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L'Oreal - A key holding in your equity portfolio

L’Oreal is a global cosmetics group that operates in 130 countries worldwide with major brands including L’Oreal Paris, Garnier, Lancôme, The Body Shop and Maybelline New York.

About the Shares

L’Oreal shares are up 15% year-to-date compared to the Euro Stoxx 50 which is down 4% and the CAC 40 which is flat for the year.

The outperformance is not a coincidence. It is a result of two strong quarters and an increase in management’s full-year forecasts on the back of very promising results.

Price Target of €195/share

We increased our price target on L’Oreal post H116 results to €195/share (previously €184/share). The main contributor to the increase in Price Target was an improvement in our financial forecasts for 2017, moving them closer to market consensus.

We are now more confident that the Group is well positioned to reach our projections. L’Oreal has also proved to be resilient in difficult times.

The increase in price target is justified in our view for the following reasons:

1. We expect H216 to be stronger than H116 mainly driven by a stronger innovation program. Management re-iterated its view that L’Oreal will continue to outperform its market and deliver “sales and profit growth.”

2. We continue to see increased sales in the make-up business which accounts for most of the organic sales growth we are seeing at Group level.

3. Momentum in both the mass and selective channels has improved and we
expect this positive trend to continue in the coming years mainly through innovation and increased market shares through acquisitions.

4. Management are focusing on growth in emerging markets. We are seeing potential there both from an improvement in the standard of living as well as an increase in population.

5. The company has strong net cash of €11bln enabling the Group to continue increasing its market share through acquisitions, increase dividends and/or buyback shares

Potential for further growth

• World sales leader in the global beauty market followed by Unilever and Proctor & Gamble

• We are confident that the Group will continue to increase its sales across all regions as it continues to:

o Gain from economies of scale
o Growth through acquisition – L’Oreal made seven acquisitions in the past two years. We expect management to continue increasing market share by buying additional companies at more attractive prices due to global growth concerns
o Focus on growth in emerging markets as we are seeing the middle class in these markets continue to increase. Management is targeting this new middle class in order to continue increasing its top line

• Growth in e-commerce. Growth through sales over the internet is something which a lot of companies are focusing on. We continue to see growth from online sales and expect this to continue as the company continues to add additional products to its online portal

The negatives

• Global growth concerns remain a worry

• Increased competition in competition could be a threat to increasing market share

• Currency headwinds

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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