L’Occitane: Fine-Tuning Near-Term Forecasts; Shares Very Undervalued

We fine-tune our forecasts for L’Occitane 00973 but maintain our fair value estimate at HKD 36.60 per share, implying a fiscal 2024 P/E ratio of 21 times. With its share price currently around HKD 20, we find L’Occitane’s valuation very attractive, trading at just 11 times fiscal 2024 earnings. We think investors should take advantage of this opportunity to buy the shares, which are trading at more than a 45% discount to our fair value estimate.

We lowered our fiscal 2023 (ending March) earnings forecast by 11% to reflect slower-than-expected post-COVID-19 recovery in China and reduction in product shipment to online wholesalers in the U.K. and U.S. We believe both disruptions are temporary, as (1) a continued pickup in economic activities in China bodes well for demand recovery in the second quarter of calendar 2023, and (2) Elemis’ decision to reduce sales to e-tailers was done to limit discounts and protect brand image, which we expect is one-off in nature. Therefore, we keep our long-term forecasts unchanged.

Our HKD 36.60 fair value estimate assumes L’Occitane grows its revenue by a five-year CAGR of 12.8%. We expect operating margin will increase to 18% in fiscal 2027, from 17.4% in fiscal 2022. As a result, the group’s bottom line should expand at a pace slightly ahead of the top line, at a five-year CAGR of 14.1%.