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According to Morningstar, an asset management company, Swatch Group is one of the few remaining attractive investment opportunities in the increasingly expensive luxury sector.
The firm believes that Swatch Group remains one of the few remaining attractive investment opportunities with its strong balance sheet, significant cash generation, quality assets and under-appreciated opportunities to improve profitability.
Morning Star says Swatch’s profitability should benefit from a continued shift in mix towards the group’s most profitable luxury and premium watch brands, notably Omega and Longines.
It also predicts that the core and mid-range brands (21% of revenue, according to its estimates) will continue to suffer from competition from smartwatches over the next 4-5 years before stabilising at lower levels as these products mature. In this context, cost control measures, such as the shift to e-commerce and shop closures, are expected to mitigate the impact of the decline in brand revenues.
In addition, investments in automation should enable higher profitability to be achieved even with lower volumes.
The Harry Winston brand (8% of turnover) could then increase its revenues at a moderate pace over the next 10 years, helped by the fundamental drivers of demand for branded jewellery (gains in market share, feminisation of the customer base) and a strong image (supported by auction successes, very high-end positioning and distribution control).
Its operating margin could thus reach between 10% and 20% by 2025 and 20% or more by 2030, compared to less than 10% in 2019 thanks to economies of scale.
Finally, Swatch Group’s balance sheet is solid, backed by precious stones and metals. The Group generated free cash flow of almost 700 million Swiss francs, even in the crisis year 2020 (a free cash flow yield of 4.9%).
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