Credit Suisse rates Richemont shares too expensive
Outlook for watches is not improving, while investment in luxury fashion retailer YNAP is likely to hinder profitability, investment bank says
Investment banking giant Credit Suisse says Richemont’s shares are overvalued considering how much capital Johann Rupert’s luxury goods company will need to pour into its operations.
The Swiss bank has downgraded Richemont’s equity to “underperform” from “neutral”, and lowered its price target to CHF64 from CHF73, Bloomberg reports.
Richemont’s shares closed down 3.88% on the JSE at R97.87, the worst level in just less than two months.
“We believe the market underappreciates the amount of investment needed in all three major businesses, including jewellery,” Credit Suisse said in a note to clients, Bloomberg reports.
The outlook for watches “isn’t getting any better”, while the group’s investment in online luxury fashion retailer Yoox Net-a-Porter (YNAP) is likely to be a further drag on profitability.
Richemont bought the holding in YNAP it did not yet own for €2.7bn in March 2018. Thanks to that deal, the group’s online sales now make up about 18% of total sales, from 1% previously.
In March, Canadian bank RBC lowered its outlook for Richemont, which sells branded jewellery and high-end watches, Bloomberg reports.
US bank JP Morgan, which has a “neutral” rating on Richemont, said in a research note last Friday the company’s shares “are the object of polarised opinions and positioning”.
“The bulls argue that its share price — one of the laggards of the sector year to date and in the last 12 months — is already factoring in most of the negative news and that critical assets, Cartier and Van Cleef & Arpels (VC&A), are currently undervalued.
“The bears point out that investors underestimate the earnings cuts required in the semesters to come — notably from YNAP.”
JP Morgan said Richemont’s earnings before interest and taxes in the year to March, due to be published in May, probably rose 5% to €2bn.
“YNAP will be a drag again,” the bank said.
While JP Morgan said Richemont is “ideally positioned” to benefit from strong fundamentals in the jewellery market, through its Cartier and VC&A brands, its watch segment has been facing headwinds since 2012.
“It notably faces distribution channels pressures and disruption” from smart watches.
Local money manager Vestact said earlier in 2019 it was a “happy holder of Richemont in our clients’ portfolios”.
“Prospects for the majority of their products are positive, especially in mainland China, their largest market.”
In 2018, Richemont announced a partnership with Chinese e-commerce giant Alibaba.
In January, Richemont reported that YNAP’s contribution was the main reason sales were up 25% to €3.91bn for the third quarter to end-December.
The group’s online operations offset a somewhat sluggish retail operation, whose sales rose a modest 7% to €2bn. Sales for its wholesale operations only increased 1% to €1.1bn.