20151113-美银美林-普拉达-01913.HK-Q3_preview__don_t_count_on_easy_comps_12页_711kb

Prada Financial and Operational Analysis Summary

Core Content

Prada, a luxury goods company, is set to report its Q3 results on December 15. The report highlights the company's ongoing underperformance, with a revised price objective (PO) of HK$25, down from HK$28, indicating a 15% downside potential. This suggests a continued cautious outlook on the stock, with the rating reiterated as Underperform.

The company is experiencing declining sales and earnings, with Q3 Group sales forecasted at €796m, down 0.6% year-over-year (yoy), and EBIT at €92m, down 26% yoy. The EBIT margin is expected to be 11.5%, a 390 basis points (bps) decline from the previous year. The report indicates that sales are deteriorating further, with retail SSSG down to -7% in Q3 from -3% in Q2, despite easier comparisons. Retail growth at constant FX is forecasted at -6%, while wholesale is expected to decline by 17%, slightly better than the -20% in Q2.

Main Points

• Underperformance: Prada continues to underperform, with no signs of a turnaround.
• Sales Decline: Q3 sales are expected to decline by 0.6% yoy, and EBIT by 26% yoy.
• Margin Pressure: EBIT margin is down 380 bps yoy, reflecting continued pressure.
• Valuation Concerns: Prada's valuation is considered too high, trading at 26.4x FY17E PE, a 26% premium to the sector, despite lower earnings growth expectations.
• Earnings Outlook: FY17E EPS is estimated at €0.14, which is 25% below consensus, indicating a structurally lower earnings outlook.

Key Financials

Earnings Estimates (Jan)

Valuation (Jan)

Key Changes

Company Overview

Prada is a luxury goods company that designs, manufactures, and sells handbags, leather goods, footwear, ready-to-wear apparel, accessories, eyewear, and fragrances. It operates in 70 countries, with 85% of sales coming from its 540 directly operated stores. The company is listed on the Hong Kong Exchange (HKEX) and is known for its distinctive efficient industrial process.

Investment Rationale

The investment rationale emphasizes that Prada's earnings outlook is structurally lower, which justifies a de-rating. The report suggests that without a turnaround in brand momentum, the stock remains a risk. Industry headwinds and brand underperformance are key factors contributing to this outlook.

Financial Performance (Key Highlights)

• Sales: Declining at constant FX, with the most significant drop in Q3.
• EBITDA Adjusted: Shows a downward trend, with FY17E at €872m.
• EBIT Adjusted: FY17E at €586m, with a 380 bps decrease from FY16E.
• Net Income (Adjusted): FY17E at €381m, indicating continued earnings pressure.
• Free Cash Flow (MM): FY17E at €340m, reflecting ongoing cash flow challenges.

Key Financial Ratios

• Return On Capital Employed: 10.0% in FY17E.
• Return On Equity: 12.5% in FY17E.
• Operating Margin: 16.1% in FY17E.
• Net Debt/Equity: -7.71% in FY17E.
• Price to Book Value: 2.9x.

Risk and Valuation Considerations

• Valuation Premium: Prada's valuation is 26% above the sector despite inferior earnings growth.
• Earnings Risk: High earnings risk leads to a lower valuation.
• Market Performance: The stock's performance has been mixed, with a 52-week range of 29.00 HKD to 52.00 HKD.
• Dividend Yield: Expected to decrease to 2.7% in FY17E.

Conclusion

Prada continues to face challenges in both sales and earnings, with no signs of a turnaround. The company's valuation is considered too high relative to its earnings outlook, and the investment opinion remains cautious. The financial data supports the notion of structural underperformance, with a revised price objective reflecting the continued risk to the stock. Investors are advised to consider this report as one of many factors in their decision-making process.