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Why Padenga remains a Top Pick on the ZSE

Abraham Lincoln, the 16th president of the United States and one of the greatest American leaders once said; “The best way to predict your future is to create it”. One industry that has indeed been reshaping its future in the wake of the Covid-19 pandemic is the Global Luxury Brands Sector. As illustrated in the graph, the high-net-worth individual (HNWI) population and financial wealth each grew by nearly 9.0% in 2019 despite rising trade tensions and geopolitical risks that took a toll on business confidence and investment decisions. A notable shift to monetary policy accommodation across regions – and tech sector performance optimism – calmed tensions around financial market activity. Covid-19 has however severely impacted billions of lives, both socially and financially. In Q1 2020, the impact of Covid-19 wiped out over USD18 trillion from markets globally over the course of February and March 2020, before recovering slightly in April. That said, the Global Luxury Brands sector is re-inventing itself in the new environment.

Number of HNWIs by Region (in Millions)

Source: Capegemini Financial Services Analysis

An interesting trend is that luxury brands are adapting their production lines to also incorporate the manufacture of medical supplies such as hand sanitizers, surgical masks and medical overalls. For example, LVMH is producing alcohol-based sanitizers for French health authorities. Prada has also started producing medical overalls and masks. Zegna converted part of its production to produce sanitary masks. More luxury brands like Coty, Gucci, YSL, Balenciaga, Ralph Lauren, Burberry and others have adopted similar approaches. This points to the fact that the pandemic has created product portfolio diversification opportunities. An important observation is that social distancing and self-protection behavior will continue even after the Covid-19 crisis and this may further create opportunities for new products as consumer needs shift. This may include fashion accessories to cater to extended social distancing and protection needs, such as all-season gloves and scarves, fashionable masks and high-end hand sanitizers.

It should also be highlighted that luxury brands are now optimizing their e-commerce experience given the expected growth in the online channel and a dip in offline purchases during the outbreak. According to a survey carried out by Bain & Company, 60% of apparel and luxury industries are planning to overhaul the way brands go to market, moving away from offline and toward online channels. Luxury brands have also adopted live streaming to showcase their new collections. For example, in February 2020, Armani was the first luxury brand which decided to showcase its Autumn-Winter collection through a live-streamed the event during the Milan Fashion Week. Louis Vuitton was also the first international luxury brand to host a live streaming session on Little Red Book, the Chinese social media and e-commerce platform in March 2020. Luxury brands are taking advantage of shifting consumer online behavior and this will enable them to maintain a constant conversation with their customers and create a closer integration between the digital and physical touch-points.

Speaking of luxury brands and high net worth individuals, a company that comes to our minds is Padenga. The group is the sole listed company in Africa whose business is the production and sale of crocodilian skins and meat. It is one of the world’s leading suppliers of premium quality crocodilian skins, accounting for nearly 85% of the supply of Nile crocodile skins to high end luxury brands globally. The global demand for crocodilian skins is driven primarily by the demand for high value leather goods produced by top-tier fashion and luxury brands. Padenga has, since 2011, consistently supplied c40,000 plus skins annually into this market. The defensiveness of the global luxury brands industry implies that the demand for top quality skins will remain steady and the firm prices should hold. Piggy expects financial markets to be resilient in 2020 despite the dwindling global economy. In addition, as observed from past recessions, consumers tend to reward themselves as they emerge from periods of austerity and luxury brands are well prepared for that moment. Piggy likes Padenga’s business model given that is specialized, export-oriented and has significant barriers of entry.  The acquisition of the Dallaglio mining group was also a good diversification strategy given the good performance of gold in economic slowdowns.

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