Buying Christian Dior Means Buying LVMH At A 15% Discount (OTCMKTS:CHDRF)

Introduction

Christian Dior (OTCPK:CHDRF) (OTCPK:CHDRY) is one of France’s most prominent fashion brands. As a higher-end brand, the margins are pretty spectacular and the free cash flow expressed as a percentage of the revenue is obviously much higher than “normal” clothing brands. And although you might suspect Dior owns the Dior luxury brands, it actually isn’t the purpose of the company. Christian Dior is the mono-holding with a 41% stake in LVMH as its main asset. Both companies recently released its FY 2022 results so this is a good moment to have a look under the hood.

Christian Dior’s primary listing is on Euronext Paris where it’s trading with CDI as its ticker symbol. While the average daily volume sounds low with just 4,000 shares changing hands on a daily basis, this still represents a monetary value of 3.2M EUR per day. Negligible compared to the current market capitalization of in excess of 140B EUR but keep in mind the float only consists of just over 4 million shares.

The cash flow profile remains strong

Christian Dior consolidates its 41% ownership in French luxury group LVMH (OTCPK:LVMHF) (OTCPK:LVMUY) so perhaps investors should look at Christian Dior from the “mono-holding” perspective. The most valuable asset by far is the stake in LVMH. A slightly confusing ownership method as Dior is the investment holding which owns LVMH but the fashion brand name Dior is part of the LVMH empire. I will discuss the consolidated results so when I am referring to “the company,” it really is about LVMH as underlying entity.

During 2022, the total reported revenue was 79.2B EUR, an increase of 23% compared to the preceding year and a stunning 80% increase compared to the COVID year 2020. The total amount of COGS increased to just under 25B EUR which means the gross margin came in at almost 70%, or 54.2B EUR.

As you could generally expect, the company spent a lot on marketing and selling expenses: In excess of 30% of the revenue was spent on marketing. Despite the 6B EUR increase in marketing efforts, the recurring operating profit increased to 21B EUR. The net income was 14.7B EUR on a consolidated basis but as Dior only owns about 41% of LVMH, we definitely need to deduct the net income attributable to the non-controlling interests (the other shareholders of LVMH).

The attributable net income was 5.8B EUR or 32.13 EUR per share for the Dior shareholders.

The cash flow statement obviously showed an equally strong result. The reported operating cash flow was 17.8B EUR but this includes a 3B EUR investment in the working capital position while it included 5.6B EUR in cash tax payments although only 5.4B EUR was owed based on the income statement. We should also deduct the 2.75B EUR in lease payments from the equation. On an adjusted basis, the operating cash flow was 18.25B EUR. The total capex was roughly 5B EUR resulting in a free cash flow result of 13.25B EUR on a consolidated basis.

That’s less than the net income of 14.7B EUR as Dior’s (and LVMH’s) capex was relatively high. Although the company recorded just 6.2B EUR in depreciation, its 5B EUR capex and 2.75B EUR lease payments indicate it spent a total of 7.75B EUR on these investments. That explains the discrepancy.

The consolidation of the stake in LVMH is an issue, but fortunately it’s easy enough to calculate Dior’s net financial position by comparing the Dior balance sheet with the LVMH balance sheet. We know Dior’s balance sheet contains 7.6B EUR in cash, 10.4B EUR in long-term financial debt and 9.4B EUR in current financial debt (excluding lease liabilities) for a net debt of 12.2B EUR. The LVMH balance sheet (shown below) shows just 7.3B EUR in cash and roughly the same net financial debt numbers.

This means there’s approximately 300M EUR in net cash on the Dior level. We also know Dior owns 208.4M shares of LVMH.

Investment thesis

This makes the approximate sum of the parts valuation relatively straightforward. Ignoring small rounding errors, the fair value of Dior is 208.4M * 807 EUR per share = 168.2B EUR. Adding in the 300M EUR in net cash on the Dior level results in a SOTP of roughly 168.5B EUR. We know Dior has 180.4M shares outstanding, resulting in a fair value of 934 EUR per share (give or take a few percent for rounding).

This means that at the current share price of 792 EUR per share of Dior, you’re essentially buying LVMH at a 15% discount. Dior owns 1.15 shares of LVMH per Dior share outstanding and thus offers an interesting possibility to indirectly invest in LVMH at a discount.

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