An update on Kering sell-off

• As an aside Equity {KER FP Equity} sell-off still leaves it higher on the year after a +11% rally that wasn't on fundamentals - we see it currently trading at forward P/E of 15.2 vs. ~14* earlier this year leaving more downside for equities on relative terms.
• On credit; S&P, the sole rater on Kering, moved its outlook to neg in Mid-Feb post FY23 results - spreads did underperform/move wider on it but not the extent of today's moves. On sales it was looking for a "gradual" recovery to +4-6% (headline not organic seems) over next couple of years (2024-25). It expected FY23 FOCF at €2.9b to improve to €3-3.5b this year and €3.5-4b in 2025 - improvements on sales growth, stable capex & normalising WC were the drivers.
• It's fcsts were ~in-line with consensus at the time but are now well above market expectations for €2.8b/€3.2b in operating cash flows over next 2 years. Analyst comments today point to another 5-15% in cuts to FY24 earnings, uncertain how many of those revisions has already been captured in today's numbers we are quoting (that are down on the day).
• The sales/FCF revision down should be enough for a downgrade but still only a small dent on BS (subject to acquisition/Capex though)- it runs leverage at 1.3* with net debt of €8.5b (up from 0.3* in FY22) - that was after €1.75b in dividends from €1.98b in FCF net of RE acquisitions (€3.3 excluding) at a 56% pay-out ratio.
• That was higher than its target 50% pay-out ratio & leaves headroom to cut dividends if it chooses to - interim dividend expectations are unch at €4.5/share or ~€550m. No buyback last year, policy is "flexible".
• S&P saw FY23 leverage at 2.2* (up from 1.1*) which it expected to remain flat - we don't see that happening now - before falling 2025 to 1.8*-2*; downgrade was on leverage remaining above 2*.

Downgrade has been firmly priced in this morning - 30's give +20bps to Richemont (NR, A+) & outside the sector now trades in line with Booking.com/BKNG (A3/A-).