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Equity Report – Inditex

Date: 21/06/18 Current Price: €29.5 Target Price: €21.5 (-27%)


Ticker: ITX.MC Market Cap.: €91B Recommendation: Sell

FIGURE 1 – MARKET PROFILE


Business Description
Market Profile
Inditex is one of the world's largest fashion retailers, having started out as a
Closing Price (€) 29,44 small family business in a workshop making women’s clothing in 1963 and
52 Week H/L (€) 27,21 currently operating eight brands - Zara, Pull&Bear, Massimo
Average Volume (3M) 26,06Mn Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe - and
7,475 stores in 96 markets around the world.
Shares Outstanding 3,11Bn
Inditex's revenues have grown at a CAGR of 12% between 2014 and 2017 and
Float 36%
currently stand at €25Bn. Inditex achieves substantial excess returns (18%
P/BV 7x
vs 7% WACC) by leveraging on its supply chain competitive advantage: it
P/E 27x employs an advanced demand forecast system, 48h maximum delivery time
EV/EBITDA 16x and 2 week product design and production timeframe which allow it to adapt
and meet new trends very fast while minimizing inventory and the need for
SOURCE: YAHOO FINANCE
discounts.

FIGURE 2 – SHARE PRICE AND VALUE 2017 2018F 2019F 2020F 2021F 2022F
Revenues (€Mn) 25336 26349 27140 27954 28793 29657
40 Operating Margin 17% 18% 18% 18% 18% 18%
Price
35
29,93 Net Profit Margin 13% 13% 13% 13% 13% 13%
30 Debt/EBIT 0.03x 0.03x 0.03x 0.03x 0.03x 0.04x
25
FCFF (€Mn) 2690 4045 4423 4560 4701 4846
20
Value ROE 24% 23% 22% 21% 20% 19%
15
21,5 ROC 24% 23% 22% 21% 19% 19%
10
EVA (€Mn) 2308 2428 2431 2433 2436 2439
jun/14
dez/14
jun/15
dez/15
jun/16
dez/16
jun/17
dez/17

SOURCE: TEAM ANALYSIS

SOURCE: YAHOO FINANCE AND TEAM ANALYSIS


Investment Analysis
Our analysis suggests Inditex is relatively overvalued at €29.5. Therefore, we
FIGURE 3 – DCF VALUATION SCENARIOS
issue a sell recommendation for Inditex shares based on a DCF estimated
DCF Valuation Scenarios share value of €21.5 and a relative valuation estimated share value of €21.2.
The main assumptions behind this valuation include (1) a stable operating
Optimistic – 4%
excess returns, 3.8% €25.7 margin near 18% until 2022 and in perpetuity and (2) the presence of
growth in perpetuity perceived strong, sustainable competitive advantages (namely brand name
Base – 2% excess and an effective logistical system) and considerable barriers to entry
returns, 2.8% growth €21.5 (substantial investment required) which allow Inditex to generate consistent
in perpetuity
Pessimistic – 0%
excess returns of 2% in perpetuity.
excess returns, 1.8% €19.2 Our optimistic scenario (figure 3), considering higher excess returns in
growth in perpetuity
perpetuity and higher economic growth rates, yields an intrinsic value of
SOURCE: TEAM ANALYSIS
€25.7, which adds confidence to our sell recommendation given it’s still
below the current price of €29.5.

Corporate Finance Department | www.fepfinanceclub.org


P&L
FIGURE 4 – MULTIPLE VALUATION

Multiple Valuation (€Mn) 2017 2018F 2019F 2020F 2021F 2022F


EBIT 4351 4643 4783 4926 5074 5226
P/E 20,3x
Interest 5 5 6 7 7 8
P/B 5,4x EBT 4346 4638 4777 4919 5067 5218
EV/EBITDA 9,49x Effective tax rate 25% 23% 23% 23% 23% 23%
Equity Value (Avg., €) 66033 Tax 1086 1160 1194 1230 1267 1305
Net Income 3260 3478 3583 3690 3800 3914
Share Value (€) €21.19
SOURCE: TEAM ANALYSIS

SOURCE: TEAM ANALYSIS


Balance Sheet
FIGURE 5 – DCF VALUATION
(€Mn) 2017 2018F 2019F 2020F 2021F 2022F
DCF Valuation (Base Scenario) Fixed Assets 8563 9576 10367 11181 12020 12884
Enterprise Value (€M) 60385 Working
-1494 -3070 -4697 -6377 -8111 -9901
Capital
Cash and NOA (€M) 6575
Non
Firm Value (€M) 66960 Operating 1644 1644 1644 1644 1644 1644
Debt (€M) 121 Assets
Cash 4931 6907 9200 11566 14006 16523
Equity Value (€Bn) 66839 Equity 13522 14923 16367 17853 19384 20961
Shares Outstanding Debt* 121 134 146 160 173 188
3117
(Bn)
SOURCE: TEAM ANALYSIS
Share Value (€) 21,45 *DOES NOT INCLUDE OFF-BALANCE SHEET DEBT

SOURCE: TEAM ANALYSIS

Cash Flow Statement


FIGURE 6 – WACC
(€Mn) 2017 2018F 2019F 2020F 2021F 2022F
WACC Net Income 3260 3478 3583 3690 3802 3915
Risk-free Rate 0,56% - ΔWC 205 -1576 -1627 -1680 -1734 -1790
Country Risk - Δ FA 368 1013 790 814 839 863
2,29%
Premium + Δ Debt -5 13 13 14 14 14
Beta 0,81 -Dividends/Buybacks 1941 2076 2139 2203 2270 2337
Equity Risk Premium 5,16% + Δ Equity (Issue) 0 0 0 0 0 0
+ Δ NOA 0 0 0 0 0 0
Cost of Equity 7,03%
= Δ Cash 741 1976 2293 2365 2440 2517
Default Spread 0,54%
SOURCE: TEAM ANALYSIS
Cost of Debt 3,39%
WACC 7,03%
SOURCE: TEAM ANALYSIS, DAMODARAN

Corporate Finance Department | www.fepfinanceclub.org


Analysts Email LinkedIn
Joana Fernandes joana.f.97@hotmail.com https://www.linkedin.com/in/joana
Virgínia Corrente v.aleixo85@hotmail.com https://www.linkedin.com/in/virginia-
corrente/
Director Email LinkedIn
Miguel Guimarães migftg95@gmail.com www.linkedin.com/in/miguelftguimaraes

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