Company Update Report Retail June 16, 2015 – Folli Follie Group Overweight Upgrade to O/W on Valuation Previous Rating: Equalweight Research Grounds Share Price: €22.30 (close of June 15) Positive Earnings Momentum to Persist (Confirmed by Good 12M Price Target: €34.50 Q1’15) – FFG Q1’15 interims were overall strong, with improving Previous Target: €34.00 operating profitability (EBITDA up 13% y-o-y) and positive FCF, mostly Euroxx Expected Total Return: 57% explained by FX differences. In our view, FFG’s solid Q1’15 confirms that it is on track for a good 2015e, despite the Greek uncertainties. Estimates 2014 2015e 2016e 2017e We have fine-tuned our 2015-17e forecasts resulting in minor changes. Sales (€m) 998 1,135 1,210 1,291 We still expect 2015e recurring EPS growth of 13% y-o-y to €2.39, EBITDA (€m) 223 255 277 300 driven by the Jewellery-Watches-Accessories (J-W-A) division. All in margin (%) 22.3% 22.5% 22.9% 23.2% Net profit (€m) 141 152 174 191 all, we forecast group revenues, EBITDA and adj. EPS to grow by Net profit adj. (€m) 141 160 174 191 2014-17e CAGRs of 9%, 10% and 11% respectively, underpinned by EPS (€) 2.11 2.27 2.60 2.85 aggressive international expansion, organic growth on improving brand EPS adj. (€) 2.11 2.39 2.60 2.85 awareness, resilient margins owing to the franchise-led development Adj. EPS chng (%) 65.3% 13.1% 8.9% 9.7% in China, as well as the positive operating leverage and FX tailwinds. Source: FFG, Euroxx Research Ratios Turning Positive on FFG – Our positive view on FFG is based on (1) 2014 2015e 2016e 2017e its defensive qualities, as Greece accounts for 24% of total sales and P/E adj. (x) 10.6x 9.3x 8.6x 7.8x 10% of total EBITDA in 2015e, (2) our belief that FFG’s currently weak EV/EBITDA (x) 5.9x 5.4x 4.9x 4.3x EV/EBIT (x) 6.5x 6.0x 5.4x 4.8x FCF will improve in the future, courtesy of the increased operating EV/Sales (x) 1.3x 1.2x 1.1x 1.0x profitability, the lower financial expenses as well as the higher Net debt/EBITDA (x) 0.24x 0.41x 0.24x 0.05x management focus, better WC management and the franchise-led FCF Yield (%) 0.4% 4.0% 5.7% 7.3% expansion in China, (3) its successful transformation which has Div Yield (%) 1.8% 2.2% 2.7% 3.1% P/BV (x) 1.1x 1.0x 0.9x 0.9x strengthened the BS (net debt/EBITDA at 0.2x in 2014) and Source: FFG, Euroxx Research shareholders base with valuable partners, (4) its strong growth outlook driven by China (and J-W-A), and (5) its attractive valuation, with the Stock Performance shares now trading at large discount to peers and even a 1% discount 3M 6M 12M YTD Absolute -17.4% -16.6% -29.9% -15.5% over historic P/E, not fully justified by FFG’s smaller size, Greek-related Difference (ATG) -13.3% -4.8% 12.0% -4.9% risk and poor cash conversion. We still believe that becoming a global brand will be the catalyst taking FFG to the next level, amending cash Stock Data: flow generation and driving a stock re-rating. This by no means easy Market Cap (€ m) 1,493 Outstanding shares (#) 66,948,210 task should also challenge current management resources. Daily volume (#) 105,470 Low / High 52 w (€) 21.80 – 33.56 TP Slightly Raised to €34.5 (from €34.0) / Upgrade to O/W – as the Free float 48% increase from target multiples more than offsets the lower DCF-based Bloomberg / Reuters HDFr.AT / FFGRP GA valuation (on higher WACC of 10.7% from 10%). Following a c16% Company Description: share price decline y-t-d, our new TP implies 57% upside from current Folli Follie Group (FFG) is one of the top Greek retail levels; hence we upgrade our rating to Overweight from Equalweight. companies and one of the leading luxury players in China’s low-to-mid end J-W-A segment. It designs, Overall, we believe that FFG is a defensive play in light of the elevated manufactures and distributes jewellery, watches & political/macro uncertainties in Greece. Moreover, the company has fashion accessories. FFG has an international managed to restructure to a leaner operation, cleanse its balance presence with a large PoS network spanning in 3 sheet (albeit to the expense of large inventory/receivables write-downs continents, distributing its products in Europe, Asia and America under the brand names of Folli-Follie and back in 2013) and substantially reduce net debt, hence successfully Links of London. tackling many critical issues. The last action point is the poor FCF, Vangelis Karanikas Vangelis Pilios which is the price to pay for going global and building the brand. In our Head of Research Research Analyst view, current price levels (which are very close to 52-week lows) do not [email protected] [email protected] capture FFG’s strong outlook and defensive qualities and offer an +30 210 68 79 322 +30 210 68 79 486 attractive entry point. Please refer to important disclosures in the Disclosure Appendix. June 16, 2015 Greece / Retail Summary of Financials (in €m, unless otherwise stated) PROFIT & LOSS (€m) 2013* 2014 2015e 2016e 2017e BALANCE SHEET (€m) 2013 2014 2015e 2016e 2017e Sales 887 998 1,135 1,210 1,291 Intangible Assets 104 106 115 115 115 % change 9.6% 12.5% 13.7% 6.7% 6.6% Tangible Fixed Assets 175 186 200 204 206 Gross Profit 447 502 568 613 659 Other non-current assets 268 314 345 347 350 % change 10.3% 12.3% 13.2% 8.0% 7.5% Total non-current assets 547 606 660 667 671 EBITDA 187 223 255 277 300 Accounts receivable 390 534 554 640 686 % change 44.6% 19.5% 14.3% 8.6% 8.3% Inventories 255 367 394 424 467 Depreciation & amortization 21 -21 -25 -28 -31 Cash & cash equivalent 252 297 240 267 309 EBIT 167 202 230 249 269 Other current assets 128 166 182 182 194 % change 53.9% 21.5% 13.6% 8.3% 8.2% Total current assets 1,025 1,364 1,370 1,513 1,656 Net financials 227 -9 -22 -12 -11 TOTAL ASSETS 1,572 1,970 2,031 2,179 2,327 Profit before tax (reported) 394 193 208 237 258 Gross debt 223 351 344 334 324 % change 542% -50.9% 7.6% 13.9% 9.0% Net debt / (Cash) -29 54 104 67 15 Taxation -51 -47 -52 -58 -62 Working Capital 553 760 840 943 1,032 % effective tax rate 12.9% 24.5% 25.0% 24.5% 24.0% Cash Conversion Cycle (days) 331 312 340 360 375 Minority stake in profits -3 -4 -5 -5 -6 Shareholders' funds 1,160 1,334 1,453 1,587 1,732 Profit after tax (reported) 340 141 152 174 191 Long-term Debt 36 304 301 301 301 % change 1313% -58.4% 7.2% 14.7% 9.7% Provisions & other LT liab's 29 44 34 36 39 Profit after tax (adjusted) 85 141 160 174 191 Minorities 23 27 31 36 41 % change 255% 65.3% 13.1% 8.9% 9.7% Non-Current liabilities 88 375 366 373 381 EPS (in €) 5.08 2.11 2.27 2.60 2.85 % change 254% -58.5% 7.5% 14.7% 9.7% Accounts payable 92 140 109 121 122 Adjusted EPS (in €) 1.28 2.11 2.39 2.60 2.85 Short-term bank debt 187 47 43 33 23 % change 255% 65.3% 13.1% 8.9% 9.7% Taxes payable 17 32 26 29 31 Dividends /Capital Returns 50 27 33 40 47 Other Liabilities 28 42 34 36 39 DPS (in €) ** 0.75 0.40 0.50 0.60 0.70 Current liabilities 324 260 212 219 214 % change n/m -46.7% 25.0% 20.0% 16.7% TOTAL EQUITY & LIABILITIES 1,572 1,970 2,031 2,179 2,327 CASH FLOW (€m) 2013 2014 2015e 2016e 2017e RATIO ANALYSIS 2013 2014 2015e 2016e 2017e EBITDA 195 223 255 277 300 P/E (x) 16.9x 10.6x 9.3x 8.6x 7.8x Change in WC 116 -217 -112 -99 -96 EV/Sales (x) 1.5x 1.3x 1.2x 1.1x 1.0x Net interest 224 -9 -22 -12 -11 EV/EBITDA (x) 6.7x 5.9x 5.4x 4.9x 4.3x Tax paid -50 -47 -42 -48 -52 EV/EBIT (x) 7.5x 6.5x 6.0x 5.4x 4.8x Other one-offs (devaluation etc) -478 107 0 0 0 P/CF (x) 4.0x 9.0x 8.2x 7.2x 6.6x Cash from operations 6 56 79 118 141 P/BV (x) 1.3x 1.1x 1.0x 0.9x 0.9x Less: CapEx -15 -36 -40 -32 -32 FCF Yield (%) 13.1% 0.4% 4.0% 5.7% 7.3% Less: Other Investments 167 -43 -40 -2 -2 FCF/EBITDA conversion (%) -33.3% 2.5% 23.2% 30.9% 36.2% Free cash flow 158 -23 -1 84 107 Dividend Yield (%) 3.4% 1.8% 2.2% 2.7% 3.1% FCFE (Exx definition) -65 6 59 85 109 Net debt (cash)/EBITDA (x) -0.1x 0.2x 0.4x 0.2x 0.0x Less: Dividends 0 0 -27 -33 -40 ROE (%) 35.1% 11.3% 10.9% 11.4% 11.5% Plus: Change in Debt -519 129 -7 -10 -10 Gross margin (%) 50.3% 50.3% 50.1% 50.7% 51.1% Other 486 -60 -22 -13 -14 EBITDA margin (%) 21.0% 22.3% 22.5% 22.9% 23.2% Change in Net Debt / (Cash) 125 45 -57 27 42 EBIT margin (%) 18.8% 20.3% 20.3% 20.6% 20.9% Cash at end 252 297 240 267 309 Net profit margin (%, adj.) 9.6% 14.1% 14.1% 14.4% 14.8% Note: (*) P&L figures in 2013 are from continuing operations (excl.