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Equity Report LVMH

Date: 30/04/18 Current Price: 289.30€ Target Price: 206€ (-29%)


Ticker: LVMH Market Cap.: €145.449B Recommendation: Sell

FIGURE 1 – MARKET PROFILE Business Description


Market Profile LVMH is an European multinational luxury goods conglomerate, headquartered
Closing Price in Paris, France, and listed on Euronext Paris. Currently, the firm has a portfolio
289.30
(€) of 70 brands in all five major sectors of the luxury market: Wines & Spirits,
52 Week H/L Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry and Selective
289.30/211.90
(€)
Retailing. It is present in 70 countries, with Asia and the US having been the
Average
Volume (3M)
654,067 Mn regions with the highest revenue growth in 2017 - 28% and 25%, respectively.
Shares The industry is characterized by moderate growth (5% CAGR) and significant
505.09Mn
Outstanding
barriers to entry under the form of high entry costs and very reputable players.
P/E 28.42x LVMH faces competition from luxury brands including Richemont, Kering, Ralph
SOURCE: REUTERS Lauren and Herms, but the reputation of its brands allows it to lead them in both
size and growth, whilst maintaining profitability levels significantly above sector
average (16% ROC vs around 11% for the sector, net of cash).
2017 2018F 2019F 2020F 2021F 2022F
FIGURE 2 – SHARE PRICE AND VALUE Revenues (€Mn) 42636 44767 47006 49356 51824 54415
Operating Margin 19% 18% 18% 18% 18% 18%
320 Price
Net Profit Margin 12% 12% 13% 13% 13% 13%
280 €289
240 ROE 17% 16% 17% 16% 16% 16%
200 ROC 14% 14% 14% 14% 14% 14%
Value WACC 6% 6% 6% 6% 6% 6%
160
€205
120 EVA (€Mn) 3255 3047 3521 3574 3725 4027
80 Net Debt/EBIT 1.43x 0.83x 0.87x 0.90x 0.93x 0.96x
40
SOURCE: TEAM ANALYSIS
0
1/3/11
1/3/12
1/3/13
1/3/14
1/3/15
1/3/16
1/3/17
1/3/18

SOURCE: TEAM ANALYSIS


Investment Analysis
SOURCE: YAHOO FINANCE AND TEAM ANALYSIS
Our analysis suggests LVMH is considerably overvalued at 289.30€, the closing
price at 30/04/2018. Therefore, we issue a sell recommendation for LVMH shares
FIGURE 3 – DCF VALUATION SCENARIOS based on a DCF estimated share value of 206€ supported by a peer derived
multiple valuation yielding a share value of 222€. The main assumptions behind
DCF Valuation Scenarios
this valuation include (1) a stable operating margin of 18% until 2022, (2) the
Optimistic –3.65% presence of perceived strong, sustainable competitive advantages (namely brand
growth in perpetuity; 240€
name and large financial capabilities) and considerable barriers to entry
ROC=10%
Base - 2.65% growth (substantial investment in production facilities required, reputation and
in perpetuity; 206€ customer loyalty), which allow LVMH to generate consistent marginal excess
ROC=9% returns of 2% in perpetuity, and (3) a growth rate in perpetuity of 2.65%.
Pessimistic – 1.65%
growth in perpetuity; 188€ Our optimistic scenario (figure 3), considering a higher economic growth rate and
ROC=8% superior marginal returns on new projects in perpetuity (10% vs 9%) yields an
SOURCE: TEAM ANALYSIS intrinsic value of 240€ - 17% below the latest market price, which adds
confidence to our sell recommendation.

Corporate Finance Department | www.fepfinanceclub.org


P&L
FIGURE 4 – MULTIPLE VALUATION

Multiple Valuation (Median) (€Mn) 2017 2018F 2019F 2020F 2021F 2022F
Revenues 42636 44767 47006 49356 51824 54415
P/E 36,3x
EBIT 8113 8058 8461 8884 9328 9795
EV/EBIT 4,0x Interest
179 334 194 212 230 187
MtB 3,6x Expense
EBT 7934 7724 8267 8672 9098 9608
Tobin-Q 3,2x
Tax Rate 29% 33 % 28% 28% 27% 25%
Equity Value
112025 Net Income
(€Mn) 5616 5167 5952 6244 6605 7159
(before MI)
Share Value (€) 222 SOURCE: TEAM ANALYSIS
SOURCE: TEAM ANALYSIS

Balance Sheet
FIGURE 5 – DCF VALUATION ($Mn) 2017 2018F 2019F 2020F 2021F 2022F
DCFFIGURE 5 – DCF
Valuation VALUATION
(Base Scenario) Fixed Assets 43434 44022 46223 48535 50961 53509

Enterprise Value (€Mn) 110060 Working -6764 -6715 -7051 -7403 -7774 -8162
Capital
Cash and NOA (€Mn) 5166
Non 1428 1428 1428 1428 1428 1428
Debt (€Mn) 11576 Operating
Equity Value (€Mn) 103650
Assets
Cash 3738 836 2556 4359 6281 8435
Shares Outstanding
504 Equity 30260 32844 35820 38942 42245 45824
(Mn)
Debt 11576 6727 7337 7976 8652 9386
Share Value (€) 206
SOURCE: TEAM ANALYSIS
SOURCE: TEAM ANALYSIS

FIGURE 6 – WACC
Cash Flow Statement
WACC
(€Mn) 2018F 2019F 2020F 2021F 2022F
Risk-free Rate 0.59% Net Income 5167 5952 6244 6605 7159
Country Risk - ΔWC -49 336 353 370 389
1.40%
Premium
S-OURCE
Δ FA: TEAM ANALYSIS -588 -2201 -2311 -2427 -2548
Beta 0.88
SOURCE: TEAM ANALYSIS + Δ Debt -4849 610 639 676 733
Equity Risk Premium 5.19% -Dividends -2584 -2976 -3122 -3303 -3579
Cost of Equity 6.56% + Δ Equity (Issue) 0 0 0 0 0
+ Δ NOA 0 0 0 0 0
Default Spread 0.90%
= Δ Cash
SOURCE: TEAM ANALYSIS
-2903 1721 1803 1921 2154
Cost of Debt 2.89%
SOURCE: TEAM ANALYSIS
WACC 6.17%

SOURCE: TEAM ANALYSIS, DAMODARAN

Corporate Finance Department | www.fepfinanceclub.org


Analyst Email LinkedIn
Andreia Silva andreiasousa@live.com.pt https://www.linkedin.com/in/ andreia-
sousa-silva/
Director Email LinkedIn
Miguel Guimarães migftg95@gmail.com www.linkedin.com/in/miguelftguimaraes

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