Ira Sohn London: Masroor Siddiqui, Managing Partner, Naya Management LLP.
Trade Idea: Salvatore Ferragamo Italia SpA (BIT:SFER) (OTCMKTS:SFRGY). Short: Essilor International Cmpgn Gnl d’Opq SA (EPA:EI) (OTCMKTS:ESLOY)
Price Target: E35 target price, 40% upside from current levels. E60 of Essilor current price is E80
Masroor Siddiqui on Salvatore Ferragamo
European company but only 25% of sales are within Europe. Luxury company, most of sales from footwear. Emerging market growth of luxury goods. Low single-digit sales growth expected 12-15. Underpriced vs. peers such as Burberry historically, plenty of room for growth by raising prices. Margins are key. Margins are significantly below peers predicting EBITDA margins of more than 20% during 2015. Driving growth through margins and pricing. Company is not chasing fashion trends, moving into everyday products. Historically under-managed company self helping. Pays employees per head, 50% more than peers as most production is within Italy. High costs. Company was unaware that airfreight shipping was more expensive than sea, significant changes within management and operations. 60% owned by Ferragamo family. Clean balance sheet. The luxury goods sector is consolidating.
Masroor Siddiqui on Essilor
Ophthalmic lens producer growth of 3% on average for last 23 quarters. Margins are in secular decline. Forward earnings multiple and growth used to be highly correlated – have become de-coupled forward earnings have shot higher while growth has stagnated. Free cash flow yield used to be in the double-digits but has now fallen to single digits. Suppliers expect price declines within the sector. Multiples are surging higher while the company’s revenues and earnings decline. Very little growth possible through prices and no brand loyalty within the sector. Technology is breaking down barriers to entry within the sector. New technology has slashed costs and removed the ability for the company to command high margins.