BROKERS’ NOTES: Buy Richemont, cash in on Sanlam

Chantal Marx, head of investment research and content at FNB Wealth & Investments

BUY: Richemont (long term)

Richemont released results last week that missed analyst forecasts. Currency headwinds amplified some softness on challenging macros. Importantly, the company still showed decent growth across most geographies despite macro pressures and a relatively demanding base. Jewellery showed solid growth — this is an area in which Richemont is particularly strong and where it is growing market share. Consumer interest in branded jewellery is growing and we see structural growth in this space. The cash balance is robust, and a strong balance sheet allows it to fund growth both organically and acquisitively.

The share price is a third off its highs and the stock is now trading at a wider-than-usual discount to peers (24% vs 5% over time), and more than one standard deviation below its forward p:e and enterprise value to earnings before interest, taxes, depreciation and amortisation ratio average over time. Current levels present attractive upside for long-term investors, but there is little technical impetus currently so shorter-term investors may want to keep this one on their watch list and see how the price action evolves over the next few days. The 50% retracement level of R2,080 could offer support in this instance.

SELL: Sanlam (take profits)

We still regard Sanlam as a solid longer-term hold, but institutional money could rotate from insurers to banks as we approach the end of the year. Sanlam has outperformed the sector so far this year. The stock has returned close to 50% year to date, and we think it is a good time to consider taking some money off the table. With the Allianz joint venture the business is more exposed to a volatile African market in which there are structural constraints and substantial currency volatility. While the growth opportunity is substantial, it could result in a less-defensive earnings profile.

We don’t think Sanlam is an outright short yet, but this could change should it push closer to pre-Covid levels (about R77 would be a decent short entry level).