EQUITY RESEARCH
Research
FERRARI (RACE) - HOLD
Report:
Research
Report
ADVISORY SERVICES
Report Date
27th OCTOBER 2015
Ferrari IPO; a successful debut for the “prancing horse”
Fiat Chrysler’s (“Fiat”) decision to IPO 10% of Ferrari’s capital with the balance to be
distributed to Fiat’s existing shareholders in early 2016 appears clever from Fiat’s
point of view. As part of the spin off, Ferrari is paying €2.8bn to Fiat via the FCA loan
note (due April 2016). This significantly mortgages Ferrari relative to its balance
sheet (net assets €2.46bn 31 March 2015) and in the circumstances of a growth
slowdown.
Analyst
Ravi Lockyer MSc Llb
Collins Sarri Statham
Investments Ltd
Stock Rating: HOLD
Share Price………………...$55
Target Price…...………….NA
Yr Hi/Low:…...…………...NA
Shares o/s................188.92m
Market Cap.............$10.65bn
Avg Daily Vol............... 9.67m
Dividend Yield……………0%
Key Risks to Price
Target
i) Ferrari IPO on NYSE
is for just 10% of co
hence likely to be
volatile due to limited
share availability.
ii) Sensitive to engine
demand from Maserati
iii) The Ferrari brand
value is highly
subjective and difficult
to value.
iv) Demand is
essentially controlled
by production factors.
Please note the risk
warnings and
disclaimers on the last
page of this document.
Ferrari is an Italian
luxury automobile
manufacturer that is
80% owned by Fiat.
The Ferrari business is well known to Fiat, it originally bought 50% of Ferrari in
1969. Fiat has a considerable advantage over investors in its understanding of
Ferrari. Fiat is in the midst of a €45bn investment programme hence has significant
capital needs in respect of Ferrari. It is also rated BB- a non-investment grade
reflecting Fiat’s weak balance sheet and capital requirements.
The Ferrari IPO at $52 per share ($9.8bn market capitalisation/ $12.3bn including
debt) has attracted significant retail and institutional interest despite the current
upheaval in the automobile sector (post the Volkswagen scandal). The IPO was
oversubscribed and UBS has already exercised its over-allotment option over 1% of
the shares. The valuation of Ferrari has raised eyebrows as it appears expensive
relative to its peer group and likely growth prospects.
Whilst this is a rough and ready measure, on the basis of Ferrari’s 2014 net profit of
Research
€265m ($300m) the IPO values Ferrari
on a P/E of 32.6x. This is expensive relative
to auto peers (Daimler 10.4x, General
Motors 12.9x, Ford 16.8x, Porsche 4.4x and
Report:
Tesla Motors Inc 27.1x). Furthermore the rating suggests high profit growth which
at Ferrari is limited to cost efficiencies and price uplift.
The problem is Ferrari’s expected production growth. This reflects the fundamentals
of the luxury car market and the need to preserve high prices by not rapidly
increasing production (which necessitates lower prices). Typically Ferrari
establishes a volume target and then manages waiting lists in respect of the target.
Relatively static production leaves the company with only cost efficiencies and
pricing as levers for managing profit.
Ferrari
2012
2013
2014
2019 (F)
Sales (units)
7405
7,000
7255
9,000
Growth
7.3%
-5.4%
3.6%
c.4.4% pa
Revenues €m
2225
2335
2762
3,400
Source: Ferrari IPO prospectus
Over the next 4 years the Ferrari board are targeting unit growth of 4.4% pa to 9,000
by 2019. This is relatively pedestrian, the nearest peer group company on a similar
P/E rating, Tesla Motors (2015 50k units forecast) is expecting to increase
production to over 100k by 2019. Ferrari manufactures at its home in Maranello.
Even if the board were to change its volume based system, the issue would be how to
ramp up production using existing facilities. We suspect higher production would
require significantly higher capital spending.
Collins Sarri Statham Investments Ltd. 6th Floor 5 Lloyds Avenue London EC3N 3AE
Telephone: +44 (0)20 7264 2360 Facsimile: +44 (0)20 7264 2361 www.css-investments.com Email: info@css-investments.com
Collins Sarri Statham Investments Ltd. is authorised and regulated by the Financial Conduct Authority (Registration No 483868).
Registered in England and Wales (Company No 6539190).
Ferrari brand is key
Part of the Ferrari allure is its enduring global appeal in the premium sports car segment.
This is due to Ferrari’s ability to maintain its supercar program which began in 1988 with
the F40 – now the main models are the 458 Italia, F12berlinetta, FF and California. For
2015 the plan is to turbocharge all future V8 models starting with the California (its least
expensive model at $202k) in 2015.
There is a significant expertise at Ferrari in car engine design/ technology and brand/
licensing opportunities. Ferrari manufactures engines for Maserati (2014: 36,500 units
sold +136% on 2013) an area of significant growth. In addition to merchandising lines,
eyewear, pens, pencils, perfume, clothing, bicycles, watches, mobile phones using the
Ferrari brand. The merchandising are useful adds-on but not the core business.
Whilst we recognise the significant brand value at Ferrari, (the major reason for the
premium Ferrari valuation) making an investment in Ferrari stock or indeed any other
recognisable brand on this basis alone has had mixed results. One recalls the high profile
global brands of the 1990’s, companies like Apple, Merrill Lynch, Nike, McDonalds,
Vodafone. Our suggestion is a brand is a great asset, but investors should not invest solely
on this basis.
Ferrari / Fiat Chrysler next step is a distribution
Fiat will hold an EGM on December 3rd 2015 to approve the demerger of its 80% stake in
Ferrari to Fiat shareholders. This is a demerger of a very high proportion of the Ferrari
capital and likely to be the main driver of the Ferrari share price.
This transaction will increase the free float from 10% to 90% (Piero Ferrari holds the
balance 10%) hence removing pricing anomalies caused by the low float in the NYSE IPO
by early 2016. Hence the next few months will be a fast moving sequence of events as Fiat
holders anticipate and possibly hedge against their forthcoming Ferrari distribution.
Nearer to the demerger date (as yet undecided) it is likely that Fiat shares will reflect the
forthcoming demerger possibly presenting a cheap way into Ferrari via Fiat. It will
certainly represent an alternative way to buy exposure to Ferrari.
CONCLUSION
One perceived reason for the IPO is to create investor interest ahead of the distribution
to “whet investor appetite”. It has certainly achieved that objective with the shares
holding onto a 6% premium despite the top of the range pricing. The initial range was
$48-$52.
We are sitting on the fence at the moment, recognising the brand value, but weary of the
high Ferrari valuation and forthcoming events. It is likely that investors will be able to
pick up the shares post the distribution in an environment of a high free float, rather than
the rather artificial tight conditions at the moment.
Ferrari sits perfectly within our HOLD criteria with potential investors advised to await
key events notably the forthcoming Fiat demerger of the balance 80% stake.
Collins Sarri Statham Investments Ltd. 6th Floor 5 Lloyds Avenue London EC3N 3AE
Telephone: +44 (0)20 7264 2360 Facsimile: +44 (0)20 7264 2361 www.css-investments.com Email: info@css-investments.com
Collins Sarri Statham Investments Ltd. is authorised and regulated by the Financial Conduct Authority (Registration No 483868).
Registered in England and Wales (Company No 6539190).
Collins Sarri Statham Investments Ltd - Analyst Rating Definitions:
BUY: A “buy” rating is applied to companies with established businesses that are profitable and where there is further profit growth
expected. A “buy” recommendation means the analyst expects the share to reach the share price target on the note.
HOLD: The company’s valuation appears to reflect investor expectations in the short-term. Alternatively the company is awaiting
key developments that will impact on the share price. Investors are advised to await the resolution of these key developments.
SELL: The company’s valuation appears too high having regard to material uncertainties, declining profit prospects or has sizeable
funding requirements. A sell recommendation may also be applied where the board have failed in key objectives or appear to be
frequently changing strategy. A sell recommendation means the analyst expects the share to fall to the price target on the note.
NEUTRAL (Not Rated): The analyst does not maintain a view in either direction.
Key to Material Interests:
Please be aware that the following disclosures of Material Interests are relevant to this research note:
Ferrari
Relevant disclosures: < 2>
1. The analyst has a personal holding in the securities issued by the company or of derivatives linked to the price of the company’s
securities.
2. Collins Sarri Statham Investments Ltd has clients who hold either shares or CFD positions in this security.
ANALYST CERTIFICATION:
The report’s author certifies that this research report accurately states his personal views about the subject security, which is
reflected in the ratings as well as the substance of the report.
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Collins Sarri Statham Investments Ltd. 6th Floor 5 Lloyds Avenue London EC3N 3AE
Telephone: +44 (0)20 7264 2360 Facsimile: +44 (0)20 7264 2361 www.css-investments.com Email: info@css-investments.com
Collins Sarri Statham Investments Ltd. is authorised and regulated by the Financial Conduct Authority (Registration No 483868).
Registered in England and Wales (Company No 6539190).