value and opportunity

Et voilá, after 3 preparing posts (part 1, part 2 and part 3) I finally try to come up with some kind of valuation for Piquadro.

Comparables approach

The simplest approach and much liked by many I-bankers because you only need a simple Bloomberg sheet for this which even a M&A Banker can handle…

The most obvious comparable company is Samsonite, TUMI hasn’t listed yet. Due to its history, Samsonite’s numbers are quite a mess, but I tried to distill some numbers which we could use:

		mn HKD
Market Cap		17,082
Sales 2010		9,441
Debt 2010		2,011
EBITDA 2010		1,306
EBITDA 2011		1,657
EBITDA 2012		1,864
Earnings 2012		1,234
Earnings 2011		582
		Multiple
P/S 2010		1.8
EV/EBITDA 2010		14.6
EV/EBITDA 2011		11.5
EV/EBITDA 2012		10.2
P/E( 2012)		13.8
P/E (2011)		29.4

So appoximately, Samsonite is selling at around 11.5 x 2011 EV/EBITDA, 1.8 x sales and 14 times 2012 Earnings.

In order to have a few more data points, I looked up two other companies from the Piquadro matrix, which are not direct competitors but still somehow similar, namely Tod’s and Coach.

		TOD’s	Coach	Samsonite	Avg
P/S		2.5	4.4	1.8	2.9
EV/EBITDA 2011		12.1	12.8	11.5	12.1
P/E		17	21.3	13.8	17.4
P/B		2.5	10.8

The Interesting aspect of Tod’s ist that they too, generate the majority of their sales in Italy and are majority held by the founder. Coach is a well known US based manufactorer of luxury leather goods.

Interestingly, EV/EBITDA is similar to Samsonite, with 12-13 (pre operating leases), PEs are significantly higher. P/B for Coach is extremely high, this reflects most likely the “aggressive” US approach to capital management.

The big question with “comparables” is always: Are those companies really comaprable or do we need to apply discounts etc.

For the time being, I will just use the averages to give one datapoint. For the valuation, I estimated Piquadros Earnings, EBITDA and Sales in line with half year results more or less unchanged compared to 2010:

Piquadro	est. Mn EUR	Multiple valuation
		avg	Min	Max
Sales 2011:	65	3.77	2.35	5.72
EBITDA 2011	15	3.64	3.46	3.84
Earnings 2011	9	3.13	2.49	3.83
Avg:		3.51	2.77

So either way, before any individual adjustements and subject to all issues with comparables, similar companies are trading at multiples which would justify prices for Piquadro in the range of 2.35 EUR – 3.51 EUR per share, a respective potential upside of ~ 70-150% from the current 1.40 EUR

DCF Valuation

Conservative case:

As we have seen in part 3, Piquadro is currently much more profitable than TUMI and Samsonite. For a conservative DCF Valuation, I will assume that profitablity drops in 2011 to the “peer group” level of around 16% EBITDA Margin. As a proxy for free cashflow, I will use the historic average of FCF to EBITDA which is around 0.52. This would correspond with 0.10 EUR Free cashflow per share in 2011 (vs. 0.13 2010, 0.18 in 2009)

Side remark: For simplicity reasons, I decided against a “pseudo sophisticated” 2 or even 3 stage DCF model. The majority of the value with such “normal” shares lies anyway in the “terminal” value, so why bother and doing this unnecessary step.

Based on this we can calculate a relatively easy sensitivity analysis of DCF fair values against growth and discount rates:

	Growth	2%	3%	4%	5%	6%
Discount
	7%	2.06	2.57	3.43	5.14	10.28
	8%	1.71	2.06	2.57	3.43	5.14
	9%	1.47	1.71	2.06	2.57	3.43
	10%	1.29	1.47	1.71	2.06	2.57
	11%	1.14	1.29	1.47	1.71	2.06
	12%	1.03	1.14	1.29	1.47	1.71

We can clearly see that at the estimated European market growth rate of 4%, we need to have a discount rate of approx slighlty less than 8% to get into the lower range of the multiple valuation.

Howvwer, as a conservative value I would use the 10% discount and the market growth of 4% which would give us a value of 1.71 EUR per share in the conservative case.

Base Case
In the normal case, I assume that Piquadro will be able to earn 20% EBITDA margin with corresponding Free cashflow as outlined above, which results in 0.13 EUR cashflow in 2011. Sensitivites are:

	Growth	2%	3%	4%	5%	6%
Discount
	7%	2.57	3.21	4.28	6.43	12.85
	8%	2.14	2.57	3.21	4.28	6.43
	9%	1.84	2.14	2.57	3.21	4.28
	10%	1.61	1.84	2.14	2.57	3.21
	11%	1.43	1.61	1.84	2.14	2.57
	12%	1.29	1.43	1.61	1.84	2.14

This results, if we use market growth of 4% and 10% discount rate, in a value of 2.14 EUR per share in the base case

Optimistic Case

Here I assume average past profitability level (25% EBITDA margin) and past EBITDA growth (~6%) as future growth rate based on the limited history since 2007.

	Growth	2%	3%	4%	5%	6%
Discount
	7%	3.21	4.02	5.36	8.03	16.07
	8%	2.68	3.21	4.02	5.36	8.03
	9%	2.30	2.68	3.21	4.02	5.36
	10%	2.01	2.30	2.68	3.21	4.02
	11%	1.79	2.01	2.30	2.68	3.21
	12%	1.61	1.79	2.01	2.30	2.68

Based on the sensitivity table with 25% EBITDA we end up with 4.02 EUR in the optimistic case per share.

To summarize the DCF valuation, we get a range of 1.71 EUR – 4.02 EUR based on the assumption on profitablity and growth.

This is somewhat outside the comparables range, most likely due to the fact that the current stock prices of companies like Samsonite, Coach and Tod’s either imply lower discount rates or higher growth rates.

So let’s summarize now what we know about Piquadro, its market, competitiors and valuation:

+ the market itself has no “hard” barriers of entry. However, Piquadro and its competitors seem to achieve quite high returns on capital and margins. This is most likely the effect of established brands and “aspirational branding”,it is therefore not unreasonable to expect above average rates of return in the future.

+ As a result, Piquadro’s competitors and similar (but larger) companies enjoy rich valuations which imply either relatively low cost of capital or high implied growth rates or both

+ A comparables valuation results in a fair value range of 2.35 ~ 3.51 EUR, which implies quite a large “penalty” compared to Piquadros current stock price of 1,40 EUR.

+ A DCF valuation using market growth and historical growth with either average peer profitablity or historical profitablity results in a range of 1.71 – 4.02 EUR per share

+ the reason for the current low valuation seems to be easy to identify: the market considers Piquadro’s exposure to the Italian consumer as very risky

+ from a “soft factor” point of view, Piquadro looks good: conservative balance sheet, fair dividend distributions, coherent management, CEO and founder’s interst is aligned with minority shareholders

+ however, Piquadro also showed in the first round of the crisis that it can earn money in difficult times and if they really manage to grow above market rate, the upside potential is significant

So in summary, I would describe Piquadro as a very profitable company with an potentially very attarctive business model, where a lot of headwinds are most likely priced in. It’s definitely not a “deep value” reversion to the mean kind of stock, but one doesn’t pay for the growth either.

The fact that makes Piquadro interesting for me is that currently no growth is priced in, but if Piquadro only manages to maintain its historical growth rate and profitablity, the upside would be large. So it is basically a very reasonably priced dividend stock with a very cheap growth option.

Risk of Value Trap

Compared to potential “Value traps” like Bijou Brigitte, which I kicked out last year, Piquadro has some advatages:

+ still relatively strong same store sales growth

+ expansion in the direct operated retail outlets only in the beginning phase

+ Piquadro might benefit from consumer growth in emerging markets. For an “aspirational goods”company, it might be easier to make business there than in the low cost sector

However, this aspect is always something one has to keep in mind. You don’t want to own a shrinking retailer working off the long term leases.

Portfolio Risk Management aspects:

Together with Buzzi, EMAK and Autostrada, I have already ~15% exposure to Italian small caps. Adding Piquadro as a full portion would overweight this specific risk too much for my risk appetite. Especially f I want to add further GIPSI stocks in the future.

If we look at the last 6 months, one can see that Piquadro has underperformed the FTSE MIB significantly and the correlation was relatively limited:

As I want to hedge the cummulative Italian risk of the portfolio, I wouldpreferably use the FTSE MIB as hedging intrument.

Final Summary:

I will add Piquadro as full position to the portfolio in the coming days as I believe that the “fair value” should be somewhere between 2-2,50 EUR based on market growth and conservative assumptions, giving the stock an upside of at least 50%. In order to manage the Italy risk and to fund the position, I will fund this through an equivalent short position on the FTSE MIB which will be built up according to the Piquadro purchases.