Overstone Global All Cap Value Fund on The Swatch Group AG
Thesis
Swatch has suffered a prolonged luxury-market slowdown, particularly in China, with first-half operating margins at 1.7%. However, constant-currency revenue increased 8.5%, including US growth of 27%. Management is maintaining its workforce and capacity so that recovering sales can translate into greater operating profit. The market values the company at CHF9.5 billion despite CHF1.5 billion of net cash and CHF4 billion of property, leaving the operating business priced at about 3.3 times its historical average operating earnings.
“Management continue to defend the decision to maintain headcount and capacity, which we believe creates the platform for material operational gearing.”
Key risks
- A China recovery remains delayed.
- Mainland China sales fell roughly 5%.
- Maintaining capacity could keep costs high if demand fails to recover.
- First-half profitability is very weak.