Cardiovascular Critical Care©2021 American Association of

Cardiovascular Critical Care
©2021 American Association of Critical-Care Nurses
doi:https://doi.org/10.4037/ajcc2021687
Background For women undergoing median sternotomy,
especially those with a bra cup size C or larger, breast
support can reduce pain, wound breakdown, and infection.
This study addressed a gap in research, identifying the
best bra after sternotomy in terms of patient satisfaction
and wear compliance.
Objectives To evaluate larger-breasted women’s satisfac-
tion and compliance with wearing 3 commercially available
front-closure bras—with a hook-loop closure (the hospital’s
standard of care), a zipper closure, or a hook-eye closure—
after cardiac surgery.
Methods This study used a posttest-only, 3-group ran-
domized controlled design. A convenience sample of par-
ticipants were sized and randomly assigned a product that
was placed immediately postoperatively. Participants agreed

to wear the bra at least 20 h/d until the provider cleared them
for less wear. At inpatient day 5 or discharge, and at the
follow-up outpatient visit, subjects completed investigator-
developed surveys. Data were analyzed from 60 participants
by using the
2
test and Kruskal-Wallis analysis of variance;
also, patterns were identified within written comments.
Results Participants were most satisfied with the hook-eye
front-closure product before (P = .05) and after (P = .02)
discharge.
Participants recommended the hook-eye and zipper prod-
ucts over the hook-loop bra (H = 8.39, P = .02). Wear compli-
ance was strongest in the group wearing the hook-eye bra.
Conclusions The hook-eye closure product had the most
satisfaction and greatest wear compliance, and it received
the highest recommendation. A practice change was made
to fit and place the hook-eye bra in the operating room
immediately after surgery. (American Journal of Critical
Care. 2021;30:21-26)
www.ajcconline.org AJCC AMERICAN JOURNAL OF

CRITICAL CARE, January 2021, Volume 30, No. 1 21
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this article.
BRAS FOR BREAST
SUPPORT AFTER
STERNOTOMY: PATIENT
SATISFACTION AND
WEAR COMPLIANCE
By Kimberly Bolling, BSN, RN, CCRN, Takako Long, BSN,
RN, Cathy D.
Jennings, DNP, RN, ACNS-BC, Francis C. Dane, PhD, and
Kimberly Ferren
Carter, PhD, RN, NEA-BC
22 AJCC AMERICAN JOURNAL OF CRITICAL CARE,
January 2021, Volume 30, No. 1 www.ajcconline.org
P
revious research confirms that women, especially those with
larger breasts, can benefit
from external breast support after cardiac surgery via median
sternotomy.1 Normally,
breast tissue without support moves in all directions when a
female participates in
minimal activity.2 Simple walking and running can displace the
breast vertically,
mediolaterally, and anteroposteriorly.2,3
A midchest incision in a patient with large
breasts further increases the need for a supportive

garment to decrease wound tension. Tension at the
midline sternotomy incision site has been directly
linked to macromastia (defined as breasts large
enough to require a bra cup size C or larger),4 which
places the patient undergoing cardiac surgery at an
increased risk for both sternal wound infection4-7
and postoperative pain, especially during the early
recovery period.8,9 Use of a supportive bra may
reduce this risk.4-5,9
Many female patients undergoing cardiac sur-
gery are reluctant to discuss their breast support and
breast pain issues with their care providers.10 In one
study, most women were surprised by and unprepared
for the breast pain they experienced after sternotomy
and did not know how to manage breast symptoms.10
Further, care providers may
not acknowledge or address
breast issues when teaching
women how to care for
themselves after discharge
from the hospital after car-
diac surgery.10 Early during
the postoperative period,
the healing midchest inci-
sion site and drainage tubes
can also impact use of a bra. Care providers may
not advise these patients to wear a bra immediately
postoperatively because regular bras interfere with
nursing care11; however, King et al,2 in the Women’s
Recovery from Sternotomy-Extension (WREST-E) study,
suggested the importance of consistent education
about and reinforcement of the need for a comfortable

and supportive bra after surgery. Brocki et al12 sug-
gested actually placing the bra on the patient at the
end of the surgery, which ensures breast support
soon after closure of the skin incision.
The optimal bra for wear after sternotomy closes
in the front, because moving both arms around the
back simultaneously can cause incisional (and ster-
nal) tension.12 Second, and perhaps most important,
the optimal bra is both comfortable and supportive.
If a woman is dissatisfied with the bra, she may con-
sciously decide not to wear the garment regardless of
its importance or necessity.
Although researchers have explored the effect of
a supportive bra on pain reduction, functional status,
infection at the surgical site, and sternal wound heal-
ing in this population,7,9,11 we found only 1 study that
elicited feedback from both patients and nurses regard-
ing a particular postoperative bra—in this case, one
that aimed to help prevent pressure ulcers.13 In a best-
evidence review of 6 randomized controlled trials of
postoperative external support devices,14 only 1 study
specifically evaluated the effectiveness of a postoper -
ative bra in reducing pain and promoting sternal heal-
ing in female patients.11 We found no recent research
that focused on a patient’s satisfaction with a commer-
cially available bra and compliance with the provid-
er’s instructions for wear after sternotomy.
Consequently, we designed this study to answer
the question, Which of 3 commercially available
breast support products—standard-of-care hook-
loop bra (similar to Velcro brand ), zipper bra, or
hook-eye bra (Figure 1)—results in the greatest user
satisfaction and wear compliance? This study contrib-

utes to the limited knowledge base regarding the type
of product that will both satisfy larger-breasted women
after sternotomy and yield optimal wear compliance
among patients after sternotomy.
Methods
Design, Setting, and Participants
This study was approved by the institutional
review board at Carilion Clinic and was conducted in
accordance with that board’s standards and the ethi-
cal standards set forth in the Declaration of Helsinki.
The study used a 3-group, posttest-only randomized,
controlled, longitudinal design. It was conducted
About the Authors
Kimberly Bolling is a registered nurse in the cardiac sur-
gery intensive care unit and Takako Long is a registered
nurse in the cardiovascular progressive care unit, Carilion
Roanoke Memorial Hospital, Roanoke, Virginia. Cathy D.
Jennings is a clinical nurse specialist, Carilion Roanoke
Memorial Hospital. Francis C. Dane is a professor of psychol -
ogy, Radford University, Radford, Virginia, and a professor
of interprofessionalism, Virginia Tech Carilion School of
Medicine, Roanoke, Virginia. Kimberly Ferren Carter is senior
director, nursing research, Carilion Clinic, Roanoke, Virginia.
Corresponding author: Kimberly Bolling, BSN, RN, CCRN,
Carilion Roanoke Memorial Hospital, 1906 Belleview Ave,
Roanoke, VA 24014 (email: [email protected]).
Many women undergo-
ing cardiac surgery are
reluctant to discuss
their breast issues with

their providers.
from June 1, 2016, through June 8, 2017. The study
took place at a 703-bed academic medical center in
the southeastern United States; the center’s cardio-
vascular institute has been providing cardiac surgical
services since 1982 and performed more than 500
cardiac surgical procedures in 2017. During the study
period, the institute featured 4 cardiac surgery oper-
ating rooms, an 11-bed cardiac surgery intensive care
unit, and a 25-bed progressive care unit.
Eligible study participants were women (≥18 years
old) who were not pregnant and were undergoing
nonemergent cardiac surgery via median sternotomy.
They had no history of chest radiation, breast reduc-
tion, mastectomy, or median sternotomy; wore a min-
imum of a C-cup bra size; spoke English; and were able
to verbalize their understanding of the study. The prod-
uct to which a participant was randomized had to be
available in her measured bra size (hook-loop bra
[Surgical Bra, DeRoyal Industries]: 36.0-55.0 in; zip-
per bra [Genie Zip bra; TriStar Products]: 39.0-52.5 in;
hook-eye bra [Carefi x Mary bra; Tytex]: 32.0-54.0 in).
The participants were asked to wear their bra for a
minimum of 20 h/d, removing it only to bathe or
to launder it.
Instruments
Outcome measures included satisfaction before

and after discharge and wear compliance after dis-
charge. The literature we reviewed included no mea-
sures for these outcomes; therefore, we developed
measures for use. Satisfaction with the bra before
discharge was measured on postoperative day 4 or 5
by using a question about satisfaction (self-report);
results ranged from 1 to 10 (1 = completely dissatis-
fi ed, 10 = completely satisfi ed). The survey after dis-
charge included the same satisfaction item, a question
about whether the participant would recommend
the bra to other women undergoing sternotomy
(rating scale, 1 = defi nitely would not recommend to
5 = defi nitely would recommend), a question about
the amount of time the bra was worn after discharge
(compliance), and an opportunity to provide any
comments about the product. The postdischarge
survey was administered at the follow-up offi ce
visit, which generally occurred between 20 and 40
days after surgery.
Protocol
We reviewed the daily surgery schedule to identify
potential study participants. We screened inpatients
who were currently hospitalized and outpatients
who were visiting the center’s presurgical testing clinic.
Then, study team members requested assistance from
each patient’s nurse to determine whether the patient
would be interested in receiving information about
the study. If the patient was interested, a study team
member met with her and provided both informa-
tion about informed consent and a written study
information sheet.

After confi rming that all of the patients’ questions
had been addressed and obtaining their verbal consent
to participate (the institutional review board had
granted a waiver of signed consent), a member of
the research team measured the participant’s chest/
band and cup sizes. Participants were randomized to
1 of the 3 product groups (hook-loop bra [the hos-
pital’s standard of care], zipper bra, or hook-eye bra)
through the use of a random numbers table. If a par-
ticipant was randomized to wear a bra that was not
available in her size, she was excluded from the study
and was given the standard of care (the hook-loop
bra). If the selected product was available in the par -
ticipant’s size (on the basis of the manufacturer’s
sizing recommendations), the appropriately sized
product was delivered to the cardiac surgery operat-
ing room on the day of the procedure. The staff in the
operating room applied the bra to the patient at the
end of surgery, before she was transferred to the car-
diac surgery intensive care unit.
Sample Size
We calculated effect size using the estimation
approach described by O’Brien and Muller15 for
analysis of variance studies. On the basis of esti-
mates of between-means variance (1/33) and
within-group SD (1.49), and using a rating of
satisfaction between 1 and 10 for 2-way analysis
of variance, we estimated an effect size of 0.6.
Using this estimated effect size, a power of 0.80,
Figure 1 Sample bra products (left to right): DeRoyal
Industries
Surgical Bra (hook-loop closure; similar to Velcro brand),
TriStar

Products Genie Zip (zipper closure), Tytex Carefi x Mary
(hook-
eye closure).
and an of .05, we deemed a sample size of 20
participants per group to be sufficient.
Statistical Analysis
We used SPSS version 25 for statistical analysis.
Because none of the measures were normally dis-
tributed, we use the Kruskal-Wallis analysis of vari-
ance, and we report median values and interquartile
ranges for continuous variables. We used the 2 test
for categorical variables.
Analysis of Written Comments
We also analyzed participants’ comments about
the bra they received. Three independent coders (K.B.,
K.F.C., C.D.J.) categorized the qualitative data, and
discrepancies were resolved through discussion
among all coders until consensus was reached.
Results
Participants
Of the 97 patients assessed for eligibility for
inclusion in this study, 28 did not meet the inclu-
sion criteria; 69 patients consented to participate
and were randomized (Figure 2). The zipper product

did not come in a large enough size for 3 patients,
who were removed from the study and given the
standard-of-care product. Six of the randomized
participants (1 in the hook-loop group, 2 in the zip-
per group, and 3 in the hook-eye group) were lost to
follow-up (they were intubated or sedated, which
affected their ability to communicate, or they died).
We included 60 participants in the final analysis; 20
participants were randomized to each group. The
study ran 53 weeks, ending when the 60th partici-
pant had been enrolled and had completed the post-
discharge survey. No harm or unintended effects
occurred in any group. The 3 groups were demo-
graphically similar (Table 1).
Satisfaction With Bra
On postoperative day 5 or the day of discharge
(whichever occurred first), we found significant dif-
ferences in patients’ satisfaction with the various
products (H = 5.88, P = .05). Participants were less
satisfied with the hook-loop bra (satisfaction score
8.5 out of 10.0) than with the zipper bra (10.0) and
the hook-eye bra (9.5). This pattern of satisfaction
continued after discharge (H = 7.7, P = .02): partici-
pants were significantly less satisfied with the hook-
loop bra (7.0) than with the hook-eye bra (8.0);
satisfaction with the zipper bra (7.5) fell between
the other 2 (Figure 3). Participants recommended
the standard-of-care product (hook-loop bra; rec-
ommendation score 4.0 out of 5.0) significantly
less (H = 8.39, P = .02) than they did both the zipper
(5.0) and the hook-eye (5.0) products. The recom-
mendation rating varied most for the hook-loop bra
(interquartile range 4.0); for the other products, the

recommendation rating varied little (interquartile
range for both 1.0, P = .009).
Figure 2 CONSORT flow diagram for study enrollment.
Enrollment
Allocation
Follow-up
Analysis
Excluded (n = 28)
• Did not meet criteria (n = 28)
Patients assessed for eligibility (n = 97)
Randomized (n = 69)
Allocated to zipper front closure (n = 25)
• Received allocated intervention (n = 22)
• Did not receive allocated intervention
(bra not large enough; n = 3)
• Allocated to hook-eye front closure (n = 23)
(n = 0)

Allocated to hook-loop front closure (site
standard; n = 21)
(n = 0)
• Lost to follow-up (intubated/sedated;
n = 1)
• Discontinued intervention (n = 0)
• Lost to follow-up (intubated/ sedated;
mortality (n = 3)
• Lost to follow-up (intubated/sedated (n = 2)
• Analyzed (n = 20)
• Excluded from analysis (n = 0)

Wear Compliance
We assessed participants’ compliance with wear-
ing the bra during the postoperative period using
postdischarge reports of wear 7 days per week and
at least 20 hours per day. We found no significant
difference in wear compliance between the products
( 2
2
= 2.5, P = .29). The percentage of patients wear-
ing the assigned bra as instructed, however, did vary
among the products (Table 2). The participants who
reported wearing the hook-eye product 7 days per
week also reported wearing it 24 hours per day. Four
participants—3 assigned the hook-loop bra and 1
assigned the zipper bra—did not wear the assigned
bra at all after discharge.
Qualitative Feedback
Respondents provided comments related to their
perceptions of the bra; the support it provided; mal -
functions; and any rubbing, cutting, irritation, or com-
fort issues. The comments were consistent with the
results of the statistical analysis, indicating discom-
fort and rubbing with the hook-loop product and

malfunctions with the zipper product. Participants
also noted some rubbing with the hook-eye product.
Discussion
This study aimed to identify the best bra for
patients after sternotomy in terms of satisfaction and
wear compliance. The participants in this study were
least satisfied with the hook-loop front-closure bra, the
standard of care at the study site. They were most sat-
isfied with the hook-eye closure bra and recommended
that bra and the zipper bra over the hook-loop bra.
The zipper product did not come in sizes for women
with very large breasts, and the zipper frequently
malfunctioned. With regard to wear compliance, none
of the participants wearing the hook-eye bra reported
not wearing the bra at all. Overall, wear compliance
was strongest in the group wearing the hook-eye bra.
On the basis of these findings, we have determined
that the hook-eye closure product yielded the most
satisfaction (it was given the highest recomme ndation)
and greatest wear compliance in this study.
The strengths of this study include the experi-
mental design and the sample size, which is large
enough to provide sufficient statistical power. The
study contributes to the limited knowledge related to
bra selection to promote satisfaction and wear com-
pliance. The limitations of the study include the lack
of availability of zipper products for women with very
large breasts (we had to exclude from the study such
women who had been randomized to the zipper prod-
uct). The study was not powered to detect differences
in compliance. The findings supported a change in
practice: the hook-eye bra is now the product used

as the standard of care for this patient population
at the study site. In addition, the bra is placed imme-
diately after surgery while the patient is still in the
operating room (a practice recommended by Rochon
et al7), rather than later, after they have been moved to
the intensive care unit, which was the standard pro-
cedure at our site before the study.
This randomized trial is generalizable to samples
like the one used in this study. We did not include
in this study women with breasts smaller than a bra
cup size C; therefore, more work is needed in order
Variable
Table 1
Demographic variables by group
Chest size, mean
(SD), in
Cup size, %
C
D
DD
DDD
Body mass index,a
mean (SD)

PREVENA Incision
Management
System, % yes
.85
.21
.76
.36
39.9 (4.0)
60.0
35.0
5.0
0.0
28.6 (8.5)
42.1
0.15
(3.1)
0.56
(2.1)

39.0 (7.0)
38.9
50.0
11.1
0.0
30.2 (9.0)
30.0
39.4 (6.0)
66.7
27.8
0.0
5.6
28.1 (8.6)
52.6
PHook-eye H or ( 2)Hook-loop Zipper
a
Calculated as weight in kilograms divided by height in meters
squared.
Value in group

Figure 3 Satisfaction with bra before and after discharge.
S
a
ti
sf
a
ct
io
n
w
it
h
b
ra
10
9
8
7
6
5
4
3

2
0
1
Hook-loop Hook-eyeZipper
Before discharge After discharge
Variable
Patients wearing product, %
Table 2
Wear compliance as a function of product
7 d/wk
24 h/d
(among those
wearing 7 d/wk)
.27
.17
89.5
100.0
2.59
3.53

70.0
85.0
84.2
94.7
PHook-eye 2Hook-loop Zipper
to understand the best bra for women with smaller
breasts after sternotomy. Given that we used only 1
brand for each closure type, future investigations
should examine brand variability with regard to fit
and comfort. This study focused only on women,
but obese men with macromastia may require breast
support; this topic also warrants further study. Study
of new products would be beneficial as they emerge
on the market. Finally, more study is needed in order
to evaluate the approach of combining both a bra
and an external chest support device.
Conclusion
This study contributes to the currently limited
literature related to patients’ bra preference after
sternotomy. By promoting use of the bra that engen-
ders the most satisfaction and wear compliance, nurses
can facilitate the availability and postsurgical appli -
cation of the appropriate bra, thereby lessening a

patient’s risk for adverse effects—including infection,
healing issues, and pain—that are known to occur
when bras are not worn after sternotomy. Replica-
tion studies are warranted in different populations.
ACKNOWLEDGMENTS
This work was performed at the Cardiovascular Institute
of Carilion Roanoke Memorial Hospital. The study was
completed as a Carilion Nursing Research Fellowship.
The authors gratefully acknowledge the contributions
of Debra Pullen, BSN, RN, Sandy Wilson, RN, Sara Gill, BSN,
RN, Maria Cristofis, and Laura Kate Jennings, BA, all from
Carilion Clinic, Roanoke, Virginia.
SEE ALSO
For more about care after sternotomy, visit the Critical Care
Nurse website, www.ccnonline.org, and read the article
by Liu et al, “Topical Lidocaine Patch for Postthoracotomy
and Poststernotomy Pain in Cardiothoracic Intensive Care
Unit Adult Patients” (October 2019).
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13. Cooper DN, Jones SL, Currie LA. Against all odds:
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14. Tsang W, Modi A, Ahmed I, Ohri SK. Do external support
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1.0 Hour Category BC E
Notice to CE enrollees:
This article has been designated for CE contact hour(s). The
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following objectives:
1. Identify why bra selection and wear compliance is important
for women after sternotomy.
2. Discuss strengths and limitations for various closure types of
bras used for women after sternotomy.
3. Describe the type of bra closure that resulted in greatest user
satisfaction and wear compliance for women
after sternotomy.
To complete the evaluation for CE contact hour(s) for this
article #A21302, visit www.ajcconline.org and click
the “CE Articles” button. No CE evaluation fee for AACN
members. This expires on January 1, 2023.
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3 | P a g e
Abstract
This report presents an investment recommendation report for
Compagnie
Financière Richemont SA. The methodology deemed most
appropriate to perform
such analysis was the Discounted Cash Flow (DCF) model. The
report also
through the use of multiples.
The DCF provided an intrinsic value of Richemont, whilst the
multiples approach
revealed a more extrinsic value for Richemont, bringing
together the investment
case. The report analysed five years of historical financial data
and forecasted the
following five years. In order to execute the forecast, external
value drivers for the
luxury goods industry in which Richemont operates, were
identified. Additionally,
in
geopolitical and the economic outlook were analysed, as it is a
positively correlated
In consideration, the DCF variables were forecasted, revealing
an equity value of

million and an implied share price of 0 per cent premium to
the share price as of 29th June 2018. A sensitivity analysis was
also performed to
show how modifications in the weighted average cost of capi tal
and growth would
affect the enterprise value and equity value per share. The
report also conducts a
scenario analysis illustrating two cases; a bullish case and a
bearish case, and their
relative effects on enterprise value and equity value.
Following this, a relative valuation was conducted through the
use of the P/E,
EV/EBIT, EV/EBITDA and EV/REV multiples, revealing that
Richemont is
undervalued relative to its competitors.
The report concludes that the findings of the DCF approach and
the relative
valuation approach, indicate an investment recommendation of
BUY.
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DCF Discounted Cash Flow
CAGR Compound Annual Growth Rate
Capex Capital Expenditures
CHF Swiss Franc
CAPM Capital Asset Pricing Model
COGS Cost of Goods Sold

Euro
EBIT Earnings Before Interest and Taxes
EBITDA Earnings Before Interest, Taxes, Depreciation and
Amortisation
ERP Equity Risk Premium
EV Enterprise Value
FFCF Forecasted Free Cash Flow
FCF Free Cash Flow
FY Financial Year
YNAP Yoox-Net-A-Porter
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Contents
1.0 Introduction
...............................................................................................
...................................... 6
1.1 Trajectory of the Valuation
...............................................................................................
............. 6
1.2 Company Overview
...............................................................................................
........................ 7
1.3 Capital Structure
...............................................................................................
............................ 7
1.4 Financials
...............................................................................................
....................................... 8

1.3 Regional Sales
...............................................................................................
............................... 8
1.4 Business Area
...............................................................................................
................................ 9
1.5 Industry Overview
...............................................................................................
.......................... 9
2.0 Methodology
...............................................................................................
................................... 10
2.1 Introduction to Valuation
...............................................................................................
.............. 10
2.2 Discounted Cash Flow Model (DCF)
.......................................................................................... 10
2.3 Relative Valuation
...............................................................................................
........................ 11
2.4 Data sources
...............................................................................................
................................ 12
3.0 Empirical Analysis
...............................................................................................
......................... 13
3.1 Historical Financial Performance
...............................................................................................
. 13
3.1 Determining Key Performance Drivers
....................................................................................... 15
3.2 Free Cash Flow Projections
...............................................................................................
......... 15

3.2.1 Sales growth drivers applicable to Richemont in all
regions................................................ 15
3.2.2 Sales growth factors affecting regions
................................................................................. 16
3.2.3 Cost of Goods
...............................................................................................
....................... 21
3.2.4 Operating Expenses
...............................................................................................
.............. 21
3.2.5 Tax
...............................................................................................
........................................ 23
3.2.6 Depreciation
...............................................................................................
.......................... 23
3.2.7 Capex
...............................................................................................
.................................... 23
3.2.8 Working Capital
...............................................................................................
..................... 24
3.3 Weighted Average Cost of Capital (WACC)
............................................................................... 25
3.3.1 Cost of Debt
...............................................................................................
.......................... 26
3.3.2 Cost of Equity
...............................................................................................
........................ 26
3.4 Terminal Value
...............................................................................................
............................. 29

3.5 Enterprise Value
...............................................................................................
........................... 30
3.6 Equity Value
...............................................................................................
................................. 31
3.7 Sensitivity Analysis
...............................................................................................
....................... 32
3.8 Scenario Analysis
...............................................................................................
......................... 33
...............................................................................................
........................ 35
4.0 Conclusion
...............................................................................................
...................................... 38
5.0 References
...............................................................................................
...................................... 39
6.0 Appendices
...............................................................................................
..................................... 42
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1.0 Introduction
The aim of this chapter is to introduce; the purpose of the
report, the company being

valued and the sector in which it operates.
1.1 Trajectory of the Valuation
The subject of this thesis is a valuation of Switzerland-based
luxury goods company
Compagnie Financière Richemont Richemont This will be
achieved by using the Discounted Cash Flow (DCF) model for
valuation which will
reveal the perceived value of Richemont relative to the
discounted expected future
cash flows of the next 5 financial years for the Group. The
forecasted free cash
flows and the terminal value will then be discounted using the
weighted average cost
of capital. The sum of the discounted free cash flows and the
terminal value will
establish an enterprise value which serves as the basis for the
DCF valuation.
Following a construction of the DCF, a sensitivity analysis and
a scenario analysis
will be performed. The sensitivity analysis will show how
changes in the growth rates
and weighted average cost of capital (WACC) will affect both
the equity share price
and enterprise value of Richemont. The scenario analysis will
present two alternative
cases a bullish case and a bearish case and the
relative effects on Richemont enterprise and equity value.
Following this, a relative
valuation will be performed, comparative to DCF valuation
which seeks an intrinsic
value. Relative valuation, through the use of multiples, will
allow an alternative
derivation of the value of Richemont using the pricing of

comparable firms
standardised using common variables. The amalgamation of
these two different
valuation methods can be then used to assess investment
decisions obtained from
either approach. Accordingly, the thesis will conclude by
providing an investment
recommendation of buy or sell.
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1.2 Company Overview
Founded in 1988, Richemont in the field of
luxury consumer goods sector. The Group operates in three
segments: Jewellery
Maisons; being Cartier, Van Cleef & Arpels and Giampiero
Bodino; Specialist
Watchmakers: A. Lange & Söhne, Baume & Mercier, IWC
Schaffhausen, Jaeger-
LeCoultre, Officine Panerai, Piaget, Roger Dubuis and
Vacheron Constantin; and
Others: Alfred Dunhill, Azzedine Alaïa, Chloé, Montblanc and
Peter Millar in addition
to watch component manufacturing activities. Since its
formation, the Group has
continuously expanded; making an acquisition almost every
year since 1993. The
most recent of which being in June 2018, where YOOX NET-A-
PORTER GROUP

) was acquired through a voluntary public tender and delisted
from the Milan Stock Exchange effective as of 20 June 2018
(Richemont, 2018).
Richemont is listed in Switzerland, however reports in Euros
and has a March year-
end. The share price as of 29th
1.3 Capital Structure
Richemont has 522 000 000 'A' registered shares, with a par
value of CHF 1.00
each, and 522 000 000 'B' registered shares, with a par value of
CHF 0.10 each, in
issue (Richemont, 2018). The 'A' shares are listed and traded on
the SIX Swiss
Exchange and the 'B' shares, representing 9.1 per cent of
Richemont equity and 50
per cent of voting rights, are not listed and are held by
Compagnie Financière
Rupert. Table 1 shows the number of shares calculated by
means of their par value.
Table 1: Capital Structure of Richemont (Richemont, 2018)
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1.4 Financials
In FY2018, Richemont revenues totalled 10 979 million, a 3.12
per cent increase
from FY2017. The Asia Pacific accounted for 40 per cent of

Group Sales; with
particular strength in its main markets, namely China, Hong
Kong, Korea and Macau.
In Europe, the second-largest region, Group sales decreased 2
per cent to 27 per
cent as a result of the relative strength of the euro and
inventory-buybacks. Across
the Group, improved gross margin and tight operating expense
control resulted in a
5 per cent increase i lion. Richemont has a
strong balance sheet, with net cas s of 31st March
2018
market funds, short term bank deposits and short-duration bond
funds primarily
denominated in Swiss francs, euros and US dollars (Richemont,
2018)
1.3 Regional Sales
Richemont operates on a worldwide basis. Figure 1 illustrates
the evolution of sales
by geographic region from FY2014 to FY2018. From the figure
it is clear that the
Asia Pacific has consistently dominated sales (in terms of
revenue), followed by
Europe.
Figure 1: Richemont Sales by Region (Source: Richemont,
2018)

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1.4 Business Area
The group operates in three segments; Jewellery Maisons,
Specialist Watchmakers
and Others. The largest revenue generating area of Richemont is
the Jewellery
Maisons, accounting for 6 447 million of revenue in 2018.
Figure 2 demonstrates
the historical progression of sales by business area.
Figure 2: Richemont Sales by Business Area (Source:
Richemont, 2018)
1.5 Industry Overview
The luxury goods industry is continuously evolving; whether it
being due to the digital
transformation, economic cycles or changing customer
preferences. Consequently,
the industry is becoming increasingly competitive.
Aggregate net luxury good sales of the top 100 global luxury
good companies
amounted to $217 billion in 2016. Compound annual growth
rate in luxury goods

sales for FY2014 to FY2016 was 3.9% (Deloitte, 2018).
Bain estimates a 4 to 5 per cent compound annual growth rate in
the luxury goods
sector over the next three years, with total revenues between
by 2020 2017).
In general, the outlook for 2018 appears promising however
economic volatility could
intimidate market expansion.
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2.0 Methodology
This chapter of the report will introduce the models utilised to
conduct
valuation. The section commences with a brief introduction as
to what valuation is,
followed by a description of the valuation models; DCF and
Relative Valuation. The
underlined determinants in this chapter will be defined and
applied to Richemont in
conjunction thus have been addressed in Chapter 3.
2.1 Introduction to Valuation
Every asset has a value. Any preconceptions or biases an
individual brings to the
valuation process will be reflected in the valuation. A Valuation
analysis focuses on
cash generation and its sustainability throughout the lifetime of
the asset. The role
and relevance of valuation is reformed in different arenas; such
as in portfolio

management, acquisition analysis and corporate finance
(Damodaran, 2012).
2.2 Discounted Cash Flow Model (DCF)
In DCF valuation, the value of an asset is the value of the
expected (future) cash
flows of the asset, discounted back at a rate that reflects the risk
associated with
achieving these cash flows (Damodaran, 2012). A DCF
valuation is a function of the
expected cash flows of an asset. Assets with high and
predictable cash flows should
have greater values than assets with low and unpredictable cash
flows. According to
DCF, the value of an asset is estimated using the present value
of the expected cash
flow associated and can be calculated using Equation 1.
Equation 1: DCF
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normally forecasted for a five year period,
though it can vary amongst sectors and a stage of development.
Given the characteristically difficult nature of accurately
forecasting a firms financial
performance over a lengthy period (due to reasons such as
economic cycles), a
terminal value is calculated to capture the remaining value of

the firm beyond the
forecasted five year period (Pearl and Rosenbaum, 2009)
The forecasted free cash flows and the terminal value must be
discounted using the
weighted average cost of capital. The sum of the discounted
present value and the
terminal value establish an enterprise value which serves as the
basis for the DCF
valuation.
It must be emphasised that there are limitations associated with
DCF valuation, in
particular its sensitivity towards assumptions related to
perpetual growth rate and
discount rate (Pearl and Rosenbaum, 2009). The sensitivity of
changes in these
assumptions can be measured using a sensitivity analysis.
The use of a scenario analysis can also allow experimentation of
cases other than
the base case the report explores. The conducted scenario will
present a base case,
a bullish case and a bearish case and the relative effects it has
on the enterprise and
equity value will be concluded.
A relative valuation approach, unlike a DCF valuation which
seeks an intrinsic value,
trusts the market to be right. Relative valuation refers to the
derivation of the value of
an asset using pricing of comparable assets, standardised using
common variables
such as revenues or book values (Damodaran, 2012). Multiples
are a device
enabling a relative valuation; the use of appropriate multiples

will allow conclusions
from the DCF to be cross checked.
There are different types of multiple, i.e. sales multiples,
earnings multiples, book
-book value ratio (PBV) is an example
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of a book value multiple; whereby assets selling at a discount
on book value relative
to comparable firms can be perceived as being undervalued.
If the derived multiple for the company being valued is at a
significant premium to its
peers it is important to provide a strong justification as to why.
It is also important to
understand the fundamental variables driving the multiple, as
they may result in
inaccurate conclusions, for example a high Price to Earnings
ratio could be a result
of higher expected growth rate which is likely to have positive
implications.
The selected multiples for this valuation are; Price/Earnings
Ratio (P/E), Enterprise
Value/EBITDA (EV/EBITDA), Enterprise Value/EBIT
(EV/EBIT) and Enterprise
Value/Revenue (EV/Rev).
2.4 Data sources
In order to perform this valuation, information from
independent sources were
utilised. Further, to support the analysis, historical financial

data from Annual Reports
and Bloomberg were used.
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3.0 Empirical Analysis
The aim of this section is to perform the valuation models
introduced in Chapter 2
and present the findings. Execution of this will allow the reveal
the perceived value of
Richemont, allowing an investment recommendation to be made.
3.1 Historical Financial Performance
Before embarking upon valuation it is important to analyse
historical
financial reports from a valuation perspective. This should
allow identification of key
value drivers in the investment narrative and comprehend how

Richemont is
preparing for the future.
The analysed historical period for Richemont was between
FY2014 and FY2018.
During this period the Groups sales grew at a CAGR of 1.84 per
cent. Average
capex as a percentage of sales was 5.03 per cent and this figure
has been
consistently higher than depreciation, indicating expansion of
operations.
Inventory turnover over the historical period proves to be
improving (i.e. inventory
turnover days are reducing); a positive indication of better
inventory management.
The evolution working capital levels and ratios are shown in
Table 2.
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Table 2: Working Capital Schedule

A solid investment analysis must identify how risky the
investment decisions
Richemont has made over time and how much risk do equity
investors face.
Short term liquidity risk surfaces mainly from the need to fund
current operations.
The current ratio and the quick ratio are frequently used
measurements of short-term
liquidity risk. Gallo (2015) defines the current ratio as a
measur
pay off its short-term liabilities with its current asse
equation 2.
Equation 2: Current Ratio
Historic data for the past 3 years was computed to reveal the
current ratio trend for
Richemont. All 3 years had a current ratio above 3. This is a
desirable outcome as a
current ratio below 1 would indicate Richemont has financial
obligations outstanding
in the following year exceeding the assets it can expect to turn
into cash. It must be
15 | P a g e
noted however that current ratios can be manipulated around
financial reporting
times. S&P rating for default risk rating is A+ (Bloomberg,

2018).
3.1 Determining Key Performance Drivers
The first step in performing a DCF is to understand the valued
firm and the sector in
which it operates, allowing one to identify value creating or
destructing determinants.
Richemont recognises its growth drivers as the following;
geographic spread, the mix
of sales by product type and distribution channel; acquisitions
of businesses. The
Group further reports a positive relationship between consumer
confidence and
consumer spending on its products.
Research of independent sources identifies key growth drivers
in the forthcoming
years as; Chinese middle class rising, local consumption
recovery in mature
markets, increase of online sales and Generations Y and Z
(Bain, 2017).
3.2 Free Cash Flow Projections
Forecast for sales were made in consideration of internal,
strategic
measures taken by the Group and external factors such as the
political and
economic climate of regions; Europe, Middle East and Africa,
Asia Pacific, Americas
and Japan.
3.2.1 Sales growth drivers applicable to Richemont in all
regions

An annual study conducted by the BCG and Altgamma (2018)
identifies an
increasing trend of sales attributed to millennials thus
emphasises the importance of
attracting millennials in the forthcoming years. Bain (2017) also
reported that in
2017, 85 per cent of growth in the luxury goods sector is
attributable to Generations
Y and Z, reaffirming the importance of charming millennials.
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Richemont has taken several measures to attract millennials.
Firstly, Rupert
launched a man
diverse board members. Richemont, recognising the importance
capturing these
millennials, launched a relatively cheaper new watch brand
Baume in May 2018,
aimed at younger consumers (Koltrowitz, 2018).
Online sales of luxury goods are accelerating, rising 24 per cent
year on year in 2017
(Sanderson, 2018). In response to the growing importance of
online presence,
Richemont acquired YNAP. (2018) study into key trends for
the luxury goods sector emphasised the importance of luxury
brands prioritising an
omni- -channel experience is a multi-channel sales approach
that provides the c
Richemont acknowledged the importance of such strategy,

describing its YNAP
accelerate their focus on omni-channel and digital marketing.
3.2.2 Sales growth factors affecting regions
The group acknowledges positive correlation between consumer
confidence and
sales hence the economic and political climate of regions have
been individually
analysed to derive supported growth figures.
Europe
There are mounting fears about political instability in Italy and
Spain (Johnson, Politi
and Stothard, 2018). sales from Germany, Italy and Spain 2018
accounted for 854 million (28 per cent) of European Sales. In
France, economic
growth is anticipated close to 2 per cent due to strong external
demand and healthy
business confidence (OECD, 2018).
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France is an important market as it accounts for approximately a
quarter of
European sales. Other Europe (which includes the UK) accounts
for a third of sales.
The UK is set to leave the European Union at the end of March
in 2019 hence the
potentially crippling effects of the separation is incorporated
into growth estimates in

FY2019 and FY2020. Brexit is expected to cause higher
inflation due to a weaker
sterling, which will reflect onto consumer purchasing power
hence its purchases of
Richemont
figures for FY2019 and FY2020 were forecasted shyly at -0.55
per cent and -2.67
per cent for FY2019 and FY2010 respectively. Remaining
forecasts have been made
unforeseeable at present.
Middle East and Africa
Growth prospects for the Middle East and North Africa region
will continue to be
mostly determined by geopolitical tensions and conflicts. The
MENA region accounts
for approximately 29 per cent of sales, as of FY2017 and
FY2018 figures. According
to the World Bank (2018) growth among members of the Gulf
Cooperation Council
(GCC) is expected to rise to 2.7 per cent in 2019. Consequently
an increase of 1.22
per cent and 1.14 per cent growth is forecasted in FY2019 and
FY2020, respectively.
In the following three years, growth rates are shying at 1 per
cent due fluctuations in
oil prices that may occur due to factors such as greater-than-
expected U.S Shale oil
production would result in a decrease of oil prices (World Bank,
2018)
Asia Pacific
40 per cent of Richemont
strength in China, Hong Kong, Korea and Macau.
A McKinsey study found that Chinese customers will be

accountable for over 40 per
cent of the global luxury market by 2025 and be accountable for
most of the industry
growth (Bu et al., 2017). In consideration of the significance of
Chinese demand for
goods now and its industry, China is
identified as a key value driver in this valuation.
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The Q/A session transcript for the 2018 Annual Report
presentation revealed Helen
Brand, questioned Richemont o which
Richemont
anks and companies
to start
increasing debt to GDP ratio.
rumours of an approaching Minksy Moment in China (Authers,
2017). A Minksy
Moment is a term used to describe periods of stability that
result in over-confidence
causing banks to engage in speculative lending which will
ultimately lead to a
collapse of assets (Glenn and Yao, 2017)
second quarter
of 2018 it increased 6.7 per cent, though this expansi on was
slowest pace since
2016 which is attributed to aggressive deleveraging efforts
which curtailed

investment in infrastructure. However, IMF forecasts for 2018
and 2019 do not report
any expected cuts in economic growth in 2018 or 2019
(Liubing, 2018).
2018 survey however has since slightly
dropped to a one year low point of 118.2 points (June 2018) but
still remains
reassuring. This is a key indicator of demand for luxury goods.
The impact of the
economic data (Wildau, 2018). Also, at present the Renminbi is
clearly
strengthening and purchasing power is significant inside
mainland China and
outside. Morgan Stanley (2017) projects 6.1 per cent growth in
average real GDP
growth until 2020, falling to 4.6 per cent in 2021-25.
In FY2019 and FY2020, growth in India is expected to rebound
to 7.4 per cent, after
temporary disruptions resulting from the currency exchange
initiative and the Goods
and Service Tax (IMF, 2018).
Considering the aforementioned, growth in FY2019 is expected
to prosper at 11.50
per cent, in line with FY2018 growth. In FY202 t
causing an asset crisis is forecasted and therefore growth
declines 4.50 per cent.
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In addition to a potential Minsky Moment, long term outlook for
the APAC region are

affected by aging demographics and slowing productivity
growth. Consequently,
growth forecasts diminish from 2.22 per cent to 1 per cent from
FY2021 to FY2023.
Nevertheless, even at the aforementioned shy growth rates,
sales from the Asia
Pacific will account for approximately 43 per cent sales in
2023).
Americas
The US accounts for approximately 81 per cent
At present, US economic growth is fuelled by tax cuts, which is
feeding through to
consumer confidence. Additionally, the yield on the 10 year US
Treasury note
increasing, reflecting expectations of a stronger economy
(Hunter, Platt and
Samson, 2018). The US Federal Reserve, quantitative tightening
programme is also
expected to strengthen the dollar making Richemont products
relatively cheaper,
stimulating growth in the next couple of years (Anstey and
Borghese, 2018).
Accordingly, forecasts assume growth of 4 per cent in FY2020
and FY2021.
Mexico, Central America and the Caribbean is formed largely
by developments in the
United States due to the cumulative effects of trade, financial
and migration linkages
(IMF, 2018). In the short term the region is expected to benefit
from higher growth in
the US.
Due to the uncertainty of the outcome of the November 2020 US
election, forecasts
are shying as US policies will be largely affected from the
outcome. Sales growth is

projected to decrease to 3 per cent to in FY2020 and 0.61 per
cent thereafter.
Japan
Japan alone accounts for approximately 9 per cent of total
sales. In
FY2018 Japan experienced a 3 per cent decline in growth of
sales, however since
then the economy is showing signs of rebound and consumer
spending has
improved (Kalish, 2018). The economy is expected to continue
to strengthen in
2019, supported by stronger private consumption, external
demand and investment
(IMF, 2018). Subsequently, growth in FY2019 and FY2020 is
expected to grow at
3.61 and 3.81 per cent respectively.
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Section 3.2.1 identified a key value driver as millennials,
however approximately a
, 2017). The looming
effects of an aging population and the deficient number of
millennials stifling growth.
YNAP Sales
The BCG and Altgamma (2018) report found that 55 per cent of
luxury consumers
that purchase online use their mobile phones versus a computer,
emphasising the
need for brands to develop their mobile strategy. The report

identified that the
majority of those that purchase on their mobiles were younger
generations and
Chinese consumers. YNAP chief executive Mr Marchetti
recently indicated interest in
Richemont
, 2018). Such alliance could allow rapid
penetration of the Chinese market, which would supplement
sales growth.
In order to make relatively accurate assumptions it was deemed
appropriate to
analyse historical data from the past five years. The first step in
the valuation
process was to project out the income statement. Online sales
are expected to
account for a quarter of total luxury sales by 2025 therefore the
rapid and dominant
online presence accessed through the acquisition is believed to
be a key sales driver
for Richemont ( Arpizio, 2017). Considering this, it was
forecasted that e-commerce
sales will grow in all regions at an average of 10 per cent per
year
Concluding sales figures
Due to the significance of size of YNAP takeover and different
expected growth
rates, sales projections were divided for Richemont and YNAP
and then total sales
were summed. Please see Appendix 1 to see the full projected
sales for the
forecasted period.

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3.2.3 Cost of Goods
Costs of Goods (COGS) for Richemont was assumed to
gradually decline as the
group established company and it is expected that direct costs
such as
manufacturing will become increasingly streamlined. For YNAP
microscopic
variations in COGS is expected, as consumer expectations of
omni-channels,
research and development costs are likely to keep COGS
constant. Total COGS for
Richemont and YNAP was integrated from the historic annual
reports and then used
to benchmark against expected COGS calculations. The results
are presented in
Table 3.
Table 3: Cost of Sales
3.2.4 Operating Expenses
Operating expenses for Richemont and YNAP were also
forecasted separately.
Selling and distribution expenses are expected to average
around 27.58 per cent of

total sales. Communication expenses from FY2014 to FY2016
averaged around 9.06
per cent of sales figures with the exception of FY2017, where
this figure rose to
10.51 per cent. As a result, Richemont ensured that
communication expenses
declined in FY2018 to 10.07 per cent. It has been identified that
their desired level
thus measures taken to achieve such level for communication
expenses is
approximately 10 per cent of sales (Richemont, 2018). Hence,
forecasts have been
conducted accordingly. Administrative expenses are forecasted
to remain consistent
with historic levels, averaging at 8 per cent.
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Table 4
Historic averages of YNAP operating expenses were averaged
an extrapolated with slight
deviations across the forecasted period. Total operating
expenses for Richemont including
YNAP are forecasted in line with theoretical figures of the
Richemont takeover of YNAP and
average at around 5 per cent of total sales.
Table 5: operating expenses

After operating expenses for Richemont and YNAP were
computed, the EBIT was derived
as the following (see Table 6).
Table 6: EBIT for Richemont (including YNAP)
.
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3.2.5 Tax
Richemont states that taxation charge differ across the Group;
therefore each annual
report identifies an average effective tax rate that is calculated
using profit before tax
figures but excluding share of post-tax results of equity-
accounted investments. The
provided tax rates from FY2014 to FY2018 were averaged to
20.8 per cent yet
Richemont explains that they apply an average rate of 21 per
cent to reflect a rate
applicable to the main Swiss-based operating companies
(Richemont, 2018). The
Group also reported that it anticipates their effective tax rate to
remain in the 19-21
per cent range for FY19, always excluding exceptional items.
For this reason an
effective tax rate of 21 per cent was flat lined across the
forecasted period.
3.2.6 Depreciation

Historic depreciation for Richemont averages at 4.31 per cent
however it is assumed
that depreciation will increase to 5.4 per cent due to the
significantly larger entities
wear and tear implications. Depreciation eventually decrease
slightly in the projected
period 5 per cent in FY2023. YNAP depreciation is expected to
remain consistent at
historic figures and therefore is flat lined at 3.82 per cent.
3.2.7 Capex
The historical average of capex averages at 5 per cent and has
been consistently
higher than depreciation and indicating expansion of operations
thus forecasts have
been made similarly.
Capex for YNAP is largely attributable to investing in
converging and upgrading
technology (YNAP, 2016). In a 2016 press release YNAP states
its aim of reducing
capex to 4-5 per cent of net revenues by 2020. However, in
(2018)
-180 million CAP
2 301 million we identify Capex to be
approximately 7.1 per cent of YNAP revenues (YNAP, 2016).
Capex in FY2020 is
24 | P a g e

expected to stay around 7 per cent, the following 3 years are
projected around 6 to
6.5 per cent of YNAP sales.
year of the DCF calculation, Capex figures and Depreciation are
set at the same
value to ensure that Richemont in perpetuity is not overvalued.
3.2.8 Working Capital
Working capital is often referred to as the difference between
current assets and
current liabilities. Depending on the purpose of the valuation
the definition can be
slightly modified. For the purpose of the DCF, operating
working capital is required.
Operating working capital excludes any non-operating items
such as excess cash or
dividends payable (Goedhart, Koller and Wessels, 2010).
A working capital schedule was created by subtracting specific
current liabilities;
trade and other payables, current income tax liabilities and
provisions, from specific
current assets; Trade and other receivables, inventories and
prepayments. The
historical figures were averaged and flat lined across the
forecasted period.
Appendix 1 presents the full working capital schedule.
Historic trends were analysed and forecasts were made
accordingly. Inventory
turnover over the historical period proves to be improving (i.e.
inventory turnover
days are reducing); a positive indication of better inventory
management. A quicker
inventory turnover decreases the cash conversion cycle (Tarver,

n.d.) This means
Richemont is able to collect cash from revenues relatively
quicker thus Richemont is
able to use its working capital more effectively.
In the recent years, Richemont has launched series of excess
inventory buybacks
unauthorised sellers. Such preventative measure have weighed
on profit growth in
the short term however in the long run protects, if not
appreciates brand value.
Richemont management appears confident that inventory levels
are now relatively
healthy (Richemont, 2018)
25 | P a g e
Forecasts implemented in the valuation, anticipate this trend of
strong inventory
management to continue.
Based upon the assumptions for the variables of the DCF the
free cash flows are
expected to be following (see Table 7)
Table 7: Free Cash Flows
3.3 Weighted Average Cost of Capital (WACC)
WACC is a widely accepted method used as a discount rate to
calculate the present

The cost of capital represents the average rate of return equity
holders and debt
investors require to cover the opportunity cost of investing in
the firm. As debt and
equity have different tax implications and risk profiles, WACC
is dependent on a
(Damodaran, 2010). The formula for the
calculation of WACC is shown below.
Equation 2: WACC
WACC = After Tax Cost of Debt % of Debt in Capital
Structure + Cost of Equity % of Equity in Capital
Structure
26 | P a g e
3.3.1 Cost of Debt
In March 2018, Richemont International Holding SA, a
subsidiary of the Group
issued the 4 types of corporate bonds. The Mid YTM and the
Last Price of the bonds
were extracted from Bloomberg (2018), the market values of
each bond were then
calculated by multiplying the Bond Par Value by the market
value divided by 100.

The calculations were then weighted and the before tax cost the
bonds were derived
as 1.40 per cent (as shown in Table 8). The before tax cost of
debt was then
multiplied by 1 minus the effective tax rate of 21 per cent
(applicable to the entire
forecasted period) to find a cost of debt of 1.11 per cent.
Table 8: Before Tax Cost of Debt
3.3.2 Cost of Equity
The cost of equity is determined by three variables; the risk-free
rate of return, the
market risk premium and a risk adjustment that echoes
riskiness
relative to the average company (Goedhart, Koller and Wessels,
2010). Cost of
equity is commonly calculated using the Capital Asset Pricing
Model (CAPM),
equation 3.
Equation 3: Cost of Equity
Risk Free Rate
Damodaran (2010) define -free asset as one where the investor
knows the
27 | P a g e

expected return. This will occur only if there is no default risk
which infers that the
security must be issued by a government. It must be noted
however that not all
governments are default free, as seen recently with the Greek
government. Another
condition that an asset must fulfil to be classified as a risk-free
is there being no
uncertainty about reinvestment rates thus indicating there are no
intermediary cash
flows.
In the case of Richemont the German bund was deemed the
appropriate risk free
rate as The Consistency Principle states, the currency in which
the cash flows are
estimated must determine the choice of the risk-free rate
(Damodaran, 2010).
Although headquartered in Switzerland, financial reports are
domiciled
in euros. Also German bonds have higher liquidity and lower
credit risk than bonds
of other European countries (Goedhart, Koller and Wessels,
2010). The German 10-
year bund yield as of 29/06/2018 was 0.34 per cent however this
is forecasted to rise
to 0.8 per cent in the cost of equity calculation as the European
Central Bank end
their quantitative easing programme at the end of December
2018 (Martin, 2018)
Equity Beta
and the overall market return (systematic risk). The market is
described as having a
beta of 1.0 therefore companies with a beta of 1.0 are expected
to have the same

return as the market, companies with a beta less than 1.0 have
lower systematic risk
than the market and those with a beta greater than one have
higher systematic risk.
Higher systematic risk stocks are captured in the CAPM
calculation as the higher
beta will result in a higher cost of equity.
For Richemont the beta was calculated using the return of the
market in which it is
listed Swiss Market Index ('SMI') and the return of Richemont
using the all the
available data. The covariance between the market and
Richemont was
subsequently computed. The unlevered (asset beta) was then
calculated using
equation 4.
28 | P a g e
Equation 4: Unlevered Beta
The unlevered beta does not consider the capital structure of
Richemont therefore
this calculation must then levered (equity beta) using equation
5.
Equation 5: Levered Beta

Using a target capital structure of 80 per cent debt, 20 per cent
equity and a tax rate
of 21 per cent. The Modigliani-Miller (1958) theory believe that
there are benefits to
leverage (debt) until the optimal structure is reached. Firms
operating within the
luxury goods sector have similar debt-to-equity ratios thus a
target ratio of 80:20 was
deemed appropriate.The levered beta (equity beta) was
calculated as 1.18.
Equity Risk Premium
The equity risk premium is the difference between the expected
return of the market
and the risk free rate (Goedhart, Koller and Wessels, 2010). It
is the average return
investors demand over the risk free rate that compensates them
for the risk involved
in investing in the market. A country risk premium can be added
to the equity risk
premium to include any additional risk associated with
investing in that
country/region. sales by region was weighted and multiplied by
the
equity risk premium for the corresponding region, sourced by
Damodaran (2018).
The weighted equity risk premiums were then summed to 7.11
per cent, a number
believed to represent the equity risk premium for the operations
29 | P a g e

globally. It must be noted ERP calculations are an estimation;
where Richemont has
not provided country data in its reports, regional estimations
have been computed.
Table 9: Weighted equity risk premium
Source: Damodaran, 2018
Upon identification of the equity risk premium (7.11 per cent),
risk free rate (1.2 per
cent) and the equity beta (7.11 per cent), the CAPM formula
(see equation 3), was
utilised to derive the cost of equity at 8.18 per cent. WACC was
therefore calculated
6.8 per cent (see Figure 3).
Figure 3: Components of WACC
3.4 Terminal Value
The Terminal Value (TV) reflects the potential future growth of
a company beyond
the explicit forecast period (KPMG, 2015). The TV is
computed by applying an
expected continuous level of growth to the final cash flow
forecasted in the last year
30 | P a g e

of the forecasted period. This method of valuation assumes that
growth can be
achieved by the asset until perpetuity. TV can be calculated
using equation 6.
Equation 6: Terminal Value
TV was thus computed using the formula. The final free cash
flow for
Richemont is forecasted at 731 million, a modest growth rate of
1.84 per cent was
presumed, in line with historical CAGR and WACC was
determined as
6.8 per cent resulting in TV for Richemont at
3.5 Enterprise Value
enterprise value.
The enterprise value of Richemont will be calculated summing
the net present value
of the discounted forecasted free cash flows and the discounted
terminal value,
illustrated in the equation 7.
Equation 7: Enterprise Value
31 | P a g e

Richemon net present value of the discounted future free cash
flows in the DCF
totalled 10 446 million and the discounte ,
resulting in an enterprise v million.
3.6 Equity Value
Determination of the enterprise value allows the implied equity
value to be further
calculated. While enterprise value embodies the value of the
entire company, equity
value represents the portion owned by shareholders (Goedhart,
Koller and Wessels,
2010).
Equation 8: Equity Value
Using the aforementioned calculations, equity value was
derived at
360 million (see Figure 4). Total debt was found by summing
long-term borrowings of
lance sheet as of 31st
March 2018 (Richemont, 2018).
Figure 4: Equity Value

32 | P a g e
Equity Value per Share
Equity value per share can be computed using the formula
below.
Equation 9: Equity Value per Share
equity value of million was divided by 574 200 000 shares (See
section 1.2 Capital Structure) to find an implied share price of
per
cent premium to share price as of 29th June 2018.
3.7 Sensitivity Analysis
Enterprise Sensitivity Analysis
Figure 5 represents the ranges for the sensitivity analysis. An
enterprise sensitivity
analysis allows investors to determine how different values for
the WACC and
growth rates affect the enterprise value. The DCF was produced
using a WACC of
6.83 per cent and a growth rate of 1.84 per cent at which
enterprise value is
million. If the growth rate was to increase to 2.34 per cent and
WACC remained the
same enterprise value would increase to 53 008 million. If
WACC
increased to 7.08 per cent and growth remained at 1.84 per cent,
enterprise value
would decrease to 311 million.

Figure 5: Enterprise sensitivity Analysis
33 | P a g e
Equity Share Price Sensitivity Analysis
Figure 6 demonstrates how changes in WACC and growth rates
will impact equity
share price. The DCF was produced using a WACC of 6.83 per
cent and a growth
rate of 1.84 per cent at which implied equity share price was
per share. If
WACC was to decrease to 6.58 per cent and growth was to also
decrease to 1.34
per cent, the sensitivity analysis shows that implied equity share
price would fall to
86.71. If WACC was to remain at 6.83 per cent and growth was
to increase 2.34
per cent, implied equity share price would increase to 97.21 per
share.
Figure 6: Equity Share Price Sensitivity Analysis
3.8 Scenario Analysis

To use the scenario analysis, two cases were constructed, other
than that of the
base case presented in this report. The alternative two cases
were a bullish case (an
extremely aggressive scenario) and a bearish case (a very
conservative scenario).
Appendix 2 presents the growth rates in a bearish case. The
smallest historical
growth rates in the income statement were computed to find the
effect on the
enterprise value and equity value. Figure 7 illustrates the
pessimistic/bearish case;
235. It must be emphasised that this figure was computed using
the lowest historical
average growth rate for all sales, and the highest historical
growth of expenses.
34 | P a g e
Figure 7: Bearish Case Scenario analysis

The converse, bullish case was then tested. The bullish case
selected the highest
historical sales growth rates and the lowest expenses to test the
implications on
enterprise value and equity value then extrapolated the rates to
forecast the next five
free cash flows. Figure 8 presents the findings. In this case
enterprise value at an
inflated value of Appendix 3
presents the growth rates in a bullish case.
Figure 8: Bullish Case Scenario analysis
35 | P a g e
P/E
The P/E Multiple for Richemont for FY2019 was calculated as
23.42x. Compared to
the average of 26.87x of its competitive peers suggests that
Richemont is
undervalued by 12.9 per cent. In FY2020 the multiple for
Richemont is 21.31x
compared to the 26.87x of its peers, suggesting that Richemont
is undervalued by
20.7 per cent. See Figure 9.
Figure 9: P/E Comps

EV/EBITDA
The EV/EBITDA multiple does not consider the impact of
different capital structures
across companies and therefore is perceived as a primary
reference for valuations
(KPMG, 2015).
The EV/EBITDA multiple for Richemont was 12.29x and 11.33x
in FY2019 and
FY2020 respectively, compared to 14.7x in FY2019 and
FY2020. This means
Richemont is undervalued by 13.9 per cent in FY2019 and 20.6
per cent in FY2020.
Accounting standards between firms are different so it is
possible that the some of
the comparable overstating their earnings. See Figure 10.
36 | P a g e
Figure 10: EV/EBITDA comps

EV/EBIT
The EV/EBIT multiple for Richemont was 15.6 and 14.1
FY2019 and FY2020
respectively, compared to 17.5 in FY2019 and FY2020. Thus
the multiple suggests
that Richemont is undervalued by 11 per cent in FY2019 and
19.1 per cent in
FY2020. See Figure 11.
Figure 11: EV/EBIT comps
37 | P a g e
EV/REV
The enterprise value compared to Richemont priced low, this
implies
that the Group has good projects. The EV/Rev Multiple for
Richemont in FY2019
was 2.9x compared to the multiple of 4.0x of its peers. See
Figure 12.
Figure 12: EV/REV comps

38 | P a g e
4.0 Conclusion
This thesis was aimed at performing an equity valuation of
Switzerland-based luxury
goods company, Compagnie Financière Richemont SA.
Utilisation of an intrinsic
valuation measure, namely the discounted cash flow model, and
an extrinsic
valuation measure, namely relative valuation comparables, the
valuation was
performed.
The key value drivers for Richemont were identified as;
growing demand from the
Asia Pacific, more specifically China, online sales and
millennials. Following
identification of the value drivers forecasts were made and the
DCF was created.
The DCF revealed Richemont to have enterprise v million, an
equity
premium to share price as of 29th June 2018.
According to the calculated implied share price, Richemont is
trading below its
fundamental value. Considering this valuation in this report and
some global
research houses, Richemont s 12 month price target is between
70 and 111 per
share (Bloomberg, 2018).
A sensitivity and a scenario analysis was performed to test the
forecasted

assumptions. The sensitivity analysis showed how changes in
growth and WACC
A scenario analysis was conducted presenting a base case, a
bullish case and a
bearish case and the effects it had on the enterprise value and
equity value. The
Following this, a relative valuation was conducted through the
use of the P/E,
EV/EBIT, EV/EBITDA and EV/REV multiples, revealing that
Richemont is
undervalued relative to its competitors, reinforcing the findings
of the DCF.
Based upon the findings of the DCF approach to valuation and
the relative valuation
approach, the report concluded an investment recommendation
of BUY.
39 | P a g e
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42 | P a g e
6.0 Appendices
Appendix 1: Sales Forecasts

Please note that historical figures (FY 2014- FY2018) for
YNAP and Richemont have been computed
using both financial statement to show theoretical figures of if
the takeover had taken place before
(highlighted)
Appendix 2: Bearish Scenario Analysis
43 | P a g e
Appendix 3: Bullish Scenario Analysis
44 | P a g e
READ the article and answer the following question
Carefully read, summarize, and appraise your group's assigned
article. The discussion board for this week should cover the
following concepts in order to have a complete draft by the end
of the week. Apply the concepts discussed in the lecture and the

readings. As you provide input to your peers, be sure to state a
rationale for your claims.
1. Identify and discuss the following:
· dependent variable(s) and the instrument(s) used to measure
them.
· how the data for the dependent variable(s) were collected.
· the intervention and procedures for delivering it.
· the key results for the study, including any p-values, reported.
· the conclusions the researchers drew.
2. Appraise and debate the quality of the data collection
methods and determine whether the conclusions of the study
were supported by the statistical results. Consider the
following questions:
· Were the measurement instruments reliable and valid? Why or
why not?
· Was treatment fidelity for the intervention ensured? Why or
why not?
· Were the conclusions of the study were supported by the
statistical results, as indicated by the variable values and the p -
values if reported?

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