Luxury is in the detail – Asief Mohamed on Rupert’s Richemont 

Aeon Investment Management’s chief investment officer Asief Mohamed comments on Johann Rupert-controlled luxury goods maker Richemont, after the behemoth added around R100bn in market value on Friday. The share price rally, which came off the back of superb half-year results, can also be attributed to corporate action in its online sales platform; the company is in talks with e-commerce platform Farfetch. On top of this, an activist asset manager called Third Point, led by Daniel Loeb, has bought around 3% of the business and will be looking to iron out the operational issues plaguing one of the world’s largest luxury goods businesses. Whether Johann Rupert, who is the controlling shareholder via higher voting shares, will agree with Loeb’s direction is unknown at this point. Mohamed outlines some of the reasons for Richemont’s ‘expensive’ valuation, given its cheap cost of capital and rand hedge qualities. – Justin Rowe-Roberts

Asief Mohamed on Richemont’s background and industry: 

Richemont is an iconic South African company. Although you’ll see it as a Swiss company, it was started by South Africans, specifically Johann Rupert and his father many years ago. They are what we call hard luxury goods, more so than soft luxury goods. Typically, the soft luxury goods would comprise leather bags. Hard luxury goods are watches and jewellery. They also own brands like Montblanc. South Africans have done well; Elon Musk specifically. Also the founders of Monster beverages, that has done exceptionally well internationally. If you look at Richemont, a South African company that has also done very well. It’s a luxury goods company selling to high-end customers.

On the reasons for the 10% share price increase: 

A phenomenal set of results, I must say it surpassed expectations. The results now show revenue is above pre-Covid-19 levels, record levels, in fact. The numbers are off a low base given the pandemic in the prior period. The numbers are up 60% on the prior period and about 30% on pre-Covid-19. That was the one aspect; a good set of results. The other is that they have announced a potential sale or merger of YNAP because their online sales platform has been making losses. If they do sell it and get a good price, it will remove that loss from the income statement and also the amortisation. Hopefully, the party they are selling it to will still sell Richemont products: luxury brands, luxury watches to customers and a much more focused play. So, that’s the positive news. The other news is there’s been speculation there has been a corporate raider buying more shares in Richemont. [Whether] they are going to succeed is a different issue altogether as the Ruperts effectively control Richemont via high voting shares. That’s basically the reason why it is done so well. I must say it’s surpassed expectations and done well.

On whether Richemont is an ‘expensive’ share: 

It’s a very good point. It is expensive and the forward price-earnings multiple is at 30 times. Expensive. Tencent, by the way – which most South Africans are exposed to – is at a forward multiple of just under 30 times. Similar price ratios, while Tencent’s historic earnings growth was closer to 30% earnings per share growth. While Richemont has not done that in euro terms, it has been a lot lower, in single digits more than anything else. If you look over a long period of time and at the return on invested capital, Tencent’s return on invested capital is close to 20%, while Richemont’s return on invested capital has been declining to about 4% or around that mark. There’s a big difference in returns, so I can’t understand why the valuation is that expensive. I think it is driven in large because of the corporate activity supported by a great set of results. South African investors don’t really have lots of other opportunities. They have to buy rand hedge shares. One could justify a higher price-to-earnings multiple for Richemont because its cost of capital and costs of debt are a lot lower in Swiss franc terms.

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