Demand for luxury goods pumps demand for gold and gems >>>

17 september 2005

Written By: Barry Sergeant September 15th, 2005

JOHANNESBURG (Mineweb.com) -- Richemont, the luxury goods and tobacco group, has comprehensively beaten consensus market expectations in its trading update for the five months to August 31, delivered on Thursday at its annual general meeting in Geneva.

Where analysts saw five-months sales rising 11% in “constant currency terms” (euros), the actual result came in at 16%. By mid-day on Thursday, Richemont was trading up more than 3% higher in Johannesburg at just above R26 a share, and was similarly at fresh multi-year highs in Switzerland, at just above 51 Swiss francs (CHF) per unit.

Richemont’s actual five-month figures were met with resounding applause in Switzerland, where, for instance, analysts at Zuercher Kantonalbank hailed the outcome for Richemont’s watches product segment, and in geographical areas, Japan, where sales rose by a “surprising” 11% in constant currency terms.

Richemont’s luxury goods – which include Cartier, Van Cleef & Arpels, Alfred Dunhill, Montblanc, Lancel, Jaeger-LeCoultre, Piaget, Baume & Mercier, IWC,

Vacheron Constantin, A.Lange & Sohne, and Officine Panerai - are sold across the world. The group manages four geographical divisions, Europe (43% of sales to March 31, 2005), Asia-Pacific (21%), Japan (17%) and Americas (19%). Watches contributed 48% to 2005 turnover, followed by jewellery, clothing and other, writing instruments and leather goods.

Analysts at Helvea said Richemont's “heavy” past investments were now paying off, noting that high-margin products were the main driver behind the trading update. Analysts, including those at HSBC, Kepler Equities and Vontobel, appeared unanimous that forecasts for Richemont’s full-year earnings to March 31, 2006, would be increased in due course.

HSBC noted that the Cartier division (seen as the group's main luxury profits driver) recorded 14% higher five-month sales. JP Morgan focused on Richemont’s minority, but exceptionally valuable, 18.5% stake in British American Tobacco (BAT), saying that imminent US Supreme Court rulings are likely to be favorable for the tobacco industry.

Positive upgrades and comments for Richemont have poured in over the past fortnight or so. At Morgan Stanley, ahead of the five-month trading update, analysts raised Richemont’s stock price target to CHF54, following an increase in estimates for 2006 and the longer term.

Smith Barney upgraded the price target to CHF55, not least on the basis that the stock’s positive drivers are now being recognized by investors – “albeit belatedly.” Deutsche Bank upgraded its Richemont stock price target to CHF54; JP Morgan maintained its "overweight" rating, and pushed the 12-month target price to CHF50.

Some upgrades were prompted by recent results from Louis Vuitton Moët Hennessy, LVMH, the world’s biggest, and biggest-sounding, luxury goods firm.

Richemont, rated No 2 luxury goods group in the world, has also benefited in the investment world from recent stellar results from Tiffany, another luxury goods firm.

For South African investors, Richemont is one of a kind, and one of the five biggest stocks listed in Johannesburg. Last Friday, Investec’s Michael Power told Mineweb Radio, in a discussion of levels of stock markets, that “you would probably say longer term there i more in the Eastern cycle than there is in the Western cycle.” In this context, Power mentioned specifically commodity stocks, but also “stocks like Richemont, which I think will benefit extraordinarily from the rise of the East and the rise of the Eastern consumer.”

Power explained: “We have already seen quite marked increases in terms of gold consumption and platinum consumption, and that is something which Richemont will pick up on as well.” Richemont’s five-month trading update showed that sales increased 20% in Asia-Pacific, in constant currency terms.

Investment analysts are increasingly drawing sharper distinctions between Richemont and its peers. Deutsche Bank, for one, upgraded Richemont on the basis that the stock has the potential to post the strongest earnings growth in the global luxury goods sector. Morgan Stanley says Richemont remains one of the top picks in the sector. Richemont is likewise seen by Switzerland’s Bank Leu Investment Research as the “main” beneficiary from strong demand for luxury items and jewelry.

By contrast, in reaction to recent figures from LVMH, Goldman Sachs said the stock appeared to have limited leverage in its two most important divisions, fashion & leather and wines & spirits. While analysts at Merrill Lynch maintained a “buy” rating on LVMH, the stock was seen as likely to continue experiencing adverse currency effects.

Gucci, another leader in the peer group, is generally seen as delivering well on its stated regional and product-related targets, and gaining market share. Richemont, however, appears to stand out; according to Smith Barney, the group owns “better revenue drivers than average,” along with medium-term geographic immaturity (an advantage), and positive operating leverage. Richemont has also taken a more aggressive stance on cost cutting, even ridding itself of non-performing units.

The global luxury goods sector as a whole went into a deep funk after the September 11, 2001 terrorist attacks in New York City. The tide has turned with some conviction over the past 18 months or so. As Morgan Joseph analysts recently said, when upgrading Tiffany from "hold" to "buy," Tiffany’s recent profit reports were “significantly ahead of estimates.”

On June 9, Richemont published expectation-beating results for its fiscal year to March 31, 2005. Net profit on an adjusted basis was up 33% to €881-m. Analysts at Zuercher Kantonalbank noted that Richemont’s operating profit margin increased to 13.6% in its 2005 fiscal year, from 8.8% previously, suggesting that sustained recovery may be on the way.

Richemont boasted operating margins of around 16% in the 1994-1999 period, and 19.3% in 2000. Margins of 16.0% could be expected for 2006, according to Zuercher Kantonalbank

Article published by: Mineweb

Written By: Barry Sergeant September 15th, 2005