Hugo Boss
Price €54.04
52 week high-low €59.98 – €42.05
Net Yield 1.30%
Hist/Pros PER 27/19
Equity Market Cap (M) €3,754
Consumer Discretionary
Yves Müller, CFO/COO and Christian Stoehr, Head of Investor Relations
Hugo Boss aims to be a ‘premium mainstream’ luxury fashion brand and lifestyle business. In itself, this may seem somewhat challenged; luxury analysts talk of a dichotomy presented by seeking to be ‘premium but mainstream’ in fashion. However, that doesn’t mean it’s impossible – it’s just hard! Brand image needs careful nurturing to be viewed as aspirational yet, affordable. I think Nike has evidenced this status amongst Millennials.
Hugo Boss, the fashion house, is made up of two brands; Hugo and Boss. Hugo aims to be the consumer entry point brand offering bold styles that are more on-trend with a wide product offering to suit male and female consumers. Boss is the lifestyle brand with a more defined product DNA for those more committed consumers. Today, group sales are driven by menswear. In womenswear, Hugo Boss is weaker. I wonder if Hugo Boss may struggle to grow its existing brands organically with female consumers. Herein lies a challenge and/or opportunity for management. I think acquiring a premium womenswear brand may offer a better growth avenue than seeking to re-mould existing brand perceptions.
In August, I spoke with CFO Yves Müller who emphasised the company is focused heavily on building Hugo Boss’ brand appeal amongst Millennial and Gen-Z consumers. Their critical focus is a rejuvenated digital marketing strategy. Digital engagement seems key and Hugo Boss appear, rightfully, to be focused on key interactive social media platforms TikTok and Instagram. Unlike some peers, management are expanding digital marketing spend as a proportion of sales despite the weakening macroeconomic backdrop. Becoming emboldened at a time of economic weakness could help drive long term success but heightens short term risks.
Halma
Price £20.75
52 week high-low £32.70 – £18.55
Net Yield 0.91%
Hist/Pros PER 32/30
Equity Market Cap (M) £7,877
Industrials
Charles King, Head of Investor Relations
Halma is an industrial holding company which owns c.45 underlying operating businesses, producing an array of products and services linked to the broad themes of “safer, cleaner and healthier” such as fire detection, water analysis and treatment and, blood pressure monitoring. Despite deteriorating macroeconomics, Halma continues to see strong customer demand. Lead times for Halma’s order book are short, so any impact from a slowing economic backdrop should be seen quickly but this hasn’t been the case so far. Charles reiterated that Halma’s businesses typically have limited economic cycle sensitivity due to their non-discretionary nature. The two typical areas of cyclicality in the business are oil & gas and the UK water business which collectively represent less than five percent of revenue. Halma provides safety services to the oil & gas industry; its demand is exposed to the macro cycle but is much less volatile than swings in energy prices. Whilst in their UK water business, demand is not linked to the macroeconomic cycle but to the UK water regulatory cycle.
Halma regularly purchase businesses via small bolt-on acquisitions and have an excellent track record in executing and integrating acquisitions. Management have a longstanding key performance indicator (KPI) of +5% p.a. profit contribution from acquisitions. However, this hasn’t always been met. Additionally, as the business grows, the law of large numbers means any bolt-on acquisition will have less impact on group profit growth; meaning more acquisitions are typically needed to match historical growth rates. Following a recent restructuring, each reporting division now has its own dedicated M&A team; management hopes this will help them meet their KPI on a more regular basis, but we withhold optimism from our forecasts until we see sustained proof.
Prudential
Price £9.04
52 week high-low £15.66 – £8.77
Net Yield 1.7%
Hist/Pros PER N/A / 11
Equity Market Cap (M) £25,643
Financials
Patrick Bowes, Head of IR and Ming Hau, IR Manager
In recent years the Pru has spun off its UK operations (M&G) and its US operations (Jackson) and is now fully focussed on Asia. The new CEO, Anil Wadhwani was CEO of Manulife Asia and arrived with 30 years of Asian experience; they did stress that Anil brought a proven track record of strategic vision and execution in some of the world’s biggest financial services companies. He also has significant and proven digital experience, having driven the modernisation of technology platforms across 13 markets in Asia. Having an Asian person at the helm should help integrate the politics of business with its Asian focus and dampen the perception of a Western company capturing ground in Asia. I sense this will help if trade wars kick off again. They did not have an opinion on when the Hong Kong border will open and speculated that nothing will happen until Xi Jinping gets re-elected in September. The border is important for sales of Hong Kong based policies to Chinese residents as it requires a face to face meeting. They did remind us of the strength of Prudential’s distribution model in COVID China, noticing that banks stay open during COVID whereas their agents do not.
Many of the shareholders thought that the company’s shares were cheap but that the Prudential was reluctant to implement a share buy-back having just had a rights issue to raise more cash. He also pointed out that the finance director had recently been buying shares. Risks are that China persists with its sales-hampering zero tolerance COVID policy and that Prudential is discriminated against by local regulators because of its historic ties with the West.
CONSUMER DISCRETIONARY Hugo Boss
JD Sports Fashion
Frasers Group
Starbucks
WH Smith
CONSUMER STAPLESHaleon
Imperial Brands
McCormick & Company
Tesco
FINANCIALSBarclays
CarMax
Chesnara
Lloyds Banking Group
London Stock Exchange Group
Prudential
INDUSTRIALSBAE Systems
Experian
GXO Logistics
Halma
Smiths Group
INFORMATION TECHNOLOGYGlobant
Microsoft
Sage Group
MATERIALSCroda International
Hill & Smith Holdings
Johnson Matthey
UTILITIESSevern Trent
Sir John Royden, Head of Research
Michael Bray, CFA, Research Analyst
James Ayling, CFA, Research Analyst
