By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
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Indirect beneficiary of a declining oil price
Recent decline in oil price should have a positive impact on the demand for company’s products. Piaggio & C. SpA derives approximately 26% of its revenue from India. As a decline in oil price is highly beneficial to Indian economy, the results of this should be reflected in due course in Piaggio’s bottom line. Another 16% of revenue comes from rest of Asian countries, and approximately 58% from Western countries. According to industry market research study by ReportsnReports, worldwide motorcycles market demand is forecasted to expand 6% per annum to over 132 million units in 2018, valued at $120 billion. With iconic brands such as Vespa, Piaggio is well positioned to profit from this growth. Piaggio was recently highlighted at the Sohn London Investment conference by Ali Hedayat, co-chief investment officer of Indus Capital. Hedayat sees a 25% upside for the stock. We think the upside is much higher for long-term oriented investor, and that shares of Piaggio can double in 5 years period.
Company profile
[drizzle]The Piaggio Group is the largest European manufacturer of two-wheel motor vehicles and one of the world leaders in its sector. The Group is also a major international player on the commercial vehicle market, The Piaggio Group product range includes scooters, motorcycles and mopeds marketed under the Piaggio, Vespa, Gilera, Aprilia, Moto Guzzi, Derbi and Scarabeo brands. The Group also operates in the three- and four-wheel light transport sector with its Ape, Porter and Quargo (Ape Truck) ranges of commercial vehicles. The Piaggio Group brand portfolio contains some of the most distinguished and historic names in the two-wheeler industry, from Gilera (founded in 1909) and Moto Guzzi (founded in 1921) to Aprilia (which in just over twenty years has established itself as the most successful Italian and European vehicle manufacturer in the world motorcycling championships) and Vespa, the extraordinary two-wheeler that has come to be regarded as “the” scooter: with more than 18 million vehicles produced since it made its debut in 1946, the Vespa is an incredibly long-lived market success as well as one of the best known icons of Italian style and technology in the world.
Valuation summary
Based on a recent share price, Piaggio had maket capitalization of 850 million euros. Net debt was 438 million euros and enterprise value equaled 1,289 million euros. Company is currently valued at an EV/EBITDA multiples of x7.2 and x8.8 based on annualized 9 months of 2014 and full 2013 year results, respectively. In 2013, Piaggio paid an annual dividend (for 2012) of 0.092 euros per share, which provides an annual dividend yield of about 4%. According to company’s presentation, by 2017, Piaggio aims to achieve growth of EBITDA to 250 million euros, implying annual growth rate of 11.6%. At the current valuation multiple (EV/EBITDA x7.2) and assuming same dividend payment amounts for 3 years, share price could reach 4 euros per share or a 71% upside from the current level. Projecting same growth and dividends for 5 years gives one a target share price of 5.38 euros per share, or 130% upside from the current level. The annual growth assumption of 11.6% might be a little aggressive, but with possible improvements that should result from lower oil price it seems reasonable. The projections do not include any free cash flow or possible reduction of debt during these 3 and 5 year periods (with the exception of dividends). We believe that shares of Piaggio should appeal to a long-term, value oriented investor, and at the same time they provide embedded optionality to profit indirectly from declining oil prices.
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