Maintaining the buy rating, the target price was raised to HK$57.80, based on the price-earnings ratio forecast 55 times FY22, above the 5-year average (30 times) 3.5 standard deviations. We believe that Prada's strong sales growth since the beginning of fiscal year 21 and the company's optimistic profit margin guidance will support investor confidence and the company's valuation.
Therefore, we think the current valuation of the 46 times the predicted price-earnings ratio for FY22 is very attractive (although the median of the peer group is 26 times).
Net loss was slightly higher in FY20, but EBIT performed well in the second half of the year. Prada had a net loss of 54 million euros in fiscal year 20, higher than our/Bloomberg's estimate of 20.43 million euros. Net profit for the second half of FY20 was 126 million euros, 21% lower than our expectations. Since sales were lower than expected by 4% and financial costs and taxes were higher than expected, we believe that the EBIT margin for the second half of FY20 was higher than expected, 14.5% (we estimate 12.8%) is more important. It is also a positive sign that the company is still paying a dividend of €0.035 per share despite the company's recorded losses.
FY21 to date retail sales have recovered to FY19 levels. The decline in retail sales in the fourth quarter of FY20 improved to the lowest number of units (the third quarter of FY20 was the high number of units). Management also said that the improvement trend in December 20 continued until the beginning of fiscal year 21 until the beginning of fiscal year 21. Retail sales were quite strong compared to the increase in the number of existing units in fiscal year 20 (the same as in fiscal year 19), and reached a situation where a high base (about 20% increase in January of fiscal year 20) and a large number of closed stores (about 130, accounting for about 20% of the total).
Optimistic gross margin and relatively positive EBIT margin guidance. Management's gross margin target is quite impressive; in addition to forecasting 74.5% in FY21, it will also reach 78% in FY22 (within 18-24 months).
We think this is due to the continued rise in brand popularity, popularity, and interaction with consumers on Instagram, Weibo, Google Trends, and Prada.com. Therefore, in the case of increased consumer demand, the average price can be raised by improving the product structure and increasing the correlation rate. Furthermore, despite much uncertainty about the recovery of the tourism industry in FY21, management expects operations to return to levels between FY19 and the second half of FY20 due to increased demand from local customers, China, and e-commerce (previously anticipated a return to FY19 levels). As a result, we expect an EBIT margin of 11.5% for FY21 (9.5% for FY19 and 14.5% for the second half of FY20).
Maintaining the buying rating, the target price was raised to HK$57.80. We raised our earnings per share forecast for fiscal year 21/22 by 7%/6% to reflect higher gross margin and better operating leverage. As we expect Prada to outperform the industry (different from FY14 to 18), maintain the buying rating and raise the target price to HK$57.80, based on the 55 times FY22 forecast price-earnings ratio unchanged, which is 3.5 standard deviations above the 5-year average (30 times).