We reviewed our stance on L’Oreal post the first quarter sales release on April 16, maintaining our hold recommendation but increasing our price target from €230 to €240.

The increase in price target is a result of improved sales forecasts in our valuation model. Despite our price target being in line with the current price, our hold recommendation reflects a strong business model which could easily continue to surprise to the upside. It is also a low beta stock, which has outperformed the market (CAC) by 65% over a 5-year period.

L’Oreal has a portfolio of well-known brands in skincare and beauty products and has a history of continued margin expansion. We do not see a slowdown in margins in the foreseeable future, though the price is already factoring in positive figures in the years ahead, hence our hold recommendation.

Nonetheless, the group has proven to be able to find ways to continue to improve its top line as well as the discipline to decrease costs. We would not be surprised if management manages to beat our expectations given the positive track record.

There are many factors, which should continue to contribute to better margins in the years ahead.

The group reported strong growth across all segments of its business and we expect this to continue in the coming years which will be driven by:

• A continuous demand for beauty products (strong underlying trends). The middle and upper classes spending is expected to continue to grow
• Premiumisation – Consumers are ready to trade up (resulting in better margins for the group)
• E-Commerce – continued growth in sales via the web
• The number of seniors will almost double
• Men’s market < 10% of the beauty market
• Focus on topline growth and additional operational discipline
• Consistent growth in operating margins

Valuation

Our 12-month price target of €240 is based on a forward P/E ratio of 30x and a discount rate of 7%.

About L’Oreal

L’Oreal SA is a French personal care company headquartered in Clichy, Hauts-de-Seine with a registered office in Paris. It is the world's largest cosmetics company and has developed activities in the field concentrating on hair colour, skin care, sun protection, make-up, perfume, hair care and men's skincare.

Disclaimer:

This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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