Folli Follie Outperform (from Neutral) Mkt. Price: 19.50 Retail High Risk (from High Risk) Target Price: 24.0 FTSE Market: 446.94 Equity Research | Update Changes Target price 24.0 of which DPS 0.00 Previous 34.0 Total stock return 23.0% Valuation 2014a 2015e 2016e 2017e P/E 9.1x 8.5x 6.9x 6.4x P/BV 0.9x 0.9x 0.8x 0.8x EV/Sales 1.9x 1.6x 1.5x 1.4x EV/EBITDA 8.7x 7.5x 6.8x 6.3x EV/EBIT 9.6x 8.3x 7.5x 6.9x Dividend yield 1.9% 4.1% 5.1% 5.4% FCF yield 0.3% 1.1% 3.9% 5.7% Per share EPS 2.14 2.28 2.82 3.03 EPS old 3.30 2.08 2.52 3.07 DPS 0.37 0.80 0.99 1.06 BS data (€m) Sh. Equity 1,334 1,433 1,556 1,688 Net debt 54 94 109 103 P&L data (€m) Revenues 998 1,222 1,296 1,359 EBITDA 223 259 285 307 EBIT 202 235 259 279 Net income 141 153 189 203 Trading data 1m 3m 6m 12m Rel. Performance 2% 3% -5% 26% Abs. Performance -19% -19% -32% -19% H | L 52w 14.93 31.50 Market cap. (mn) 1305.49 Shares outstanding (m): 129.3 Free float (%, mn) 61% 797.7 Avg. vol. Traded (52w): 99.8k Index constituent & weight: ASE (4.77%), FTSE LC (4.5%), FTSE MI (4.3%) Antonis Diapoulis Analyst [email protected]T +30 210 367 7532, +30 210 367 7513 Please refer to important disclosures in the Disclosure Appendix 3-Sep-15 Folli Follie is a diversified retail group which offers globally own brand jewels, watches and accessories and resells a strong brand portfolio in Greece and SEE through department stores. FF operates in 28 countries around the globe and aims to further expand its presence so as to establish its brand in the international fashion world. Alpha Finance does and seeks to do business with companies covered in its research reports. Consequently, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. RIC: HDFr.AT, BBG: FFGRP GA Rating - TP EPS Could this be the turnaround in Cash Flow? Folli Follie generated a healthy free cash flow in 1H 15 of €13.18mn vs. -€17mn in 1H 14. It was the combination of prudent WC management, favorable FX trends and good l-f-l growth in Asian markets. One cannot disregard the troubling consumer sentiment outlook in China and the gradual turn to a wholesale oriented model in the Jewelry division which has lower margins. Discounting these factors in our model we lowered our target price to €24/share from €34 previously but upgraded our recommendation to “outperform” from Neutral” since we believe that investors have over penalized the stock due to its Greek listing. New Estimates We have upgraded sales and profitability estimates but adopted a more conservative stance in FCF generation during 2015-16. In detail, revenues and EBITDA CAGR 14/17e could reach 10.8% and 11.2% (vs. AFe old 6% and 7.3%) respectively. For gross profit margin we except pressure in the next couple of years and then stability close to 49% in the long term (AFe old 50%). FCF could reach €16.2mn in 2015 and increase to €56mn in 2016 reaching yield of 10-13% by 2019-20 (AFe old 7-8%). We see WC pressure to remain for at least the next three years with WC/Sales ranging around 8% (AFe old 9%). Net debt/EBITDA could continue decreasing in the coming years closing to zero by 2020 depending on the CAPEX plans of the company. 1H 15 Snapshot & CC highlights FFGRP announced 1H 15 figures which came broadly in line in terms of operating profitability but on lower margins than we anticipated since sales beat our estimates by a €31.4mn delta. In a glimpse, sales, EBITDA, EBIT and NI stood at €594.3mn (+24.1% y-o-y, AFe €563mn), €128.1mn (+10% y-o-y, AFe €135.4mn), €113.19mn (+6.2% y-o-y, AFe €120.9mn) and €73.2mn (+11% y-o-y, AFe €73.9mn) respectively. On a cash flow basis FCF (Op. CF – Inv CF) turned positive to €13.18mn vs. €17mn in 1H 14. The most important comments from the CC were: a) JWA target EBITDA margin at 28% for 2015, b) for 3Q in Greece despite the capital controls effect they were almost flat in July and had a very strong August; it was tourism and partial return of the consumer sentiment that helped a lot, c) in China during 3Q they haven’t seen any problem with their business since the middle class in the country is very low leveraged, d) no detailed guidance was given again but it was restated that a double digit growth in top and bottom line is expected for 2015 with CAPEX standing at €60mn, e) when asked for a listing in Honk Kong the CEO stated that they are considering their options but no decision has been taken yet. 10.0 15.0 20.0 25.0 30.0 35.0 0 50 100 150 200 250 300 A-14 O-14 N-14 J-15 F-15 A-15 M-15 J-15 S-15 52w performance Vol traded (,000s shares) LH scale Adjusted price
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Please refer to important disclosures in the Disclosure Appendix
3-Sep-15
Folli Follie is a diversified retail group which offers globally own brand jewels, watches and accessories and resells a
strong brand portfolio in Greece and SEE through department stores. FF operates in 28 countries around the globe
and aims to further expand its presence so as to establish its brand in the international fashion world.
Alpha Finance does and seeks to do business with companies covered in its research reports. Consequently, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
RIC: HDFr.AT, BBG: FFGRP GA
Rating - TP EPS Could this be the turnaround in Cash Flow? Folli Follie generated a healthy free cash flow in 1H 15 of €13.18mn vs. -€17mn in 1H 14. It was the combination of prudent WC management, favorable FX trends and good l-f-l growth in Asian markets. One cannot disregard the troubling consumer sentiment outlook in China and the gradual turn to a wholesale oriented model in the Jewelry division which has lower margins. Discounting these factors in our model we lowered our target price to €24/share from €34 previously but upgraded our recommendation to “outperform” from Neutral” since we believe that investors have over penalized the stock due to its Greek listing. New Estimates We have upgraded sales and profitability estimates but adopted a more conservative stance in FCF generation during 2015-16. In detail, revenues and EBITDA CAGR 14/17e could reach 10.8% and 11.2% (vs. AFe old 6% and 7.3%) respectively. For gross profit margin we except pressure in the next couple of years and then stability close to 49% in the long term (AFe old 50%). FCF could reach €16.2mn in 2015 and increase to €56mn in 2016 reaching yield of 10-13% by 2019-20 (AFe old 7-8%). We see WC pressure to remain for at least the next three years with WC/Sales ranging around 8% (AFe old 9%). Net debt/EBITDA could continue decreasing in the coming years closing to zero by 2020 depending on the CAPEX plans of the company. 1H 15 Snapshot & CC highlights FFGRP announced 1H 15 figures which came broadly in line in terms of operating profitability but on lower margins than we anticipated since sales beat our estimates by a €31.4mn delta. In a glimpse, sales, EBITDA, EBIT and NI stood at €594.3mn (+24.1% y-o-y, AFe €563mn), €128.1mn (+10% y-o-y, AFe €135.4mn), €113.19mn (+6.2% y-o-y, AFe €120.9mn) and €73.2mn (+11% y-o-y, AFe €73.9mn) respectively. On a cash flow basis FCF (Op. CF – Inv CF) turned positive to €13.18mn vs. €17mn in 1H 14. The most important comments from the CC were: a) JWA target EBITDA margin at 28% for 2015, b) for 3Q in Greece despite the capital controls effect they were almost flat in July and had a very strong August; it was tourism and partial return of the consumer sentiment that helped a lot, c) in China during 3Q they haven’t seen any problem with their business since the middle class in the country is very low leveraged, d) no detailed guidance was given again but it was restated that a double digit growth in top and bottom line is expected for 2015 with CAPEX standing at €60mn, e) when asked for a listing in Honk Kong the CEO stated that they are considering their options but no decision has been taken yet.
Chng in Cash Position 1.7 (9.0) 125.1 45.6 (41.5) (14.5) 6.2
Cash Position 135.5 126.5 251.6 297.2 255.7 241.2 247.4
Source: AFe | company data
Alpha Finance Equity Research Folli Follie
DISCLOSURE APPENDIX
ALPHA FINANCE INVESTMENT SERVICES S.A. (‘Alpha Finance’) Headquarters: 5, Merlin Street, GR – 106 71 Athens, www.alphafinance.gr T +30-210-367 7400, F +30-210-331 1193, [email protected] Ministry of Development, S.A. Registration Number: 19420/06/B/89/01,G.E.MI.1176701000 Regulated by the Hellenic Capital Market Commission, License No. 42/13.04.1989
Analyst Certification The research analyst(s) undersigned and responsible for the preparation of this report certify (-ies) that a) the views expressed in this report accurately
reflect their (his/her) personal views about any and all of the securities or issuers mentioned in this report and b) no part of the analyst’s compensation
was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Analysts receive compensation
based upon various factors, including the quality and accuracy of research, productivity, experience, individual reputation, competitive factors and feedback
from clients.
Company specific regulatory disclosures
Disclosure checklist for companies mentioned & other price data information
Reuters Rating Price Price date/time Disclosure
Folli Follie HDFr.AT Neutral €19.94 Official close @ 15 September 2015 2 Source: Alpha Finance 1. Alpha Finance and/or its affiliate(s) has acted as manager/co-manager/adviser in the underwriting or placement of securities of this company within the
past 12 months 2. Alpha Finance and/or its affiliate(s) has received compensation for investment banking services from this company within the past 12 months
3. Alpha Finance makes a market in the securities of this company
4. Alpha Finance and its affiliate(s) owns five percent or more of the total share capital of this company
5. The company and its affiliate(s) owns five percent or more of the total share capital of Alpha Finance and its affiliates
6. Alpha Finance has sent the research report to the company prior to publication for factual verification
7. Following 6, Alpha Finance has changed the contents of the initially sent research report, with respect to: no change
8. Alpha Finance has received compensation from the company for the preparation of this research report
Major changes vs. previous research reports
Date of report Price on report date (€) TP (€) Rating Forward1 EPS (€)
15/9/2014 29.45 34 Neutral 2.5
Source: Alpha Finance | 1: next year’s EPS used from December onwards Ratings and target price history
Price chart for Folli Follie Rating history for Folli Follie
DATE Rating Share Price (€) Price Target (€)
16/01/2013 outperform 13.5 16.6
22/10/2013 neutral 20.1 18.9
17/02/2014 neutral 25 25
15/09/2014 neutral 29.3 34
04/09/2015 outperform 19.94 24
Regulatory disclosures This report has been prepared by Alpha Finance Investment Services S.A. (‘Alpha Finance’), a wholly owned subsidiary of Alpha Bank A.E. Alpha Finance is
regulated by the Hellenic Capital Markets Commission (HCMC). Alpha Finance has in effect management policies to identify and confront potential conflicts
of interest that could arise in the research division of the company and/or its affiliates (“Chinese Walls”).
Valuation method Our valuation for the FF Group is based on a DCF model. We use a WACC rate of 11.5% with terminal growth rate of 2% to value the group.
Risk rating We rate the FF Group as high risk based on the qualitative/ quantitative assessment of risk we apply on the company (see definitions of risk below). We consider the following the biggest investment risks for the shares: a) Greek Economic environment – Political risk – Consumer behavior b) FX risk (any strengthening of the euro against other currencies like Yen and USD would adversely affect the business travel retail sector) ,c ) Interest rate risk – Prices – inflation – Credit risk – Liquidity risk – Inventory risk, d) Cost Pressures might arise from manufacturing goods in foreign countries (inflationary pressures in labor costs or raw materials), e) Maintaining its brand perception as affordable luxury goods., f) Further downturn in the Greek tourist industry.
Definitions of Fundamental and Risk Ratings and Allocations
RISK RATING Low (L) Medium (M) High (H) Relative to Horizon2 Coverage3 IB services4
FU
ND
AM
EN
TA
L
RA
TIN
G
Outperform O/P TRP1 > +5% TRP1 > +15% ASE Index Dec.’11 10/50 10.0%
Restricted (G) R(G) Alpha Finance belongs to the same group of companies 1/50 0.0%
Restricted (IB) R (IB) Alpha Finance is currently rendering investment banking services 0/50 0.0%
Under review UR/ Not rated NR No rating currently available 19/50 0.0%
Source: Alpha Finance | Data as of 31.12.10 | 1: Total Return Potential (=capital return + dividend yield) | 2: except otherwise stated | 3: Percentage of companies under coverage within this category as of 31.12.10 | 4: Percentage of companies within this rating category for which investment banking services were provided over the past 12 months, as of 31.12.10. In several occasions, subject to the analyst's view and/or due to volatility of the shares, the ratings applied may fall out of the brackets described in the table above. The Alpha Finance universe consists of 50 companies accounting as of 31.12.10 for 79.9% of total market value
Risk ratings explained We derive the overall risk rating for a stock by applying a 60% weight on quantitative and a 40% weight on qualitative factors. We use a scale from 1 to 3
to describe ‘low, ‘medium’ and ‘high’ risk respectively. We compute two different quantitative risks namely liquidity and volatility. We assign equal weights
to liquidity and volatility risks to arrive at a so-called trading or quantitative risk for the specific stock researched. Using a scale of 1-to-3 scale, each
analyst also assigns a qualitative risk that is entirely up to his/her discretion to determine. Following this, we calculated the combined risk of the specific
stock applying the weights mentioned earlier. All IPOs are classified ‘high risk’ for 12 months after their listing date.
Definitions of Risk Ratings
Quant factor Definition Brackets Risk rating
Liquidity Number of shares traded over the last 12 months as % of total shares outstanding
If less than or equal to 33% High If greater than 33% but less than or equal to 66% Medium If greater than 66% Low
Volatility
The standard deviation of daily changes during the last 12 months. Volatility is used as a statistical measure of dispersion and indicates the propensity of a specific equity to suffer large swings in price. The stock’s volatility is measured against the volatility of the ASE index
If equity volatility against the market’s is greater than 2 High If equity volatility against the market’s is greater than 1.5 but less than or equal to 2
Medium
If equity volatility against the market’s is less than or equal to 1.5
Low
Source: Alpha Finance | Data as of 31.12.10 | The quant factors are updated at the end of each calendar quarter
General disclaimer This report has been prepared by Alpha Finance.
This report by no means provides investment advice as to any financial instruments contained herein. We aim to express our value judgments as to
possible or existing investments, without any existing contractual obligation to our clients. We cannot assume any liability for any investments undertaken
by our clients, since these investments will be a product of their own free will. The information contained in this report has been taken from sources,
which we deem to be reliable. We do not represent that such information is accurate or complete and it should not be relied upon as such. All opinions
and estimates expressed herein constitute our judgment as of this date and are subject to change without notice. Past performance is not indicative of
future results. The opinions and recommendations herein do not take into account individual client circumstances, objectives or needs. This report is
published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial
Finance and Alpha Finance accepts no liability whatsoever for the actions of third parties in this respect.
Alpha Finance Equity Research Folli Follie
Alpha Finance Investment Services S.A.
Member of the AE, CSE 5 Merlin street, 106 71 Athens Greece
T +30-210-367 7400 F +30-210-331 1193 [email protected] www.alphafinance.gr
Equities Research Manousos Stathoudakis, Director Antonis Diapoulis Angelos Chorafas Nikos Katsenos Katia Zahari [email protected] T +30-210-367 7545
Sales & Trading Spyros Malavazos, Director Equities Sales | Foreign Institutions Natasa Martseki, Director Vassilis Galleos Ioannis Batistakis Equities Sales & Trading | Institutions Kostas Tzimos Maria Vryoni Giota Kouli Chris Xikis Derivatives Sales & Trading Lefteris Syrrakos, Director Andreas Markogiannis Angelos Kostis Stavros Tsimpos Equities Trading | Retail Andreas Tzevelekos, Head Maria Saranti
Market Making | Equities & Derivatives Andreas Papanayotopoulos, Director Stelios Tzaras International Markets | Sales & Trading Andreas Papanayotopoulos, Director Giannis Giouremos George Sarris Sofia Giannakou
Equities Sales | Retail Pantelis Tsitos, Director Kostantinos Kostoulas, Deputy Director Leonidas Kyriakopoulos Stavroula Galani Lazaros Koutromanos Kleanthis Schinas