From: Euroxx Research [mailto:firstname.lastname@example.org]
Sent: Monday, June 12, 2017 10:30 AM
Subject: Euroxx / Folli Follie Group – Company Flash Note with Rating Unchanged at O/W and TP Raised to €28.50 (from €27.00): Strong Performance in Asia Offsets Weakness in Greece
Strong Performance in Asia Offsets Weakness in Greece
Strong Q1’17 Results – on solid top-line and margin improvements in the JWA division, despite the soft Greek performance and the temporary FCF weakness, also affected by seasonal effects and the Easter timing. Specifically, Q1’17 group sales/EBITDA rose 8.3/15.7% y-o-y, driven by positive FX and the accelerating expansion in China, which more than offset the weakest quarter since the crisis in Greece. That said, FCF came in at -€74m, due to seasonally high WC needs, with the group CEO commenting that it is back on positive ground in Q2’17 and is poised to end the year in the black.
Positive Earnings Momentum; 2017-18e EPS Raised by 11-12%- to account for higher Asia-driven sales/EBITDA in the JWA division, with the new store concept, calling for larger space & more new products and the rebound in the appetite for luxury fashions in China after a slowdown, also supporting top-line & profitability.
That said, we have downgraded our previous Department Stores and Retail/Wholesale estimates to account for softer trading conditions in Greece, which, however, we expect to improve from next year onwards.
All in all, we expect FFG’s positive earnings momentum to persist, albeit at a slower pace, with 2017e pre-tax profit now seen up 6% y-o-y, while accounting for a tax rate of 18% (vs. just 10.5% in 2016), 2017e adj. EPS are seen flat y-o-y. Finally, the anticipated Greek economic recovery from H2’17e onwards, the domestic market share gains and the increased tourist flows (Greece is set for yet another record in tourist arrivals this year) should support further headline EBITDA growth from 2018e onwards (+7% 2016-19e CAGR).
Having said that, we believe that the risks to our forecasts lie to the upside, given the positive impact on margins from the increase in the online business, which FFG aims to reach 10% of total sales by end-2017e or in 2018e.
Remains O/W / TP Raised to €28.5 (44% Total Upside) – from €27.0, due to our earnings upgrades and the lower WACC of 9.0% (from 9.5%). Overall, we remain positive on FFG due to
(1) its defensive qualities, as we expect Greece to account for c21% of total sales and c7% of total EBITDA in 2017e,
(2) our belief that the 2016 improvement in the FCF will persist in the coming years, courtesy of the increased operating profitability and the franchise-led expansion in China, despite the investment in the new store concept and online stores,
(3) its positive earnings momentum, and (4) its attractive relative valuation; FFG trades at a rather undemanding 2017e PE of 6.2x and EV/EBITDA of 4.0x, which in our view, more than reflects investors’ concerns over the Chinese economy, FCF generation and Greek country risk.
Finally, we still believe that becoming a global brand will be the catalyst taking FFG to the next level, amending FCF and driving a stock re-rating.
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