Photo: Bloomberg
Photo: Bloomberg

Re-rating of Richemont is over for now, but exceptional opportunity exists

By Ryk de Klerk Time of article published Aug 16, 2021

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IN DECEMBER last year, I argued that the stage was set for a re-rating of Richemont against its peer group and global equity markets.

Since I penned the article “Richemont reinvigorated: An opportunity?”, Richemont has outperformed the South African stock market as measured by the FTSE/JSE All Share Index by about 21 percent. Richemont has also outperformed the S&P Global Luxury Index in terms of US dollars by more than 18 percent since the end of November last year.

The capital returns for holders of Richemont shares who received warrants in the shareholder loyalty scheme last year was even greater if the value of the warrants is taken into account. In South Africa, Richemont is listed as a depositary receipt where each depositary receipt represents a one-tenth share of the rights and benefits attached to a Richemont A unit. Two Swiss-listed A warrants were issued for each Richemont A share held, and in South Africa’s case, two JSE-listed warrants or options for each Richemont depositary share held.

The exercise price of the A warrant, being the price at which holders will be entitled to purchase one Richemont A share at maturity in November 2023, has been set at 6.7 Swiss francs (R107.60), and 67 warrant receipts are required to purchase one Richemont A share. In the case of South Africa, the exercise price of the warrant is 0.67 Swiss franc converted into rands at the rand-to-Swiss franc exchange rate at maturity in November 2023.

Since I wrote the original article, the Swiss-listed A warrant is up by more than 240 percent in Swiss francs and is even ahead by 37 percent compared to Bitcoin, despite the latter’s meteoric rise. Since the beginning of December, the weekly closing prices of the Swiss-listed A warrants almost perfectly reflected the theoretical values of the warrants given the weekly close prices of the Swiss-listed A shares in Swiss francs.

I use a fairly simple Black and Scholes model to get an idea of a fair price of the option – a European option, as the A warrants can be exercised only in November 2023. I made provision for total dividend distributions of 5 Swiss francs and subtracted it from the Swiss-listed A share price.

The prices of the JSE-listed Richemont warrants, or options as they are called, traded in tandem to the weekly close prices of the Swisslisted A warrants converted to rands and divided by 10, as 10 depositary receipts equals one Richemont A Share. That was until the week ended July 16.

On July 22, a massive 104 million Richemont option changed hands on the JSE at a volume-weighted price of 86 cents per option. In comparison, that day’s close of the Swiss-listed

A warrant converted to rands and divided by 10 was 99 South African cents. Since then, the gap between the two instruments widened to 21 South African cents at the close on Friday, with the SA Richemont option trading at a discount of 20 percent to the Swiss-listed A warrant.

The JSE-listed Richemont options closed at 83c on Friday, and converted to the Swiss-listed Richemont A share warrants at the then rand-to-Swiss franc exchange rate indicates a price of 53 Swiss francs. That means that the price of the option was based on a price of about 102 Swiss francs per Richemont A share, while the latter closed at about 115 Swiss francs.

There is method behind the madness, though. The average weekly volume traded on the JSE in Richemont options from the second week in December until the second week of July was about 16 million. It would therefore take more than six weeks to sell 100 million options.

If the seller for whatever reason thinks that Richemont’s share price would tank in the short term, it is better to sell the entire lot at a discount. At this stage, the leverage of the Richemont A warrant is such that a 20 percent fall in the Swiss-listed Richemont A share price could lead to a fall of 50 percent in the price of the A warrant.

The price differential between the Swiss-listed A warrants and the JSElisted options, or let’s say the mispricing, has created a massive arbitrage opportunity. By arbitrage, I mean selling 1 Swiss-listed A warrant and buying 10 JSE-listed options. At some stage, the prices will draw level again, and depending on the prices bought and sold of the two instruments, a cool 20 percent can be bagged. Unfortunately, only those investors with both offshore and domestic facilities can utilise this exceptional opportunity.

The reinvigoration of Richemont has vastly improved the prospects of above-average profit growth over the long run. Although it will remain prone to the global economic cycle, long-term profit growth will be underscored by the company’s increasing presence in China and the Luxury New Retail initiative.

I am of the opinion that much of the expected re-rating of Richemont is over for now, though. When the discount of JSE-listed Richemont option against the Swiss-listed A Warrant narrows, I would be looking to switch my holding in Richemont options to Richemont shares on a rand-for-rand basis to reduce risk. Yes, effectively a partial early exercise of the Richemont options.

Graph: Supplied
Graph: Supplied
Graph: Supplied

Ryk de Klerk is an analyst-at-large. Contact [email protected] He is not a registered financial adviser and the views expressed above are his own. De Klerk has a direct interest in Richemont options. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results.

*The views expressed here are not necessarily those of IOL or of title sites

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