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LVMH - 'cautiously confident'

George Salmon | 30 January 2019 | A A A
LVMH - 'cautiously confident'

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 678.30 | Buy: 678.40 | Change -1.10 (-0.16%)
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Rising sales in all divisions helped LVMH revenues jump 10% to EUR46.8bn in 2018. Excluding the impact of the closure of DFS Hong Kong airport concessions, revenues grew 12%.

With operating margins also improving in all divisions, operating profit from continuing operations rose 21% to EUR10bn.

The full dividend rose 20% to EUR6 per share.

The shares rose 6.1% on the news.

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Our View

LVMH, which stands for Louis Vuitton Moët Hennessy, is a sprawling conglomerate, with products ranging from wines and spirits to watches and jewellery. What unites it is a focus on the very wealthiest customers.

Building that empire has been down to Bernard Arnault, who became chief executive and chairman in 1989. Home grown success stories, and a sprinkling of multi-billion euro acquisitions have turned LVMH into the world's biggest luxury goods group.

It's already a multi-billion dollar industry, and is expected to grow by around 4.3% a year to 2025. Customers are usually hugely wealthy, and prepared to pay handsomely for the latest must have, which helps LVMH earn margins of over 20%.

Those margins mean cash generation is strong - which in turn helps support the dividend. LVMH has held or grown the payout for over 20 years, and we're hopeful this good track record can continue, although there are no guarantees. The prospective yield is 2.5%.

You might think LVMH's products are more St Tropez than Shanghai, but Asia is the group's most important geography. Not only is it the biggest, it's the fastest growing, in part due to rapid wealth creation in countries like China.

Recent results have been strong, but that all-important Asian market is being tarnished by trade wars and a crackdown on the shady world of the daigou.

Daigous are best described as somewhere between a personal shopper and luxury trader. They buy products in the west, taking advantage of lower costs or favourable exchange rates, before transporting them back to their own customers in China.

LVMH doesn't say how much business goes through this channel, but it's enough that images of airport staff rifling through luggage looking for luxury goods sent shivers down investors' spines in October. Still, it was good to see the group report strong trends in the Fashion & Leather goods division, and confirm its 'cautiously confidence' for 2019.

We think the group is well placed for the long-term. It has a host of aspirational brands, and has proven adept at managing them.

Having recently commanded a rating in the mid-20s, the sell-off at the end of 2018 has left the shares trading on 18.6 times expected earnings. That's more in line with the longer-term average.

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Full year trading details (profit details relate to operating profit from continuing operations)

A good performance from Dior and Luis Vuitton helped Fashion & Leather Goods, the group's largest division, deliver revenue of EUR18.5bn. That's up 15% on 2017, with momentum increasing in Q4. Margin gains ensured profit rose 21% to EUR5.9bn.

Across the other divisions, sales growth remains positive but is coming at a slower rate.

The Selective Retailing division saw profits rise 29% to EUR1.4bn in 2018, as sales growth of 6% (+3% in Q4) was boosted by margins rising from 8.1% to 10.1%. LVMH says Sephora, DFS and Le Bon Marché each enjoyed strong growth.

In Wines & Spirits, strong trading in the US and China helped sales rise 5% over the year (up 2% in Q4). Profits increased 5% to EUR1.6bn.

Watches & Jewelry sales rose 12% in the year, and 7% in Q4. A net 23 stores were opened in the year, with further openings due in 2019, including in Hong Kong and Paris. Annual underlying profits rose 37% to EUR703m.

Perfume & Cosmetics sales were up 14% in 2018 (+13% in Q4), with underlying profits up 13% to EUR676m. LVMH believes product innovation and digital marketing can help it continue to grow market share.

Improved profitability helped free cash flow rise 16% to EUR5.5bn. After paying EUR2.7 in dividends and buying EUR274m of Belmond shares, net debt fell from EUR7.2 to EUR5.5bn. The group will complete the acquisition of the specialist hotelier for a further $2.3bn this year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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