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Luxottica Group (LUX.MI) 17 March 2017 Europe/Italy Equity Research Luxury Goods Luxottica Group (LUX.MI) Rating OUTPERFORM Price (14 Mar 17, €) 50.10 INCREASE TARGET PRICE Target price (€) (from 50.00) 58.00 Market Cap (€ m) 24,262.1 Increase target price given merger synergies Enterprise value (€ m) 25,296.5 Target price is for 12 months. ■ Reiterate Outperform and increase target price to €58 from €50. Research Analysts Luxottica’s share price is back towards pre-Essilor merger announcement Catherine Tillson levels and appears to be pricing in little to no synergies for the deal. We 44 20 7888 6052 [email protected] believe this creates an attractive entry point into a value-generating merger. Guillaume Gauvillé, CFA Luxottica now trades in line with the luxury sector vs. a 10-year historical 44 207 888 0321 premium of 21%. EssilorLuxottica ex synergies trades just below its 5-year [email protected] 12-month forward consensus EV/EBIT of 17.3x, and on 15.6x FY18E. ■ Investment story intact. We do not believe the merger timing was a sign the equity story at Luxottica had derailed, and we continue to think the investment plan will run to completion. We believe this merger was driven by i) the synergies of becoming purely vertically integrated, creating a fully independent company with no sacrifice of profits along the value chain; ii) the end to the capital-intensive and lower-return divestment into each other’s businesses; and iii) the need to solve the succession issues at Luxottica. ■ We believe EssilorLuxottica can outperform. With the merger, we believe some of the legacy problems at each company are removed. This includes under penetration of emerging markets, Luxottica’s weakness with the independents, particularly in the US, and the online strategy. See our detailed EssilorLuxottica model in Seeing EssilorLuxottica clearly, also published today. ■ Risks to our investment case: i) the merger does not happen, ii) the eyewear industry experiences a significant slowdown, especially in the US, and iii) the company initiative is executed poorly. ■ New target price of €58. We back out Luxottica’s target price from Essilor’s given the stated exchange rate of 0.461. This target price is derived from a 50:50 weighting of a pro forma DCF for EssilorLuxottica and a Credit Suisse HOLT® Linker including synergies of €540m, in line with company guidance of €400-600m. Share price performance Financial and valuation metrics 7 0 Year 12/16A 12/17E 12/18E 12/19E Revenue (€ m) 9,085.7 9,779.9 10,301.7 10,837.8 6 0 EBITDA (€ m) 1,945.0 2,021.8 2,250.2 2,434.9 Adjusted net income (€ m) 881.70 919.17 1,041.46 1,130.62 5 0 CS EPS (adj.) (€) 1.84 1.91 2.17 2.36 4 0 Prev. EPS (€) 1.75 1.94 2.18 2.39 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 Jan - 1 7 ROIC (%) 13.7 13.3 14.5 15.3 P/E (adj.) (x) 27.3 26.2 23.1 21.3 LUX.M I FT SEURO FIRST 3 0 0 IN D EX P/E rel. (%) 108.0 214.8 224.7 232.1 The price relative chart measures performance against the EV/EBITDA (x) 13.1 12.5 11.1 10.1 FTSEUROFIRST 300 INDEX which closed at 1472.5 on Dividend (12/17E, €) 1.00 Net debt/equity (12/17E,%) 16.7 14/03/17 Dividend yield (12/17E,%) 2.0 Net debt (12/17E, € m) 1,034.4 On 14/03/17 the spot exchange rate was €1/Eu 1.- BV/share (12/17E, €) 13.2 IC (12/17E, € m) 7,225.4 Eu.94/US$1 Free float (%) 27.7 EV/IC (12/17E, (x) 3.5 Performance 1M 3M 12M Source: Company data, Thomson Reuters, Credit Suisse estimates Absolute (%) 0.2 -3.8 0.2 Relative (%) -1.0 -7.8 -9.9 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 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. 17 March 2017 Luxottica Group (LUX.MI) Price (14 Mar 2017): €50.1; Rating: OUTPERFORM; Target Price: (from €50.00) €58.00; Analyst: Catherine Tillson Income statement (€ m) 12/16A 12/17E 12/18E 12/19E Company Background Revenue 9,086 9,780 10,302 10,838 Luxottica Group is engaged in the design, manufacture and EBITDA 1,945 2,022 2,250 2,435 distribution of fashion, luxury and sporting eyewear. It operates Depr. & amort. (478) (538) (587) (639) through two arms; retail and wholesale, with the retail arm made up EBIT 1,432 1,484 1,663 1,795 of brands such as Sunglass Hut and LensCrafters. Net interest exp. (66) (67) (57) (52) Associates - - - - Blue/Grey Sky Scenario PBT 1,406 1,417 1,606 1,743 Income taxes (466) (496) (562) (610) Profit after tax 939 921 1,044 1,133 Minorities (2) (2) (2) (2) Preferred dividends - - - - Associates & other (56) 0 0 0 Net profit 882 919 1,041 1,131 Other NPAT adjustments (31) (0) 0 0 Reported net income 851 919 1,041 1,131 Cash flow (€ m) 12/16A 12/17E 12/18E 12/19E EBIT 1,432 1,484 1,663 1,795 Net interest (95) (74) (65) (62) Cash taxes paid (275) (496) (562) (610) Change in working capital (50) (102) (76) (55) Other cash and non-cash items 365 471 530 587 Cash flow from operations 1,378 1,284 1,489 1,655 CAPEX (651) (700) (738) (758) Free cashflow to the firm 632 510 686 834 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Other investment/(outflows) (136) (156) (165) (173) Cash flow from investments (787) (857) (903) (932) Net share issue/(repurchase) 0 0 0 0 Dividends paid (427) (441) (478) (521) Issuance (retirement) of debt 195 (1) (36) 20 Our Blue Sky Scenario (€) (from 56.00) 63.00 Cashflow from financing (231) (442) (514) (501) Our blue sky scenario is backed out of the EssilorLuxottica valuation Changes in net cash/debt (171) 143 273 376 of €137 at the 0.461 exchange ratio. This assumes the merger goes through faster than expected and synergies are realised faster than Net debt at start 1,006 1,177 1,034 761 we forecast. This leads to a 10% uplift in EBIT. We use the average Change in net debt 171 (143) (273) (376) historic ex synergy EssilorLuxottica EV/EBIT multiple of 17x. This Net debt at end 1,177 1,034 761 386 leads us to derive a blue sky scenario of €63. Balance sheet (€ m) 12/16A 12/17E 12/18E 12/19E Assets Our Grey Sky Scenario (€) (from 32.00) 41.00 Total current assets 3,028 3,330 3,684 4,177 We base our grey sky scenario on the merger between Total assets 10,300 10,764 11,269 11,881 EssilorLuxottica falling through. We also assume FY18 operating Liabilities profits decline by 15% as i) the company executes poorly on its Total current liabilities 2,216 2,275 2,308 2,354 investment strategy, ii) LensCrafters fails to reaccelerate growth and Total liabilities 4,515 4,573 4,578 4,640 iii) wholesale North America organic growth does not reaccelerate. Total equity and liabilities 10,300 10,764 11,269 11,881 Taking the historical average EV/EBIT multiple of 15x leads us to Per share 12/16A 12/17E 12/18E 12/19E derive a grey sky scenario of €41. No. of shares (wtd avg.) (mn) 480 480 480 480 CS EPS (adj.) (€) 1.84 1.91 2.17 2.36 Share price performance Dividend (€) 0.92 1.00 1.09 1.18 Free cash flow per share (€) 1.32 1.06 1.43 1.74 70 Key ratios and valuation 12/16A 12/17E 12/18E 12/19E Growth/Margin (%) Sales growth (%) 0.8 7.6 5.3 5.2 60 EBIT growth (%) (0.7) 3.6 12.1 8.0 Net income growth (%) 3.2 4.2 13.3 8.6 50 EPS growth (%) 3.7 4.2 13.3 8.6 EBITDA margin (%) 21.4 20.7 21.8 22.5 40 EBIT margin (%) 15.8 15.2 16.1 16.6 Pretax profit margin (%) 15.5 14.5 15.6 16.1 May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 Net income margin (%) 9.7 9.4 10.1 10.4 LUX.MI FTSEUROFIRST 300 INDEX Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) 2.8 2.6 2.4 2.3 EV/EBITDA (x) 13.1 12.5 11.1 10.1 The price relative chart measures performance against the FTSEUROFIRST EV/EBIT (x) 17.8 17.0 15.0 13.7 300 INDEX which closed at 1472.5 on 14/03/17 Dividend yield (%) 1.84 1.99 2.17 2.35 On 14/03/17 the spot exchange rate was €1/Eu 1.- Eu.94/US$1 P/E (x) 27.3 26.2 23.1 21.3 Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) 20.3 16.7 11.4 5.3 Net debt to EBITDA (x) 0.6 0.5 0.3 0.2 Interest coverage ratio (x) 21.7 22.3 29.0 34.4 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD.
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