Back in early November HERE, I got all excited about the global luxury brand company Burberry (BRBY) on the basis that Asia - especially China - was getting closer to being half the overall sales of the business. Sales elsewhere in the world were under a bit more pressure but the historic chavtastic name felt cheap to me at about sixteen quid a share. After a latest, third quarter, update the shares are up to around eighteen quid a share, so what should we think now about a share which topped out at over twenty-two quid before the stock market challenges due to Covid-19?...
Well the third quarter sales update was not flawless with fashion label sales down about 9% from the level achieved a year ago. This number is improving though and my estimate would be that the sales numbers in 2021 and 2022 are going to lead to a return of positive sales growth figures again. You can guess the rationale as to why this is plausible: a world that moves away from Covid-19 restrictions that impact up to 50% of Burberry's shops and the amount of travel that goes on.
Whilst Asian sales were up over 11% in Q3 (and China even stronger than this) and even base European demand was mildly positive, sales were pulled down by a lack of travel. Fortunately, I think this will substantially improve in a few months time as Covid-19 vaccinations materially build. And I bet you have already guessed that a big chunk of the travel purchases are from Asia, especially China. But what about shorter-term trading? The update again was China-focused with positive enthusiasm about Chinese New Year in just over a week anticipated to lead to a further bump in sales. Burberry continues to be a successful online player in China and it performs today in a complete chav contrast to those days of loving Essex and crew a decade ago. You could say that the focus today is being a China chav...but frankly in terms of making profits that gives you a better chance.
Add on the small current net debt and Burberry’s book valuation today is a little below £8 billion. Whilst profitability for the year to March 2021 is going to be minimal, the previous year was telling you this is a £500 million+ company. Based on what I read for this one about China and the importance of the travel sector realities, these are increasingly becoming the key valuation areas. And the currently implied share price of less than x15 such a level of profitability will excite Chinese or global investors. My instinct is that over the next year I think we have another go at the twenty-two quid share price level again. And that makes Burberry a Buy still for me. China chav-fantastic!
Filed under: Burberry, [email protected] Capital, Xtract Resources, Colin Bird, Saga, Directa Plus, Ross Norman
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