont has made a business model change that is a positive catalyst for its future performance. Firstly, the company has a more balanced cluster exposure on its product MIX. Compared to the pre-COVID-19 level, Chinese clients represent 28% of sales vs. 40%. Looking at the details, the Chinese consumer declined by 15% in Q4; however, this was offset by the Japan, EU, and American regions. On a quarterly basis at a constant rate, these regions were up by 41%, 7% and 11% respectively. Looking at the FX, the CFO reported a neutral impact on margin in 2025. In addition, a","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"CFRUY":"历峯集团","BK4202":"服装、服饰与奢侈品","CFRHF":"Compagnie Financiere Richemont AG"},"translate_title":"历峰：业绩稳健，买入确认","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CFRHF":1,"CFRUY":1},"content_text":"Richemont saw growth in all regions and business areas, with the strongest performance in the retail channel and the Asia-Pacific region.Richemont is moving on with a bolt-on M&A strategy and revenue diversification.The company's base is much better than before, which might support a multiple re-rating. Our buy is confirmed.   wdstock/iStock Editorial via Getty Images On 17/05/2024, Compagnie Financière Richemont (OTCPK:CFRHF)(OTCPK:CFRUY) reported its fiscal year numbers. For our new readers, the company is one of the world's largest luxury players, with a significant market share in the jewelry category. Approximately 70% of Richemont’s sales are derived from its Jewellery Maisons division, whose product portfolio comprises Cartier, Van Cleef & Arpels, and Buccellati brands. The remainder is attributable to smaller brands and specialist watchmakers, including well-known companies such as Panerai, Vacheron Constantin, Piaget, IWC, and Jaeger-LeCoultre. Here at the Lab, we also reported Compagnie Financière Richemont's leading owner (the Rupert family) and its distinctive class of shares.  Since our last update, Resilience In The Luxury Sector, Buy Confirmed, we believe we had good timing. Wall Street has long seen the company as a far more cyclical business than its comps; however, following the recent luxury sector slowdown and comparing Richemont's  Q4 results, our different view was confirmed.   Richemont rating status Q4 and FY Results Compagnie Financière Richemont delivered:  The all-time high company sales at €20.6 billion. The strongest channel performance from retail also supported this. Sales growth was recorded across all regions and business areas; A core operating profit of €4.8 billion despite adverse FX movements; Excluding the negative write-off of YNAP assets, the company achieved a solid profit for the year from continuing operations. This resulted in €3.8 billion. For this reason, Richemont decided to increase its DPS to CHF 2.75 for A shares and CHF 0.275 for B shares. This is a 10% compared to last year; Going to the balance sheet, the company has a solid net cash position of €7.4 billion, thanks to a higher FCF generation.    Richemont FY Results Source: Richemont FY press release - Fig 1 Why are we positive? Aside from the results, a few takeaways from the conference call with management are worth reporting. In the past years, following M&A diversification, Richemont has made a business model change that is a positive catalyst for its future performance. Firstly, the company has a more balanced cluster exposure on its product MIX. Compared to the pre-COVID-19 level, Chinese clients represent 28% of sales vs. 40%. Looking at the details, the Chinese consumer declined by 15% in Q4; however, this was offset by the Japan, EU, and American regions. On a quarterly basis at a constant rate, these regions were up by 41%, 7% and 11% respectively. Looking at the FX, the CFO reported a neutral impact on margin in 2025. In addition, as already reported above, Richemont's retail shares are now at 87%. This means the company has better control of sell-in versus sell-out and strict cost control. Before COVID-19, mono-brand exposure accounted for only 52% of the company's sales. Under the CFO's leadership, the group increased its core operating profit margin by 100 basis points. Burkhart Grunt has also explained Richemont's pricing power on gold inflation, with a positive uplift for the year ahead. This follows solid results achieved with leather goods. Therefore, the company is a much better base than before. This might support a multiple re-rating. Richemont board appointed Nicolas Bos, currently CEO of Van Cleef & Arpels, to the new role of CEO of Richemont starting from 1 June, while Bram Schot will become non-executive vice president of the board from 11 September. This is positive news that goes in the direction of active involvement. Moving on with two additional takeaways, we report the following:  There was a solid Jewellery momentum in Q4, and branded share gains supported this. There is an ESG angle to consider considerations, and Gen Z now represents >20% of the total company's sales; After the Gianvito Rossi acquisition, Richemont expanded its brand portfolio by acquiring 100% of the jeweler Vhernier. Founded in 1984 and based in Milan, the jewelry Maison also manages the silverware brand for the De Vecchi Milano 1935 house. The transaction will have no material financial impact on Richemont's consolidated net assets or operating results for the year ending March 31, 2025. However, this is another bolt-on M&A that reinforces Richemont's revenue diversification.  Earnings Changes and Valuation We tweaked our estimates following the Q4 results and considering the 2024 development. The company exceeded our previous expectation set at €20.4 billion with an EBITDA of €4.7 billion. Supported by better results in the Jewellery division, we increased our sales estimates to €21.6 billion, confirming a 5% year-on-year growth rate. Considering a 70% hedged in FX and a solid gold inflationary pass-through cost, we are maintaining our core operating margin uplift. This resulted in a 2025 EBIT margin of 24.4%. There are 90 basis points higher vs. the 2024 results. In addition, our EBIT was also supported by better financing costs. With no change in corporate tax, our EPS reached €7.55 on a twelve-month forward basis. Considering the current FX, the company trades at 19.2x on a 2025 P/E. Looking at Seeking Alpha valuation data, Richemont trades below its five-year historical average of 20x P/E. As a reminder, the sector luxury average P/E is at 21x. In our view, the company deserves a higher multiple; however, still applying a 20x P/E with our EPS of €7.55, we derive a target price of €151 per share, equal to CHF 149 per share. Therefore, we are maintaining our buy rating target.   Valuation Data Risks Downside risks for Richemont include 1) management strategy execution, 2) watches business cyclicality, 3) a slowdown in the luxury sector, 4) lower perception in equity markets about the luxury long-term growth, 5) brand value, and 6) M&A execution. In addition, Richemont is exposed to pricing pressure, COGS volatility, and foreign exchange rates (Fig 2). That said, the company hedges 70% of its cash flow exposure.   Richemont FX Hedge Fig 2 Conclusion Richemont offers high barriers to entry, good pricing power, and superior free cash flow generation. Here at the Lab, the company plays in the attractive jewelry category. It is more diversified and should have higher multiple valuations than before. Richemont is undervalued versus its historical average, and we maintain our buy rating.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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