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Compagnie Financière Richemont SA (CFR ZA)

Compagnie Financière Richemont SA is a Switzerland-based luxury goods holding company.  Their portfolio includes several of the world’s leading luxury brands, with particular strengths in jewellery, luxury watches, and writing instruments—these include Cartier, Alfred Dunhill, Montblanc, and Van Cleef & Arpels.

Technically, a price that appears to be in the Improving quadrant of the Relative Rotation Graphs (RRG) analysis makes for an attractive investment opportunity (see the insert on the main chart).

The RRG is used to evaluate the relative strength of different shares against a benchmark and is divided into four quadrants. When a share moves into the Improving quadrant, it implies that it is picking up momentum relative to the benchmark, thus signalling that the upward trajectory is likely to continue – a bullish indicator.

According to the RSI (Relative Strength Index), the stock will be overbought at ~R4 960.  This classifies our profit target of R3 023 as realistic.  We therefore suggest a medium capital at-risk allocation to this trade.Technical analysis

The lower panel shows occurrences of bullish divergences against the Relative Strength Index (RSI)—indicated by a reading of 1.  The RSI is in oversold territory when the reading is below 30 and overbought when the reading is above 70.  The current reading of the RSI is 35, leaving significant room for upside price potential.

Fading downside price momentum according the MACD (Moving Average Convergence Divergence) histogram is supportive of the bullish trend.

The recent upwards trajectory of the on-balance volume (OBV) indicator – which uses volume-flow to predict share price movements – indicates that money is flowing into the share, which further confirms a bullish stance.

Our entry range is between R2 494 to R2 670. Our upside target is set at R3 023 (+18.5% upside potential).

Time to exit is end-November 2023. Keep the option open to close the trade if the price reaches our profit target in a shorter time.  A price below R2 406 (-5.7% from current levels) is a major concern for downside potential and is recommended as a stop-loss.  Expect moderate volatility in the price.

Long-term fundamental view

Richemont offers a unique and strong portfolio of brands that is well-diversified from a product and geographic perspective.

The group’s growth strategy is based on utilising central and regional support hubs to deepen market penetration in fast-growing markets while seeking targeted acquisitions.  It also boasts a solid balance sheet and profitability measures, supported by low gearing levels, high cash generation, strong ROA, as well as robust ROE.

The group’s trading update for the first quarter ended 30 June 2023 was decent.  Sales growth slowed on a sequential basis, however, the business still experienced healthy y/y growth across all channels, business areas and regions (excluding the Americas), despite a tougher economic backdrop.

There was a solid recovery in APAC (the strongest performing region), with mainland China seeing double-digit growth while Hong Kong and Macau grew more than 100% – this was driven by a low base in the prior year as well as the removal of Covid-related restrictions and the reopening of borders.Still, the miss in sales relative to consensus seems to have emanated from the more tepid than anticipated post-reopening economic performance in China. Europe, Japan, and Middle East & Africa all delivered resilient performances, which was supported by robust tourist spend. Growth across all business areas was led by the Jewellery Maisons.

The company’s cash position strengthened y/y and remains key to its defensive investment case.  This also allows for large investment, which will support growth into the future.

Downside risks to our fundamental view include a sharp deterioration in global demand or a marked change in consumer confidence that could affect momentum, exchange rate risk, as well as changes in consumer tastes.

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