20160408-美银美林-普拉达-01913.HK-Still_no_end_in_sight_for_earnings_downgrades_12页_725kb

Prada Financial and Operational Analysis Summary

Core Content

Prada's financial performance and outlook for FY17 are characterized by continued earnings challenges, margin pressures, and a cautious management perspective. The company's FY16 EBIT was €503m, a -28% year-over-year decline, and after adjusting for non-recurring expenses, it fell short of consensus by 6%. This implies a 20% miss in Q4 clean EBIT, with a margin of 14.3%, down 620 basis points from the previous year.

The company's top-line growth is expected to remain negative in FY17 at -2%, compared to -6% in FY16, due to ongoing macroeconomic challenges. Key markets such as tourism, the US, and Hong Kong are showing signs of deterioration, and without a clear strategy to improve sales, the risk of continued earnings downgrades and operating deleverage remains high.

Main Points

• EBIT Performance:

  • FY16 EBIT was €503m, down 28% yoy.
  • Adjusted EBIT missed consensus by 6%, with a 20% miss in Q4.
  • EBIT margin dropped to 14.3%, a 620bps decline from the previous year.

• Top-Line Challenges:

  • Retail SSSG is expected to remain negative at -2% in FY17.
  • Continued macroeconomic instability is likely to impact sales performance.
  • Management has not shown signs of a turnaround in brand momentum.

• Margin Pressure:

  • Cost savings are unlikely to offset the negative top-line performance.
  • EBIT margin pressure is forecasted to continue in FY17 at -140bps yoy.

• Investment Outlook:

  • The stock is currently rated as Underperform (U/P).
  • The market appears to underestimate the operating deleverage, with FY17E EPS 27% below consensus.
  • The stock trades at a 32% premium to its soft luxury peers on a 23.3x P/E basis, despite ongoing brand underperformance and high earnings risk.

Key Financial Data

Estimates (Jan)

Valuation (Jan)

Key Income Statement Data (Jan)

Key Cash Flow Statement Data

Key Balance Sheet Data

Revenue and Earnings Trends

Revenue Summary (Jan YE)

Revenue by Channel

Revenue by Geography

Revenue by Brand (Retail/Wholesale)

Financial Metrics

• Return On Capital Employed (ROCE): 21.3% (FY11), 13.5% (FY12), 9.39% (FY13), 8.43% (FY14), 8.53% (FY15)
• Return On Equity (ROE): 25.1% (FY11), 15.8% (FY12), 11.6% (FY13), 10.5% (FY14), 10.5% (FY15)
• Operating Margin: 26.5% (FY11), 20.0% (FY12), 15.6% (FY13), 14.4% (FY14), 14.5% (FY15)
• Free Cash Flow (MM): 220 (FY11), 122 (FY12), 148 (FY13), 327 (FY14), 313 (FY15)
• Net Debt/Equity: -11.1% (FY11), -6.31% (FY12), -1.54% (FY13), -2.69% (FY14), -5.06% (FY15)
• Interest Cover: NM (FY11), NM (FY12), 34.1x (FY13), NM (FY14), NM (FY15)

Investment and Valuation Insights

• The stock is currently rated as Underperform (U/P).
• Prada's stock has underperformed in 2015, but still trades at a 32% premium to its soft luxury peers on a 23.3x P/E basis.
• The Price to Book Value is 2.4x.
• EPS is expected to be 0.13 in FY17, which is 27% below consensus.
• Payout ratio is forecasted to be 70% in FY17, with a dividend yield of 3.0%.

Conclusion

Despite efforts to improve efficiency and productivity, Prada faces significant challenges in stabilizing its top-line and maintaining its EBIT margins. The company's earnings outlook remains cautious, and the stock is considered to have high risk. The valuation is still relatively high compared to peers, suggesting potential for a de-rating. Investors are advised to remain cautious and consider the report as one of many factors in their investment decision.