CFA Institute Research Challenge Hosted by CFA Society Italy Team Purosangue The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was prepared in compliance with the Official Rules of the CFA Institute Research Challenge, is submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report. Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. 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This report should not be considered to be a recommendation by any individual affiliated with CFA Society Italy, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock. Ferrari CFA Institute Research Challenge Initiation of Coverage Valuation as of February 7th, 2020 €/mln FY 2019 E FY 2020 E FY 2021 E FY 2022 E FY 2023 E FY 2024 E FY 2025 E BUY REVENUES 3,766 4,140 4,641 5,231 5,596 5,976 6,369 EBIT 917 1,023 1,367 1,649 1,821 2,000 2,184 Current Price: € 153.15 EBITMARGIN 24.4% 24.7% 29.5% 31.5% 32.5% 33.5% 34.3% Target Price: € 185.9 Diluited EPS 3.72 3.95 5.41 6.60 7.35 8.08 8.83 Target Upside: + 21.4% DPS 1.03 1.20 1.63 2.00 2.43 2.75 3.10 ROE 51.1% 56.4% 68.1% 64.4% 51.4% 41.4% 34.4% Stock Exchange: Borsa Italiana ROIC 23.4% 29.7% 37.3% 40.8% 36.8% 31.2% 27.8% Ticker Bloomberg: RACE:IM P/E 39.8x 38.8x 28.3x 23.2x 20.8x 19.0x 17.4x Ticker Factset: RACE.MI EV/EBITDA 22.6x 20.1x 15.4x 13.4x 12.5x 11.7x 11.1x Sector: Consumer Discretionary Industry: Automobiles NET DEBT 1,190 1,443 1,393 1,151 424 (350) (1,406) Source: Team estimates Market Data Annual Dividend: € 1.03 We issue a BUY recommendation on Ferrari NV with a target price of € 185.9, Dividend Yield: 0.67% representing a 21.4% upside from the current price. Our valuation is based on a 52w range: € 108.95 - €157.25 discounted cash flow (DCF) model which better embodies the uniqueness of company’s 52w avg daily volume: 462 k value with an indipendent insight from relative market perspective. Beta 2y vs FTSE Mib: 0.84 Strong pricing power, exclusivity and scarcity are the main key drivers of Company Market Cap: € 28,513.1 M performance (€ 3.8bln net revenues in FY 2019 and 2015-2019 CAGR of 7.2%), Shares Outstanding: 185.9 M strenghtened by a long successful history in the racing context with its Scuderia Ferrari, the most winning team in F1 history (16 Constructor Championship titles and 15 Ownership Structure Drivers world titles) close to reach 1,000 Grand Prix presence in 2020. EXOR NV: 23.91% Ferrari Piero: 10.17% The Prancing Horse, high-performance and long-term strategy Treasury Shares: 4.73% Born from Enzo Ferrari’s racing dream, Ferrari is nowadays a symbol of elegance, Free Float: 61.19 % luxury and speed, recognized worlwide as confirmed by the nomination as the most powerful brand in 2019, for the second year in a row [Source: Brand Finance Global 500]. Maranello’s actual product range relies on 11 models: 488 Pista, 488 Pista Spider, 812 Superfast, F8 Tributo, F8 Spider, SF90 Stradale and 812 GTS for the Sport and Special Series segment; Portofino, GTC4 Lusso, GTC4 Lusso T and the latest Roma part of the GT segment. Ferrari also produces limited edition series including the new Icona family, with the € 1.2mln Monza SP1 and the € 1.6mln Monza SP2, whose shipments started at the end of FY 2019. The low volume production strategy pursued by the Company contributes to a constant excess of demand over supply, delivering a sustainable and controlled shipments growth, crossing according to the last reported results the 10k units production for the first time in its history. Figure 1: Historical prices and volumes (08/01/2016 – 07/02/2020) 18000000 180,00 07/09/2018 09/02/2018 Mr Camilleri elected as CEO 16000000 Buyback announcement 160,00 14000000 140,00 12000000 02/05/2016 31/12/2019 120,00 Mr Marchionne substituted Shipments > 10k units Mr Amedeo Felisa as CEO 10000000 100,00 8000000 25/07/2018 29/05/2019 80,00 Mr Marchionne passed away First Ferrari plug-in hybrid road car 6000000 60,00 4000000 40,00 2000000 20,00 0 0,00 January 2016 July 2016 January 2017 July 2017 January 2018 July 2018 January 2019 July 2019 January 2020 Vol Price (€) Source: Team elaboration 2 INVESTMENT SUMMARY We initiate our coverage on Ferrari NV (RACE) with a BUY recommendation and a 12- Figure 2: month target price of € 185.89 per share, offering an upside of 21.4% on the 7th of Normalised prices RACE vs FTSE MIB February 2020 closing price of € 153.15. Bullish assumption and financial items FTSE MIB (167202) 450,00 Ferrari NV (RACE-IT) The actual business plan will cover the next 2 years, ending up in 2022. Company 400,00 targets are very ambitious, but we strongly believe that management capabilities and 350,00 historically achieved financial performances will lead to exceed proposed targets (FY 300,00 2022E net revenues >€ 5.2bln vs <€ 5.0bln , EBITDA >€ 2.2bln vs € 1.8 - 2.0bln with an 250,00 estimated EBITDA margin ∼42% vs >38%, EPS diluted € 6.6 (including buyback) vs 200,00 €> 4.70). 150,00 Our upward revision of Company’s estimates is mainly related to a favourable effect of 100,00 price/mix coming from the introduction of new accretive models enhanced by hybrid 50,00 lineup presence targeted up to 60% and a substantial cut-off of R&D expensed to 0,00 the P&L due to the new budget cap imposed by the 2021 F1 regulations. EPS diluted 2016 2017 2019 team estimates also take into account the buyback program of € 1.5b started in FY Source: Team elaboration 2018 and supposed to be completed within FY 2022. A look forward: earnings visibility We identify the exclusive waiting list as Ferrari’s distinctive signature: it allows the Figure 3: total control of the shipments with a consequent long-run earnings visibility, ensuring P/E historical protection from potential downturn and management of geographical deliveries. New RACE.MI Median peers Ferrari SF90 Stradale (rumored to be priced nearly € 550k) is a work-of-art embracing a 50 shining example of Made-in-Italy craftsmanship to an exciting driving experience 39,59 (1000HP – 340Km/h max speed) most derived from F1 high technological know-how. 40 30,90 26,21 This first plug-in hybrid model opens a new era for Prancing Horse, combining 30 20,86 engineering marvels (more than 100mln lines of coding implemented, more than an 20 Airbus A350 – Source: Q2 2019 Earning Call) to an environmental concern, today more topical than ever. Book orders are strong, with a waiting list of at least 18 months just 10 few weeks after presentation. 0 Future opportunity: call it FUV FY 2016FY 2017FY 2018FY 2019 Rumored to be called Purosangue – Italian equivalent of thoroughbred – Ferrari first Source: Team elaboration utility vehicle could represent a winning move in a rapidly expanding market (Suv market FY 14-18 CAGR of 15.72%) where direct competitors already set foot (e.g. Lamborghini) or are going to do so (e.g. Aston Martin). Expected to be launched within Figure 4: the end of the actual business plan (FY 2022), Ferrari Purosangue is undoubtedly a CAPEX/Sales further reason of potential future growth. 0,20 18,62% 18,75% Diversification strategy: dual identity and unique brand All non-car business will be partially reshuffled within actual business plan, relying on 3 0,15 main pillars: elevate quality standard of all apparel products; enhance Ferrari’s 10,32% 11,10% entertainment universe; offer exclusive experiences to customers with car adjacencies. 0,10 Long-term manufacturing contract with Giorgio Armani Group, e-sports activities and the opening of a restaurant in Maranello with the Michelin-starred chef Massimo Bottura 0,05 well represents management plan to achieve 10% of EBIT contribution from brand activities within 7-10 years.