CFA Institute Research Challenge hosted by CFA Society Greece Athens University of Economics and Business 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 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. Receipt of compensation Compensation of the author(s) of this report is not based on investment banking revenue. 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This report should not be considered to be a recommendation by any individual affiliated with CFA Society Greece, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock. Athens University of Economics and Business, Department of Accounting &Finance Summary Year Sales growth FOURLIS HOLDINGS S.A. (FOURLIS or Group henceforth) is a Greek company that currently holds the franchise rights of “IKEA”, “Intersport” and “The Athlete’s Foot”. The Group currently operates in Greece, Cyprus, Turkey, 2017 2.61% Bulgaria and Romania. 2018 4.90% Investment Recommendation 2019 6.42% We issue a BUY recommendation with a target price of €6.835 per share; representing 19.91% upside from its 2020 8.06% February 8, 2018 closing price of €5.70. Our valuation is based on a Free Cash Flow to Equity Model. Our recommendation lays on the following key catalysts: 2021 7.47% 2022 Strong franchise brands and exemplary management 6.11% FOURLIS holds two largely successful brands, namely Intersport and IKEA, and has managed to increase their 2023 5.78% potential with a praiseworthy administration. Intersport has evolved into a leading name in the Greek market, 2024 5.46% while IKEA has enjoyed boosted sales through FOURLIS’ innovative pick-up points system. Opportunities arising in the five countries of operation 2025 5.12% All 5 countries demonstrate markets and characteristics that will definitely contribute to FOURLS’ project, Source: Team Analysis provided that the Group takes advantage of them. Despite ongoing risks in some countries, our analysis forecasts a more favorable future. Target Price and upside Project “FOURLIS: MISSION 2025” The Greek Group demonstrates a structured and well-detailed plan, with intention to expand its current store network throughout the 5 operating countries by the year of 2025. This is an integral part of any analysis Target Price €6.835 concerning FOURLIS’ future; the expansion is directly linked to key factors such as projected sales, operating expenses and the Group’s profitability. Current Price €5.70 Insightful decision making Upside In past years, FOURLIS has made some very intelligent moves, one of them being the shift from wholesale to 19.91% Potential retail activity in 2015, which has undoubtedly benefited its financial status. The Greek company also has a strong logistics system that facilitate transportations and relevant operating hurdles, leading to enhanced efficiency. Source: Team Analysis Recent news 1. Ingvar Kamprad, founder of IKEA, dies at 91 (27.01.18) The Swede pioneer might have peacefully passed, yet he was not involved in running the company since 1988. 2. FOURLIS sells SPEEDEX share (12.08.17) FOURLIS sold the 49.55% holding in its affiliate company SPEEDEX SA; the company has declared that the transaction will not have any significant impact on its financial status. 3. Approval of elections for a new Board of Directors (16.07.2017) Having completed its 5-year tenure, the annual General Assembly of the Shareholders approved the election of a new Board. 4. Reduction of Share Capital (16.07.2017) The annual General Assembly of the Shareholders also decided to reduce the company’s share capital through the reduction of share’s nominal value. This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 1 Athens University of Economics and Business, Department of Accounting &Finance 1. Business Description FOURLIS is a group of companies, founded in 1950. It holds the franchise rights of 3 retail (namely IKEA, Intersport, and The Athlete’s Foot) and operates in 5 countries across the area of South Eastern Europe. However, the business status was not always like this. Prior to the acquisition of IKEA and Intersport franchise rights, FOURLIS had the general dealership of GENERAL ELECTRIC household appliances (1970-1980), representation rights for SAMSUNG in Greece and Romania, and held 51% of P. KOTSOVOLOS S.A, a Greek retailer of electric gear and relative products. In 2004, KOTSOVOLOS was disposed to Dixons Group and, during the same year, the first Intersport store opened in Romania. This initiated a series of actions, which, combined with the disposal of SAMSUNG rights in 2010, led to IKEA and Intersport franchising being the Group’s main activity. Specifically, while the domestic development of the two franchises started in 2001, the Group expanded its activity with the acquisition of network and franchise rights in Romania (Intersport, 2004), Bulgaria (Intersport, 2006 and IKEA, 2011), Cyprus (IKEA, 2007 and Intersport, 2007) and Turkey (Intersport, 2011). Finally, in 2014, FOURLIS took possession of the franchise rights of another sportswear retailer called “The Athlete’s Foot”, currently operating in Greece and Cyprus. In general, during the past decades, FOURLIS’ activity has shifted from the wholesale to the retail market, a move that is reflected in the Group’s financial statements. Due to the profitable choices made throughout that period, the Group seems to have settled in a specific pattern, aiming at expanding its activity in the following years. Given the current economic state in Greece, the basis of this progressive strategy has been shifted towards the remaining 4 countries. Fields of activity Currently, FOURLIS operates in two main sectors: the retail home furnishing market via the franchise of IKEA in Greece, Bulgaria, and Cyprus, and the retail sporting goods market through the franchise of Intersport in Greece, Cyprus, Romania, Bulgaria, and Turkey, along with “The Athlete’s Foot” stores in Greece and Turkey(Figure 1). Specifically, regarding IKEA, the Group owns Housemarket S.A., a company that has the franchise rights of the Swedish brand. Meanwhile, the Group holds investments in the following companies: Sofia South Ring Mall EAD (shareholding of 50%) and Rentis Real Estate Investments S.A (shareholding of 100%). The Group also used to hold an interest of 49.55% in SPEEDEX S.A., a Greek company operating in the courier industry, which was liquidated in December 8, 2017. IKEA Originating from Sweden and founded in 1943, IKEA is one of the biggest and most popular home furnishing retailers in the world generating a big part of the Group’s income. Throughout the years, the company has established its reputation with a wide variety of quality products, and a value-for-money strategy. IKEA’s simple but sturdy designs and self-assembly products are now familiar in homes around the globe. Having enjoyed a successful trajectory in the European market, the Swedish company intends to increase its activity in other markets outside the EU in the following years and increase overall sales by 2020. Despite the recent death of IKEA’s founder, Ingvar Kamprad (January 1st, 2018) his sons, Peter, Jonas, and Mathias, still participate in the boards of various IKEA entities. The family, however, is no longer at the helm. Ingvar Kamprad had formerly stepped down from running the business, yet remained an advisor until his late days. Therefore, his departure will not have any significant impact on IKEA or FOURLIS itself. There are main 5 stores operating in Greece (2 stores in Athens,1 in Thessaloniki, Ioannina, Larisa) 1 in Bulgaria (Sofia Ring Mall) and 1 in Cyprus (Nicosia). Meanwhile, there are five (5) IKEA pick-up points operating in Greece (Patras, Rhodes, Chania, Heraklion and Komotini) and 2 in Bulgaria (Varna and Burgas) (Figure 3). These are small IKEA shops, which are used as exposition places in order to ease the market research and delivery process for those who live in places far from the main stores. It should be underlined that FOURLIS was the first company in the world to apply this approach; the strategy has been reasonably successful, leading to an increase of potential customers and sales revenues. INTERSPORT Intersport is an international sporting goods retailer, founded in France in 1968. Its popularity is undoubtedly an asset to the Group, which reaffirms FOURLIS’ diligent research when it comes to the acquisition of a brand’s franchise rights. With over a decade of activity in Greece, Romania, Cyprus and Bulgaria, the Group now aims at focusing on the recent entry in the Turkish market with a goal to double its stores in the particular country by 2025(Figure 4).