20160826-美银美林-普拉达-01913.HK-What_happens_when_you_can_t_cut_costs_anymore__Earnings_dive__reiterate_U_P_13页_762kb

Prada Financial and Operational Analysis Summary

Core Content

Prada has experienced a significant decline in sales and earnings, with its first-half (1H) sales falling 10% below estimates and EBIT beating by 9% due to a depreciation policy revision. However, when adjusted for this revision, EBIT missed by 5%. The company's retail sales declined by 17%, while wholesale sales showed a slight positive growth of 2.6%. Despite tight cost control, which reduced operating costs by 9% and improved EBITDA margins, the overall top-line performance remains weak, and the firm is not expected to return to positive growth without a more radical strategy.

Key Financial Highlights

• Sales Trends: Sales have been declining for several years, with a notable drop in retail sales. The company's retail sales declined by 16% in 2H16 and further in 2017, while wholesale sales showed some improvement.
• EBITDA Margins: EBITDA margins fell by 290 basis points (bps) in the second half of 2016, and are expected to fall further by 150 bps in FY18.
• Net Income: Net income has been declining, with a forecast of 251 million EUR for FY18, showing a continued downward trend.
• EPS Forecast: The FY17E EPS was revised up by 12% due to the depreciation policy change, but remains at 0.12 EUR, significantly below the consensus. FY18-19E estimates are largely unchanged, reflecting continued earnings risks.
• Valuation: The stock trades at 25x FY18E PE, a 25% premium to soft luxury peers. The P/E ratio has been increasing over the years, but the high earnings risk remains a concern.

Investment Rationale

Prada's structurally lower earnings outlook suggests a de-rating. The company is underperforming in key markets and has not shown signs of recovery in brand momentum. The market seems to be underestimating the ongoing operating deleverage, with the FY17E EPS 27% below the consensus. Without a turnaround in brand performance, the stock remains a high-risk investment.

Key Figures

• EPS (Adjusted Diluted): 0.25 (2014A), 0.18 (2015A), 0.12 (2017E), 0.10 (2018E)
• P/E: 8.47x (2014A), 14.1x (2015A), 20.7x (2016E), 21.4x (2017E), 25.4x (2018E)
• Dividend Yield: 4.42% (2014A), 4.68% (2017E), 2.76% (2018E)
• EV / EBITDA: 6.05x (2014A), 7.25x (2015A), 8.52x (2016E), 10.3x (2017E), 11.4x (2018E)
• Free Cash Flow Yield: 3.46% (2014A), 1.92% (2015A), -0.40% (2016E), 5.03% (2017E), 3.73% (2018E)

Financial Performance (Key Figures)

• Net Sales Revenues: 3,548 million EUR (2016E), 3,139 million EUR (2017E), 3,050 million EUR (2018E)
• EBITDA Adjusted: 1,143 million EUR (2016E), 672 million EUR (2017E), 607 million EUR (2018E)
• EBIT Adjusted: 939 million EUR (2016E), 433 million EUR (2017E), 366 million EUR (2018E)
• Net Income (Adjusted): 628 million EUR (2016E), 298 million EUR (2017E), 251 million EUR (2018E)
• Free Cash Flow: 220 million EUR (2016E), 320 million EUR (2017E), 237 million EUR (2018E)

Financial Ratios and Metrics

• Return On Capital Employed (ROCE): 21.3% (2011), 13.5% (2015), 8.81% (2016), 7.20% (2017E), 6.11% (2018E)
• Return On Equity (ROE): 25.1% (2011), 15.8% (2015), 10.5% (2016), 9.64% (2017E), 8.16% (2018E)
• Operating Margin: 26.5% (2011), 20.0% (2015), 14.4% (2016), 13.8% (2017E), 12.0% (2018E)
• Net Debt/Equity: -11.1% (2011), -6.31% (2015), 3.55% (2016), 2.40% (2017E), 4.52% (2018E)
• Interest Cover: 34.6x (2016), 45.7x (2018E)

Key Cash Flow Statement Data

• Net Cash Flows from Operating Activities: 372 million EUR (2011), 769 million EUR (2016), 607 million EUR (2017E), 510 million EUR (2018E)
• Cash Flow from Investing Activities: -192 million EUR (2011), -548 million EUR (2016), -287 million EUR (2017E), -273 million EUR (2018E)
• Cash Flow from Financing Activities: -221 million EUR (2011), -368 million EUR (2016), -285 million EUR (2017E), -301 million EUR (2018E)
• Change in Cash: -41 million EUR (2011), -33 million EUR (2016), 35 million EUR (2017E), -64 million EUR (2018E)

Balance Sheet Highlights

• Total Assets: 3,888 million EUR (2011), 4,757 million EUR (2016), 4,688 million EUR (2018E)
• Total Liabilities: 1,187 million EUR (2011), 1,659 million EUR (2016), 1,624 million EUR (2018E)
• Total Equity: 2,702 million EUR (2011), 3,097 million EUR (2016), 3,064 million EUR (2018E)
• Net Debt: -299 million EUR (2011), 110 million EUR (2016), 138 million EUR (2018E)

Company Overview

• Sector: Luxury Goods
• Description: Prada designs, manufactures, and sells luxury goods, including handbags, leather goods, footwear, ready-to-wear apparel, accessories, eyewear, and fragrances. It operates in 70 countries and has a strong presence in retail, with 85% of sales coming from directly operated stores.
• Listing: Listed on HKex on 23 June 2011.

Investment Opinion

• Rating: Underperform
• Price Objective: HK$18
• Market Valuation: The stock trades at 25x FY18E PE, a 25% premium to soft luxury peers.
• Dividend Yield: 2.8% (2017E), 2.6% (2018E)
• Payout Ratio: 100% (2017E), 70% (2018E)

Key Changes

• 2017E EPS: Revised from 0.10 to 0.12 EUR

Analysts

• Sherri Malek: Research Analyst, MLI (UK), +44 20 7996 2163, sherri.malek@baml.com
• Ashley Wallace: Research Analyst, MLI (UK), +44 20 7996 0104, awallace3@baml.com
• Amelia Hamer: Research Analyst, MLI (UK), +44 20 7996 7564, amelia.hamer@baml.com

Stock Data

• Price: 21.75 HKD
• Price Objective: 18.00 HKD
• 52-Week Range: 20.20 HKD - 35.00 HKD
• Market Value / Shares Outstanding (mn): 55,654 HKD / 2,558.8
• Free Float: 19.0%
• BofAML Ticker / Exchange: PRDSF / HKG
• Bloomberg / Reuters: 1913 HK / 1913.HK
• ROE (2016E): 10.5%
• Net Debt to Equity (Jan 2015A): -6.3%

Conclusion

Prada continues to face challenges in its top-line performance, with retail sales declining sharply and wholesale showing limited growth. Although the company has managed to maintain some cost control and improve EBIT through depreciation policy changes, the underlying issues in sales and brand performance remain unresolved. The stock is currently overvalued relative to its peers and is expected to continue underperforming. Investors should be cautious and consider the report as one factor in their decision-making process.