26. October 2021 | 12:27 CET
LVMH, Diamcor Mining, TUI, Carnival - Another lockdown or profit explosion?
The poor are getting poorer, and the rich are getting richer. Demographic studies suggest that in Europe, especially Germany, large sections of the population will be affected by poverty in old age. The reason: falling income in real terms due to high inflation, especially for everyday goods. The official inflation rate of the central banks is window dressing because the hedonically calculated indices include, for example, increases in the performance of mobile devices and thus compensate for the exploding prices of energy and food. Luxury is a particular area of consumption that tends to be attributed to the privileged tiers of the population. Here, the increase in prosperity is supported by inflation on the income side and enables the suppliers of luxury goods to achieve sustained high growth rates.
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ISIN: LVMH EO 0_3 | FR0000121014 , Diamcor Mining Inc. | CA2525312070 , TUI AG NA O.N. | DE000TUAG000 , CARNIVAL PLC DL 1_66 | GB0031215220
Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.
LVMH - The great need to catch up after the lockdown
The French luxury group LVMH (Moët Hennessy Louis Vuitton SE) is the global leader in the luxury goods industry, holding rights to 75 different brands. Internationally, the coveted items are sold in about 5,000 best-located stores in nearly 80 countries. LVMH employs more than 150,000 people, 71% of whom are female. At the end of 2020, LVMH's luxury goods portfolio covered 47% fashion and accessory items, 23% merchandise distribution through department store chains, 11% production of champagne, wines and spirits, and 18% perfumes, cosmetics, luxury watches and jewels. To strengthen international distribution, the US jewelry chain Tiffany & Co. was also acquired at the beginning of January 2021.
Within this outstanding global world leadership in almost every line of its luxury goods spectrum, LVMH posted a steady 85% overall sales increase in the seven years leading up to 2020, but a 17% decline in sales and a 35% drop in profits in the Corona year of 2020. However, business momentum has recently rebounded strongly following the lockdowns. In H1 2021, LVMH saw a jump in sales of plus 56% as well as an explosion in net income to 10 times year-on-year. In the currently reported third quarter, sales increased by another 20%. The threat of the introduction of wealth and luxury taxes in China has so far failed to break the trend.
With a market capitalization of EUR 330 billion, LVMH shares are among the heaviest stocks in the EURO STOXX 50. The share is currently just under 10% below its all-time high of EUR 716. It is reasonably valued with a P/E ratio of 25 and a PS ratio of 5.
Diamcor Mining - Sales of diamonds are surging
In an inflationary environment, demand for value-preserving goods is rising, which undoubtedly includes investment in diamonds. The gems distributed by LVMH could also come from Diamcor Mining Inc. as the Company partners with LVMH's new subsidiary, Tiffany & Co, Canada. Diamcor Mining is a publicly-traded diamond mining company listed on the TSX Venture Exchange and in Germany.
The Company has a well-established production operation in South Africa and extensive experience supplying rough diamonds to the world market. The deposits at Krone-Endora are located in two layers with a maximum total depth of approximately 15 meters from surface to bedrock, allowing for very cost-effective surface mining. Due to its location directly adjacent to the Venetia Mine, Krone-Endora benefits from the already developed infrastructure and existing services around the mining site.
In the current quarter, Diamcor is again able to achieve excellent results from the tender round for the sale of rough diamonds resulting from the processing of quarry material in the recently upgraded processing facilities at the Venetia project in Krone Endora. In this sale, which was completed a few weeks into the quarter, rough diamonds of approximately 2,517 carats were sold for a corresponding gross revenue of USD 483,422, resulting in an average price of USD 192.07 per carat for these diamonds. The Company intends to implement two additional tenders during the quarter in cooperation with the Company's long-time partner, Koin International, at its new state-of-the-art sales facilities in Dubai.
The Company has entered into a long-term strategic alliance with Tiffany & Co. Canada, a subsidiary of world-renowned New York-based Tiffany & Co, a long-term strategic alliance with a right of first refusal on up to 100% of the future production of rough diamonds from the Krone-Endora Venetia project at prevailing prices. In conjunction with this right of first refusal, Tiffany & Co. Canada also provided financing to the Company to advance the project. Diamcor's stock benefited from the good news, gaining 50% in October. With the current collaborations, the junior is very well positioned as a supplier to the luxury market.
TUI versus Carnival - Which is the better tourism share?
We want to take a closer look at two more shares from the luxury and travel sector. These are the travel and cruise experts TUI and Carnival. Both companies have had a tough time, as the lockdowns around Corona led to a temporary halt in bookings and cancellation of important tourist destinations, such as currently still Canada and Thailand.
In the case of TUI, in addition to state aid, there was also a considerable capital increase of EUR 1.1 billion recently. Russian investor Alexei Mordashov, who currently holds 32% of the shares, wants to participate in the move and keep his stake constant. TUI intends to use the new money to repay the EUR 375 million loan granted by the state-owned KfW Bank ahead of schedule and at the same time reduce bank debt. The move is not affected by the silent participation and the convertible bond issued by the German government totaling around EUR 1.2 billion. TUI had already increased its capital by EUR 500 million in January 2021. By raising equity, the Hanover-based Company is primarily gaining time.
Carnival must continue to cut corners given its loss-making business. Most recently, the ailing cruise specialist took out a senior secured loan of USD 2.3 billion. The refinancing is expected to result in more than USD 135 million annual interest savings and extend maturities. With more than USD 14 billion in operating costs, observers are left wondering how this will work out in the long run when incidence numbers start to rise again at a faster rate, especially during the winter season. Whether consumers will continue to have an appetite for cruising in the face of rising prices remains questionable. In any case, Carnival said a month ago that cruise bookings for the second half of 2022 are actually above pre-pandemic levels. One can only wish the operators that the ships will indeed sail.
Both companies can only balance their books with rising sales, and the prospects for this are currently relatively modest. From a chart perspective, the shares have recently come under stronger downward pressure again. TUI's share price must climb back above EUR 3 as quickly as possible to improve the situation; Carnival still has a thick support line at around EUR 16. Both stocks would be strongly affected by new pandemic closures. Therefore, for the time being, we recommend only a close watch on how governments now behave in the coming Corona winter.
Investment in luxury and travel stocks is very much linked to current inflation cycles and progress in pandemic control. If the virus causes major closures again next winter despite widespread vaccinations, there will be a significant loss of revenue in the travel industry. Since investing in diamonds is a risk-reducing diversification, Diamcor can be quite a profitable admixture in such times.