The Finance Ghost: The market lowdown on Richemont, Motus and Grindrod

21 Jan 2024

There are signs of life on the JSE, at least in terms of updates on Sens. But perhaps it would be better not to look at the index’s performance thus far this year, as the commodity sector in particular is off to a torrid start. At the time of writing, the Resource 10 Index has shed 12.4% in 2024 – and we are only a few weeks in.

To bring some cheer back into the room, let’s start with Richemont.

Luxury is a dangerous umbrella term

The market wasn’t expecting a good-news story from Richemont, so there was much excitement when the purveyor of the finest unpronounceable watch brands released a solid sales update. To see a company of this size move 10% higher in a day is quite something, perhaps evidencing how desperate local investors were for a promising story.

The surprise came after a worrying time for the luxury sector, including the likes of Burberry putting out concerning numbers. As it turns out, lumping all the different types of high-end goods under one “luxury” umbrella is risky analysis. After all, are Lamborghinis and Cartier necklaces always being bought by the same clientele as Burberry coats and Louis Vuitton bags? Apparently not, based on the numbers.

Cars are looking good (Lamborghini just signed off on a record year) and so is jewellery, with the Jewellery Maisons (the official name for the segment at Richemont) leading the way at the company with growth of 12% in the three months to December 2023 in constant currency. This segment is good for more than 80% of Richemont’s revenue, so the right cannon is firing at the right time.

All eyes will be on LVMH’s earnings release later this month. My gut feel is that Richemont isn’t a useful precursor. There’s a vast difference between cosmetics at Sephora in the US and Richemont’s ultra-exclusive jewellery.

Motus operandi

Cyclical goods are, well, cyclical. Sometimes, they are subject to extreme distortions that investors need to be wary of. We saw this play out in automotive retail in the aftermath of the pandemic, with a supply shortage leading to incredible price inflation in vehicles. This was great news for car dealerships that could suddenly sell the stock on the floor at higher prices.

It was also the ultimate get-out-of-jail card for a car rental industry that desperately needed to “de-fleet” as tourism suffered. With used car prices through the roof, fleets could be reduced at favourable pricing.

That was then and this is now. The supply-demand shortage has flipped, with oversupply from car manufacturers and pressure on dealerships to move stock. In an environment of higher interest rates and questionable consumer affordability, that means discounted sales and lower margins.

Although the car rental business is doing well as tourism recovers, high interest rates mean that working capital pressures (putting cars on the road) are responsible for significantly higher funding costs.

Despite the margin pressure on car sales, Motus seems to have kept it together in terms of operating profit for the six months to December. Funding costs gave the performance a real knock, though, made worse by an aggressive acquisition strategy that led to higher overall levels of debt.

Heps is expected to drop by 20% to 30% for the interim period. The market seemed more than ready for this news, with the share price actually closing in the green on the day.

Transnet’s loss, Grindrod’s gain

The state of rail and port infrastructure in South Africa is well known. TL;DR – we are in serious trouble and nobody seems to know how to fix it.

Meanwhile, in Mozambique, our neighbours have figured out that this is an exciting opportunity to attract trade flows through the Port of Maputo instead of South African ports. This is great news for Grindrod, which owns a 24.7% stake in the Maputo Port Development Company. Record volumes were handled by the port in 2023.

Unless something major improves at Transnet, expect this trend to continue. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Business Maverick

Luxury is a dangerous umbrella term

Motus operandi

Transnet’s loss, Grindrod’s gain