Prada’s IPO could be a one-way bet on Asia

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The Prada growth story is intuitively understood by Hong Kong shoppers. Anyone who has seen the queues at their stylish boutiques has a sense of the profitability and potential of this fashion and luxury goods vendor.

However, there are a couple of caveats to bear in mind. The first is that Prada’s proposed IPO in Hong Kong is expensive when assessed against listed comparables. Secondly, although Prada is surging ahead in Asia, this is about the only market where it is achieving growth. Investors should not project its success in the local malls onto a global level. Nevertheless, the Prada brand is powerful, and this is where its story is most compelling.

Its origins date back to 1913 – the number will also serve as the company’s stock code on HKEx. It designs, manufactures, promotes and sells some of the planet’s most desirable fashion brands: Prada (almost 80 per cent of revenue), Miu Miu, Church’s and Car Shoe. Some 32 per cent of the group’s revenues of just over Euro2 billion (HK$22.7 billion) in 2010-11 came from Asia.

Sales in Asia grew at a compound annual rate of more than 51 per cent over the last three years. In fact, pretty much all of the group’s growth in that period came from the region, hence the proposed listing in Hong Kong, which is at the heart of Prada’s future.

The IPO has been marketed at HK$36.5 to HK$48 per share, translating into an IPO size of about US$2 billion to US$2.6 billion.The transaction was said to have been fully subscribed on the first day of bookbuilding.

Prada’s IPO sounds like a safe bet – but there could be a few catches.

More than 85 per cent of the deal is in the form of a selldown by existing investors. That’s basically Miuccia Prada, the group president, and her family cashing in, rather than the company raising new money to finance its expansion.

Now, it could be that Prada does not need to raise much funding. It generated an Ebitda (earnings before interest, tax, deprecation and amortisation) of over Euro535 million in its last financial year, and it still has plenty of room to back new ventures through debt, a better option than expensive equity capital. Nevertheless, the offer structure means that existing owners will be intent on maximising valuation.

The implied equity value for Prada is equivalent to a range of 21 times to 28 times estimated 2011 earnings, according to research reports.That sounds rich. Contrast that with the forecast price to earnings measure of just over 18 times for LVMH, a listed firm similar to – but much larger than – Prada, or the almost 14 times the Gucci parent PPR trades at.

While there is no denying Prada’s scale and prospects, the top end of the range even represents a premium to Asian retailers that, on average, trade at prospective PE ratios in the low to mid-twenties. So there will clearly be no IPO discount for investors with Prada’s listing.

Revenues in Japan (11 per cent of group sales) have grown at only 8.7 per cent over the last three years, and may fall significantly this year, as hinted in the risk factors section of a preliminary listing document. In turn, revenues in Italy, the rest of Europe and North America (together accounting for 56.4 per cent of sales) have grown at a flat rate since 2009 – so Prada looks like a one-way bet on Asia. A lot will depend on whether the group can continue to grow its Ebitda margins, and on how much 25 planned new stores in the region can deliver.

Despite fickle markets, Prada’s IPO will probably do well. Consumer stocks are in vogue and, at the time of writing, the Samsonite deal was cut in size but said to be reasonably subscribed. The name appeals, and the IPO will likely see a much better response from the public than for some recent listings.

But savvy investors may perhaps prefer to wait to see if pricey Prada trades down, and to pick up shares in the aftermarket.

Pricing is set for June 17, with start of trading scheduled for June 24.

Philippe Espinasse worked as an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press.

Fashionista file

  • The bulk of Prada’s revenues (71 per cent) comes from retail sales, with the balance, which is declining, from some 1,400 wholesale clients and franchises
  • The group directly manages all its 11 production facilities in Italy and Britain
  • It directly operated 319 stores at the end of January, in addition to 33 franchised stores, with distribution points in more than 70 countries
  • Prada has plans to open a further 80 directly operated stores in the financial year to January next year, 25 of which – net of store closings – will be in Asia (excluding Japan)
  • Gearing is a conservative 33 per cent
  • The group is basically a family venture, with president Miuccia Prada and her husband, chief executive Patrizio Bertelli, each indirectly owning 33.2 per cent, while Prada’s brother and sister each control 14.2 per cent.
  • The balance is held by Intesa Sanpaolo, an Italian bank
  • The IPO should provide an initial free float of 16.5 per cent.
  • The size of the deal may be increased to about US$3 billion
[An article I published in the South China Morning Post‘s “Money Post” supplement on 13 June and which is reproduced with permission.]
(c) 2011 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.