Valentino Fashion Group

Transcription

1 Italy Valentino Fashion Group 2/Outperform Textile & Apparel 13 March Update Closing Price (08/03/06) EUR22.38 Target price +16.2% EUR26 Market capitalisation EUR1 658m BCI To 31/12 (EUR) - IFRS E 2006E 2007E Sales (m) Net att. profit, rest. (m) Free Cash Flow (m) EBITDA margin (%) Clean EPS Reported EPS P/E (x) NS Attrib. FCF yield (%) EV/EBITDA (x) EV/EBIT (x) ROCE (%) ROE (%) P/BV (x) NS Net debt/ebitda (x) Net dividend NA Yield (%) NA Next event: FY-05 results due on 23 March /05 07/05 08/05 09/05 10/05 11/05 12/05 01/06 03/06 mêáåé mêáåél_`f Beyond Hugo Boss VFG has launched an aggressive growth strategy for its two key brands, Hugo Boss and Valentino. We estimate that Valentino brand sales could grow by >15% pa in the next 4 years, with significantly higher margins, leveraging on the brand's limited exposure to royalties, accessories and diffusion lines. VFG's EPS could grow by >20% in the next 3 years. Sound cash flow generation should allow VFG to sustain the higher investments needed to fund growth, ensure a 2.5-3% dividend yield and reduce debt to < 1x EBITDA by end Next year, VFG could acquire a new brand, in order to increase its exposure to the accessories business and/or enter new markets (US), potentially expanding its size by 25-30%. Inexpensive stock in the luxury sector: After stripping HB out of the valuation, we estimate that the rest of the business (Valentino, Marlboro Classics, other brands and the corporate structure) is trading at ~13x P/E and ~8x EV/EBIT for 2007 in other words, at a 25-30% discount to the luxury sector. We confirm our target price of EUR26, which is based on 14x EV/EBIT for Valentino and our EUR34.9 target price for HB. 52-week range EUR18-EUR23.2 Free Float EUR663m No. of shares, adjusted m Daily volume EUR2.06m Reuters/Bloomberg V.MI/V IM 1 month 3 months 12 months Absolute perf. -3.2% 7.5% - Relative perf. -5.5% -0.9% - Marco BACCAGLIO Investment analyst mbaccaglio@cheuvreux.com (39) Shareholders: Marzotto Family 32%, Finanziaria Canova 20%, Dona' delle Rose family 9%, Free Float 40% Please see important disclosures at the end of this document

2 CONTENTS Investment recommendation I Valuation approach...page 06 DCF valuation points to EUR26.5 per share... P.06 Sum-of-the-parts valuation of EUR26 per share... P.07 Multiples nearly in line in 2006, at a discount in P.07 Valentino ex-hugo Boss is still a cheap stock... P.08 II The new group...page 10 Final phase of reorganisation... P.10 Hugo Boss is still the key asset... P.10 Valentino: growth after the turnaround... P.12 III What's ahead for Valentino Fashion Group?...Page 14 IV Estimates review...page 17 CHEUVREUX'S CONSUMER GOODS TEAM Marco Baccaglio Italy mbaccaglio@cheuvreux.com Alberto Checchinato Italy achecchinato@cheuvreux.com Michel Keusch Switzerland mkeusch@cheuvreux.com Jürgen Kolb Germany jkolb@cheuvreux.com Laurent Lamagnère France llamagnere@cheuvreux.com Pierre Lamelin France plamelin@cheuvreux.com Francoise Lauvin France flauvin@cheuvreux.com Michael Roeg Benelux mroeg@cheuvreux.com Carole Rozen France crozen@cheuvreux.com Pieter Vorster UK pvorster@cheuvreux.com 2

3 Valentino Fashion Group Company profile Valuation Marzotto Group spun off its apparel and luxury brands to found Valentino Fashion Group (VFG) on 1 July 2005, as part of the group's repositioning plan. Over the last few years, Marzotto has gradually shifted its focus from textiles to fashion. Now, VFG's three main assets are: Hugo Boss (75% of sales, 51%-owned), Valentino (13% of sales), the Marlboro Classics licence and other smaller brands. VFG's top strategic priority is to develop its 3 brands (Hugo Boss, Valentino and Marlboro Classics) by expanding the product lines (women's wear, leisure wear, diffusion lines and accessories) and pursuing geographical expansion in the US, Asia and emerging markets. In addition, VFG is expanding its network of directly owned shops (46 Valentino, 85 HB). VFG's pro-forma net debt came to EUR442m at end and fell to EUR359m at the end of September. VFG's main shareholders are the Marzotto and Dona' delle Rose families with 40%, Finanziaria Canova with 20%, while free float stands at ~40%. We set a target price of VFG of EUR26, based on our sum of the parts model. Sum of the parts We value Valentino based on a 14x EV/EBITA multiple for 2007, while we use a more cautious 11x for the other apparel businesses. We used our EUR35 target price for Hugo Boss, which yields a EUR16.9 contribution to VFG's target price. Finally, we factor in EUR50m of badwill for corporate costs and EUR50m tax credits, (which should be fully exploited in the next 2-3 years). Multiples VFG is trading at a slight discount to sector multiples in On 2007, given the superior growth of Valentino brand, we expect this discount to widen significantly. Stripping out Hugo Boss, VFG multiples look quite appealing, at 13.3x P/E and 8.3x EV/EBIT in The implicit valuation of the business ex-hugo Boss now stands below EUR0.5bn (EUR6.0 per share), vs. a peak of over EUR0.7bn last September. Investment case SWOT analysis VFG has launched an aggressive growth strategy for its two main brands, Hugo Boss and Valentino. We estimate that Valentino brand sales could grow by >15% pa over the next 4 years, with significantly higher margins, by leveraging on the brand's limited exposure to royalties, accessories and diffusion lines. All in all, we expect EPS to grow by >20% over the next 3 years. VFG's sound cash flow generation should allow it to sustain the higher investments needed to fund growth, ensure a 2.5-3% dividend yield and reduce debt to less than 1x EBITDA by end Next year, VFG might also buy a new brand in order to increase its exposure to the accessories business and/or enter new markets (US), potentially expanding its size by 25-30%. We do not feel that VFG is likely to merge with Hugo Boss at this stage. According to our simulation of potential synergies, a 25% premium to HB minorities would be EPS-enhancing, but only from 2009 and a high premium would wipe out most of the estimated NPV of synergies (EUR m). Strengths 1) High brand recognition for Hugo Boss and Valentino 2) Good cash flow generation 3) Low gearing 4) Management's strong track record Weaknesses 1) Only 50% of Hugo Boss profit is consolidated 2) Holding structure prevents full exploitation of synergies 3) Capital-intensive plan for DOS openings Opportunities 1) Further growth of HB and Valentino via new store openings 2) Key brands are underexposed in emerging markets 3) Streamlining of the holding chain (i.e. by taking over HB minorities) Threats 1) Overexposure to weaker European economies 2) Potential reaction of key competitors to further expansion of Valentino 3) Potential dilution of HB minority buy-out 3

4 Revenues by business (pro-forma 2004) EBIT by business (pro-forma 2004) Valentino 11% Other apparel 14% Valentino Other 11% apparel 9% Boss 75% Boss 80% Sales and ROCE (%) Margins ORMM OMMM ORKM OMKM OM NR NRMM NMMM RMM NRKM NMKM RKM NM R M MKM M OMMP OMMQ OMMR OMMS OMMT OMMU OMMP OMMQ OMMR OMMS OMMT OMMU p~äéë=eãf ol`b=~ñíéê=í~ñ=ebfi=êáöüíjü~åç=ëå~äé b_fqa^=ã~êöáå kéí=ã~êöáå b_fq^=ã~êöáå EV Multiples DCF valuation OM NR NM R M OKM NKR NKM MKR MKM (EUR m) Total Per share a`c=ommsjnm= SRU= UKV= qéêãáå~ä=î~äìé= O=TNU= PSKT= qçí~ä= P=PTR= QRKR= jáåçêáíáéë= EN=MOPF= ENPKUF= OMMP OMMQ OMMR OMMS OMMT OMMU aéäí= EPVOF= ERKPF= oéëík=bslb_fqa^ bslp~äéëi=êáöüíjü~åç=ëå~äé oéëík=bslb_fq^ bèìáíó=î~äìé= N=VSM= OSKR= Valentino FG: Peer comparison (EUR, EUR m, x) Mkt. Tgt. Performance P/E Yield EV/EBIT P/BV ROE Price Cap. Rating Price 1mo 3mos 06E 07E 06E 06E 07E 06E 06E BULGARI % 12.1% BURBERRY % 9.3% n.a/s HUGO BOSS % 8.9% LVMH % 4.3% RICHEMONT % 6.2% SWATCH % 11.4% Tiffany & Co NR n.a/s 1.9% -10.8% TOD'S % 5.2% Weighted Average % 5.3% Median 3.0% 7.5% VFG % 7.5%

5 INVESTMENT RECOMMENDATION We confirm our positive stance on Valentino Fashion Group (VFG), with a target price of EUR26 per share. In recent months, VFG's stock performance has been driven solely by its key asset Hugo Boss (65% of the fair value). The implicit valuation of Valentino and the other brands has remained the same since last June (when the spin-off from Marzotto took place) and 30% below the peak of last September, despite VFG's strong operating performance and attractive growth potential. For this reason, we believe that it is time to take a fresh look at VFG. More focus on growth in retail and accessories. Following the restructuring of Valentino in 2005, the brand should exceed EUR200m sales and reach a ~12% EBIT margin. VFG can now pursue a more aggressive growth strategy for the brand, based on: (1) the development of diffusion lines, accessories and royalties (which have never really been exploited in the past); and (2) the aggressive DOS roll-out, for which we expect VFG to invest >EUR10m per year. Hugo Boss is adopting a similar approach: after successfully launching the women's wear business, management intend to expand further in the retail and accessories businesses. Valentino's revenues and margins should continue to rise for another 3-4 years. We believe that the Valentino brand should post >15% growth pa for the next 3-4 years, driven by the double-digit growth expected for the wholesale business and a >20% pa increase in retail. With such an ambitious growth strategy, we expect that margins will move gradually towards the 17-18% mark, bringing Valentino closer to the ideal 20% profitability level targeted for the brand. We expect VFG to deliver 8-9% sales CAGR, 15% EBIT CAGR and >20% EPS growth, thanks to Hugo Boss (7-8% revenue growth and 10-11% EBIT growth), further development of the Valentino brand and the underexploited potential of Marlboro Classics and the Missoni brands. Strong cash flow generation should support aggressive growth and ensure an attractive dividend yield: we expect cash flow to surge from EUR184m in 2005E to EUR m in , supporting: (1) VFG's challenging investment plan (we expect >EUR100m capex pa); (2) a higher dividend for Hugo Boss minorities (EUR200m over the next 3 years); (3) a 50% pay-out for VFG shareholders (implying a 2.5-3% dividend yield in the coming years); and (4) debt reduction to < EUR300m in We expect VFG to pursue growth via acquisitions, next year. The debt/ebitda ratio should decline to 1.2x in 2006 and below 1x in 2007, meaning up to EUR bn of cash could be invested in external growth. Key targets are the US market and the rapidly growing accessories segment. According to our estimates and based on a 20% takeover premium, a cash outlay of this size would increase VFG's size by 25-30% (based on EBITA and proportional figures). Merger with Hugo Boss. Risk or opportunity? After the spin-off of Marzotto and the conversion of savings shares, for VFG the next step could be either a merger or a minority buy-out. We performed a simulation to assess the potential synergies and value creation from these operation. We concluded that: (1) given VFG's strong interest in adding a new brand or entering a new market via acquisitions, we would rule out a minority buy-out (estimated at EUR1.1bn); (2) additional synergies could reach EUR35-40m/year in the event of a merger, with a NPV of EUR m. In terms of EPS, we estimate that a merger would have a neutral impact in 2008 (5% dilution in 2007), with up to a 25% premium for HB minorities, while it could be 5% accretive assuming a 5% premium. However, VFG ex-hugo Boss still trades at quite low multiples, implying that a paper deal would be better absorbed when the value of Valentino becomes more evident. For this reason, we do not believe that a merger with Hugo Boss is likely to take place in the next months, unless the relative performance of VFG vs. HB sharply improves. Valuation appears appealing: VFG ex-hugo Boss is at 13x 2007 P/E. We based our target price on a sum-ofthe-parts model, using our fair value of EUR34.9 for HB and a 14x EV/EBIT for the Valentino brand. Applying market values for the HB stake, we derive a valuation of EUR24.2. Our DCF delivers a slightly higher valuation of EUR26.5 per share. VFG appears to be a rather cheap stock within the luxury sector, as it trades at a 5-10% discount on P/E and EV multiples. More interestingly, when stripping out Hugo Boss from the valuation, we estimate that the rest of the business (Valentino, Marlboro Classics, other brands and corporate structure) is trading at ~13x P/E and ~8x EV/EBIT for 2007 in other words, at a 25-30% discount to the luxury business. 5

6 I VALUATION APPROACH We value Valentino Fashion Group (VFG) at EUR26 per share based on a sum-ofthe parts model, using our target price for Hugo Boss (HB) and a peer multiple valuation for the other assets. Based on DCF, we reach a fair value of EUR26.5 after minorities. DCF valuation points to EUR26.5 per share DCF must factor in the heavy weight of minorities Our DCF valuation of VFG must factor in the high proportion of profit that is shared with minorities (nearly half of HB's profit). For this reason, we are restating our DCF year-by-year to account for the discounted free cash flow that Hugo Boss minority shareholders are entitled to. The key assumptions underlying our DCF model are: (1) a risk-free rate of 4% and a market risk premium of 4%; (2) unlevered beta of 0.95x (levered beta of 1.05x); (3) a terminal growth rate of 2.5% (implying a 0.5% growth rate in real terms). DCF detail (EUR m) 2006E 2007E 2008E 2009E 2010E Terminal Debt FCF (392) Discount Discounted FCF (392) Per share (5.3) Minorities (2.4) Per share (ex min ) (2.9) Source:Cheuvreux EUR26.9 DCF fair value after minorities Based on our assumptions, we derive a cost of capital for VFG of 7.8% on average during the period, composed of 8.4% cost of equity and 3.5% cost of debt (net of tax). We estimate that free cash flow will grow in the next 2 years from EUR m to EUR m, implying a discounted free cash flow per share of EUR per year from We cross checked our terminal value assumption with our multiples valuation: our EUR4bn estimate implies a EV/EBIT multiple of 12.2x and an EV/EBITDA of 9.6x, which are consistent with the current multiples for We reach a total valuation of EUR3.4bn for the group, before minorities and debt, resulting in a net valuation of EUR26.5 (EUR2bn). DCF summary (EUR m) Total Per share DCF Terminal value Total Minorities (1 023) (13.8) Debt (392) (5.3) Equity value

7 Sum-of-the-parts valuation of EUR26 per share We believe that sum-of-the parts is the most effective valuation method for VFG. Based on this valuation, we reach a EUR26 target based on fair value and EUR24.2, based on the market value of Hugo Boss. We used the following criteria: Hugo Boss. We are using our target price of EUR35 for the SOP and the market value of the shares for the NAV. Valentino. We factor in a 14x EV/EBIT multiple on 2007 profit, which we believe is the fair multiple, as we believe that the growth outlook for this brand will be above-average for the next 4-5 years. Other apparel. We are using a 11x multiple, to account for the fact that these are licence agreements, in a slightly less prestigious market segment compared to HB and Valentino (Marlboro Classics, Lebole, Missoni). We factor in EUR50m of tax credits, EUR50m for corporate costs and EUR209m of debt (basically VFG's debt excluding Hugo Boss). VFG: NAV and SOP (%, EUR, EURm) Stake Shares Price/Criteria NAV Per share Target SOP Per share Hugo Boss preferred 22% Hugo Boss ordinary 79% Hugo Boss Valentino 14.0x x Other assets 10.0x x Tax credits Corporate costs (50) (0.7) (50) (0.7) 2005 Debt ex-hugo BOSS (213) (2.9) (213) (2.9) NAV/Target price Multiples nearly in line in 2006, at a discount in 2007 VFG's multiples are aligned with the luxury sector for 2006, but present a discount in According to our estimates, peers are trading at 17x P/E for Hugo Boss is trading close to the average of our peer sample, implying that the 7% discount is basically attributable to Valentino and other brands in the group. The same conclusions can be drawn, when looking at the EV/EBIT ratio, which is almost in line in 2006, but presents an 11% discount in

8 Multiple comparison (EUR, EUR m, x) Mkt. Tgt. Performance P/E Yield EV/EBIT P/BV ROE Price Cap. Rating Price 1mo 3mos 06E 07E 06E 06E 07E 06E 06E BULGARI % 12.1% BURBERRY % 9.3% n.a/s HUGO BOSS % 8.9% LVMH % 4.3% RICHEMONT % 6.2% SWATCH % 11.4% Tiffany & Co NR n.a/s 1.9% -10.8% TOD'S % 5.2% Weighted Average % 5.3% Median 3.0% 7.5% VFG % 7.5% VFG's stock price ex-hugo Boss has reached the lowest level since the spin off Valentino ex-hugo Boss is still a cheap stock For the last 6 months, VFG's stock price has been driven mainly by the strong performance of Hugo Boss. At the time of the spin-off, VFG traded at EUR20: EUR13 was attributable to the mark-to-market value of the Hugo Boss stake and EUR6 to the other businesses (mainly Valentino, Marlboro Classics, some minor brands and the corporate structure). VFG's market price excluding Hugo Boss peaked at EUR9.7 (EUR0.7bn) in mid-september and gradually fell to the current EUR6.5 level, which is in line with the initial spin-off value and over 30% below the peak valuation. Valuation of Valentino ex-hugo Boss TRM TMM SRM SMM RRM RMM QRM QMM PRM PMM MSLMTLMR OMLMULMR MQLNMLMR NULNNLMR MOLMNLMS NSLMOLMS 8

9 Valentino ex-hugo Boss is inexpensive in 2006, and extremely cheap in 2007 After re-calculating the P/E and EV/EBIT of VFG ex-hugo Boss, we conclude that VFG ex-hugo Boss is actually trading at very low multiples, in view of the strong outlook for P/E. For 2006, we estimate that the P/E multiple ex-hugo Boss is just below 19x, exceeding the apparel business average of 17x and in line with the luxury average of 19x. In 2007, the gap widens, as our 13x P/E forecast compares with 15x-17x for the apparel-luxury sectors. EV/EBIT. In 2006, our 13x EV/EBIT forecast is in line with the 13-14x average (apparel-luxury). If our 2007 forecasts are achieved, VFG would be quite cheap at 8.3x. P/E ex-hugo Boss (EUR) 2005E 2006E 2007E EPS EPS from Hugo Boss EPS ex-hb Stock price HB at market price Price ex-hugo Boss P/E P/E ex-hugo Boss EV/EBIT ex-hugo Boss (EUR) 2005E 2006E 2007E EBIT EBIT Hugo Boss EBIT ex-hugo Boss EV EV Hugo Boss EV ex-hugo Boss EV/EBIT EV/EBIT ex-hb EUR3 upside Assuming that the fair P/E for the remaining businesses would be close to the luxury range, at 17x P/E in 2007, upside for the stock would be EUR2 per share. Applying a 2007 EV/EBIT multiple of 11.5x, we estimate that upside could reach EUR3 per share. This calculation is consistent with our EUR26 target price, which is ~EUR3 above the current stock price. 9

10 II THE NEW GROUP A very efficient financial operation Final phase of reorganisation Valentino Fashion Group (VFG) was founded through the de-merger of Marzotto's fashion assets from the parentco: its majority stakes in Hugo Boss, Valentino, Marlboro Classics and a few other brands (Lebole, M Missoni and Principe). Marzotto was left with the textile business and the financial assets (Mediobanca, Mascioni, Zucchi). The operation raised visibility on the group's key brands and permitted management to focus on the most critical business areas. The operation led to an extraordinary stock performance by Marzotto. Now, instead of being traded as a holding company, the market is treating the company as: (1) an industrial conglomerate in the luxury segment (VFG); and (2) an asset portfolio, which has acquired speculative appeal, thanks to its small size. VFG: revenue breakdown by channel (2004A) VFG: revenue breakdown by region (2004A) Other 4% DOS 10% Germany 24% Other 14% America 18% Wholesale 86% Other EU 44% Hugo Boss: 3 business areas targeted for expansion Hugo Boss is still the key asset Hugo Boss remains VFG's key asset in the new structure. It should account for 76% of 2005E sales and ~80% of its operating profit. It has already begun to implement an ambitious growth strategy, aimed at expanding three business areas: (1) it is attempting to transform the traditional menswear brand, Hugo Boss, into a strong women's wear brand as well; (2) it is pursuing growth in the accessories business (shoes and leather products in particular); and (3) is launching an aggressive investment plan to raise the profile of the Hugo Boss retail network. 10

11 Sales by business unit (2005E) Operating profit by business unit (2005E) Valentino 12% Other apparel 12% Valentino 12% Other apparel 8% Boss 76% Boss 80% Expansion into women's wear Revenues should rise in line with the retail expansion Improving fundamentals and good outlook HB kicked off the diversification process by setting up Boss Woman in 2000, which generated EUR95m sales in 2005, representing 7% of its revenues. The strategy really started to pay off in 2004, when revenues grew by 38% (vs. +10% for Boss Man division) and the division reached break-even on a net profit basis. The good performance continued throughout In our view, the division still has room to grow as: (1) the Boss Woman line consists largely of formal wear, which accounts for 67% of revenues, while for Boss Man, informal wear generates 42% of all revenues. The first leisure collection "Boss Woman Orange" has just been launched for the 2006 spring/summer season and we expect it to generate sales of about EUR10m in FY-06; (2) accessories represent just 7% of Boss Woman revenues, well below the level of similar brands in the fashion business. HB operates roughly 140 directly operated stores (DOS, 2005E) and 632 mono-brand shops (2004A) under franchise agreements. Products are also sold in another ~4,600 multi-brand stores. Revenues from the retail business (own stores), represent 8% of HB's total revenues. The strategy is to increase the number of DOS by ~20 to 25 per year with an annual investment of ~EUR30m per year over the next 5 years. On top of this, HB should also add ~20-25 franchise outlets per year (77 in 2004). This strategy should boost revenues, rather than deliver higher operating margins in the short term. After two years of declining revenues, HB reported improvement in 2004, raising its revenues by 11% to EUR1,168m. This good performance continued in 2005 with a 12% sales increase in both Euro and currency-adjusted terms. In 2005, the group's EBIT margin rose by 85 bps to 12.5%, reaching EUR163m. Hugo Boss estimates (EUR m, %) % 04/ % 05/ A % 06/05E 2006E % 07/06E 2007E % CAGR Sales % % % % % EBITDA % % % % % Margin (%) 11.9% 14.4% 14.8% 15.3% 15.6% 16.3% EBIT % % % % % Margin (%) 9.0% 11.3% 11.6% 12.5% 12.7% 13.4% 11

12 Not only Hugo Boss Strong results over the last 2 years Room to grow Valentino: growth after the turnaround HB's successful strategy was accompanied by the turnaround of Valentino, which began after the brand was acquired from HDP in The turnaround strategy focused on: (1) expanding the product range in the diffusion, women's wear and accessories segments; (2) boosting retail exposure; (3) improving the licence portfolio. In 2004, Valentino reported EUR18m operating profit (equal to 10% of sales), with 13% revenue growth. In 2005, Valentino continued to perform very well both in terms of the top line (we expect 21% revenue growth, partly driven by the acquisition of shops in Japan) and a further improvement in the EBIT margin towards the 12% mark. Valentino is now moving into a growth phase, after several years of restructuring. In our view, management's new plan could enable Valentino to better exploit its outstanding brand recognition and reach EUR m revenues in the next 3-4 years, with further revenue growth beyond Valentino has scope to improve on several fronts. The brand has still not been exploited properly in the diffusion and bridge lines. Valentino has been historically managed as a griffe (couture label) rather as a fashion brand. In the apparel business, Valentino has been positioned at the top end of each segment, with the prêt-a-porter lines receiving most of the exposure. Until recently, it completely lacked exposure to the diffusion segment and it did not enter the bridge segment until just a few years ago. The brand is still most heavily exposed to the women's wear segment. However, menswear also shows great potential for growth. It represented just 9% of all sales in 2005, retreating from the 2002 level of ~12%. Accessories (21% of sales) and royalties from license agreements (11% of sales) could be developed further. Expansion in these segments would also boost margins, as EBIT margins for royalties and accessories are higher than those of the apparel lines. With a targeted expansion in the bag and shoe segments, accessories could generate 30% of sales in the coming years. In terms of royalties, fragrances and eyewear currently generate the highest revenues. However, the diffusion lines could also make a higher contribution going forward, in view of the strong growth outlook (and they may eventually be managed/produced internally). More resources to be used to expand the retail and distribution networks DOS openings are a critical revenue growth driver Valentino is accelerating the roll-out of its DOS network and is gradually increasing its overall presence on the commercial front. In the next few years, 5-6 new DOS should be opened per year. Since Valentino has only recently started to develop its retail network, the profitability of this division continues to fall short of the target range, as several stores are still in the start-up phase. The opening of a new shop usually requires a EUR2-3m investment and at maturity, shops can deliver an average EUR m of sales. If six stores are opened per year for the next four years, we estimate that Valentino could reach DOS in The increasing maturity of the network should also lead to a sharp increase in revenues for each individual store, beyond organic growth (which is however still close to 10%). For this reason, we think that it is fair to assume that average revenues per store, which are currently just below EUR2m/store/year, could easily reach EUR2.5m. We believe that the new store openings will be one of the key growth drivers for Valentino in the coming years: we estimate that retail sales could grow by 20-22% CAGR over the next 4 years, boosting Valentino's total sales growth to 15-16%. 12

13 Valentino: Revenue breakdown by retail and wholesale business (EUR m, %) 2004A 2005E 2006E 2007E 2008E 2009E % CAGR Retail % Wholesale % Royalties % Total sales % Improvement in the sales mix should push margins up Valentino's growth strategy for accessories and DOS should lead to a significant improvement in the operating margin. The EBIT margin currently stands at 12-13%, far lower than the 20-25% potential of similar brands. However, since better margins usually come at the expense of revenue growth (as incremental revenue improvement tends to be accompanied by lower margins in the short term), we feel margin improvement will likely be gradual. Therefore we do not factor in a 20% EBIT margin into our forecasts for the foreseeable future, as the increased targets for DOS openings should slow down the recovery of the retail margin over the next 2 years. We estimate that Valentino could reach a 16-17% EBIT margin 2-3 years from now, driven by the rebalancing of the revenue mix in favour of accessories and the gradual increase in the weight of retail revenues. 13

14 III WHAT'S AHEAD FOR VALENTINO FASHION GROUP? While the company has changed significantly over the last 2 years, following the spinoff from the textile business and the conversion of savings shares, we believe that VFG could consider: (1) an eventual merger with Hugo Boss; and (2) an acquisition to expand the core business. We feel both options could be favourable, as shares would likely be used for the minority buy-out, which would leave both the company's financial structure and investment potential intact. The addition of new brand, that would raise VFG's exposure to accessories, would also be well received by investors as: (1) it would raise visibility on both Valentino and HB's accessories businesses; and (2) would likely be value-accretive, given management's strong track record in integrating/turning around acquisitions. However, we do not think that these operations are likely to take place in the very short term for the reasons outlined below. Is a merger with Hugo Boss likely in the short term? Merger with Hugo Boss From time to time, an eventual merger with Hugo Boss is cited as the next step in VFG's financial restructuring plan. We believe that the deal would make sense from a strategic point of view, however we feel that the operation is unlikely to take place in the very short term. (EUR, EUR m) Outstanding shares Hugo Boss minorities Owned by VFG Minorities Price Mkt. value of minorities Hugo Boss preferred Hugo Boss ordinary Total NPV of synergies could approach EUR m Only a paper deal would be affordable Operating synergies would be the key incentive for such an operation. To assess the potential value of synergies, we performed a rough simulation: assuming ~5% savings on personnel costs, 6% lower G&A costs (including transportation and industrial costs), a 5% reduction in sales costs and 4% lower procurement costs, total savings would reach EUR50-60m/year. Without a merger, we estimate that the structure would deliver only EUR15-20m/year of savings. The differential benefit would therefore be in the region of EUR35-40m/year in the event of a merger. We estimate that such a deal would require an upfront cost of EUR60-70m, implying a NPV of ~EUR m for synergies. With the value of HB minorities at EUR1.2bn, we believe that VFG currently has little room to manoeuvre. We believe that no matter what exchange ratio is proposed, the deal would be carried out with VFG shares, as a cash outlay of >EUR1bn would limit external growth opportunities in the future. We simulated the impact on EPS of an eventual VFG-HB merger, based on the following assumptions: We factored in EUR35-40m of additional synergies to be fully exploited in For 2006 and 2007, we factored in 10% and 50% of the target respectively. We used an adjusted net profit figure, excluding the upfront cost, which would be probably be charged in For the exchange ratio, we applied a 10% and 25% premium to HB's current market prices. These assumptions correspond to a premium of 18-20% and 33-35%, compared to HB's 6-month average stock price. 14

15 Simulation of EPS following a takeover of HB minorities (EUR m, EUR) 2006E 2007E 2008E Valentino Net profit Shares EPS HB 100% owned Valentino net profit Lower minorities Net profit before synergies Synergies (post-tax) Net profit after synergies Exchange VFG-HB with 10% premium New VGF shares New EPS before synergies Dilution/(Accretion) pre-synergies 3% 6% 6% New EPS after synergies Dilution/(Accretion) post-synergies 2% 0% -5% Exchange VFG-HB with 25% premium New VFG shares New EPS Dilution/(Accretion) pre-synergies 8% 11% 11% New EPS after synergies Dilution/(Accretion) post-synergies 7% 5% 0% Dilution would probably last until 2008 A deal would only be possible if HB shareholders received no premium Our simulation shows that the operation would be value-accretive from 2008, if all synergies were achieved and the premium to the current market price was kept low. If it were priced 25% higher than HB's market price, we feel it would probably not be EPS-accretive before This conclusion is backed by the fact that HB shares are trading at a higher P/E compared to the rest of the business: VFG would therefore be paying HB minorities with cheaper paper, implying significant dilution. For this reason, we do not believe that the takeover of HB minorities is on the cards, unless absolutely no premium is offered to minorities. In this case, according to our simulation: before one-off costs, the deal would be value-accretive in 2006 (+2%), while EPS would be boosted by 10% by However, we feel that at these terms, the deal is unlikely to go through, as minorities might opt not to deliver their shares in order to receive a better price. Significant scope for external growth From EUR0.4bn to EUR0.7bn could be invested We believe that between 2006 and 2007, VFG might be ready to make a new acquisition. With the debt/ebitda ratio expected to fall to 1.2x at end-2006 and below 1x in 2007, we conclude that VFG's excess cash could reach EUR400m by end- 2007, assuming a cautious 2x ratio. Using a more aggressive 3x ratio (achieved in the past when the Valentino brand was acquired), the group's purchasing power would rise to EUR bn (excluding potential benefits from the newly acquired company). 15

16 Debt/EBITDA and excess cash estimates (EUR m) 2006E 2007E 2008E Debt and provisions EBITDA Debt/EBITDA Target debt/ebitda Excess cash Maximum debt/ebitda (excluding acquisition) Maximum cash available Expansion in accessories and in the US would be attractive avenues for growth In our view, Valentino could develop in two directions: US market. VFG is still a primarily a European player, with 70% of sales concentrated in the EU and just 17% in America. The acquisition of a strong brand in the US market would be very good news, as it would help balance the group's revenue streams, while providing a strong operating platform in this attractive market. Accessories. Given the strong potential of this business for both Valentino and Hugo Boss, expansion in the leather product segment (shoes, bags) would be very appealing in our view, as it would support existing operations. Up to a 25-30% proportional increase in 2007 EBIT is possible Just "window shopping" at the moment Using the average sector multiples of 2.5x sales and 12-13x EV/EBITDA and applying a 20% takeover premium, we estimate that by investing EUR0.7bn, VFG could add roughly EUR m sales and EUR40-50m EBITA to our current consolidated estimate of EUR270m (with proportional at EUR170m), implying a 15-20% increase to consolidated figures and a 25-30% rise in proportional figures. VFG's strategy appears to be moving in this direction. According to management, a deal might be feasible in It has still not announced an acquisition target, but the perception within the industry is that some mid-sized brands might be viable targets. 16

17 IV ESTIMATES REVIEW Over 8% revenue growth pa to 2008 Revenue estimates by brand (EUR m, %) 2005E 2006E 2007E 2008E % CAGR Sales % Hugo Boss % Valentino % Other % Our estimates are based on the following assumptions about revenue growth: Key revenue drivers: Valentino and American & Asian markets We estimate that Valentino brand will grow by 18% pa on average to 2008, reaching EUR335m (vs. EUR205m in 2005). As we explained in the previous section, this growth should be driven by the aggressive DOS roll-out, expansion of diffusion and bridge lines and higher royalties. We expect the America and Asian markets to post double digit growth vs. 4% growth in Italy, 7% in Germany and ~9% in other European markets. Revenue estimates by country (EUR m) 2005E 2006E 2007E 2008E % CAGR Sales % Italy % Germany % EU % America % Asia % Other (including royalties) % 15% EBIT growth pa - 2% margin growth from 11% to 13% by 2008 We estimate that EBIT will approach EUR300m by 2008, fuelled by the Valentino brand's 31% CAGR, which should account for ~20% of the consolidated figure (vs % in 2005E). After stripping out the EBIT attributable to HB minorities, we estimate that Valentino could account for 30% of VFG's EBIT vs. 20% in As for operating costs, we assumed the following: We expect commercial costs to rise from 18% to ~20% of sales, at an 11% CAGR, driven by the sharp increase in DOS sales, which we expect to grow by 17% pa vs. +8% for consolidated sales. In terms of the weight of advertising expenses on revenues, we estimate a smooth increase towards the 7.5% mark, implying 10% CAGR, which should raise overall visibility on the revenue trend. We factor in a 3% increase in G&A expenses. 17

18 EBIT and margins (EUR m %) 2005E 2006E 2007E 2008E % CAGR EBIT % Hugo Boss % Valentino % Other (incl. corporate costs NM and restructuring) Margin (%) 11.1% 12.0% 12.9% 13.4% Hugo Boss 12.5% 12.7% 13.4% 13.6% Valentino 12.0% 13.8% 15.5% 16.5% Over 20% net profit CAGR, thanks to deleveraging and lower taxes We estimate that net profit could grow by >20% over the next 3 years about 6% points higher than EBIT growth, based on the following assumptions: We estimate that VFG will scale back debt from EUR m at end-2005 to EUR270m in 2008, reducing its financial charges; We factor in a 31-33% tax rate for the next 2-3 years, as tax credits can be exploited in several countries (for a total of EUR50m). Net profit trend (EUR m, %) 2005E 2006E 2007E 2008E % CAGR EBIT % Pre-tax profit % Net profit % Equity free cash flow of EUR90m pa on average from 2007 We estimate that VFG should generate ~5% equity FCF yield from 2007, after dividends are paid to Hugo Boss minorities. Our estimates are based on: 5% free cash flow yield from 2007 flat capex at ~EUR m pa, invested mainly in the development of the DOS network; underlying working capital absorption of 10% of new sales, which we think is a fairly cautious estimate, as the weight of retail in the sales mix should increase, (implying a higher cash return). cumulated EUR25-30m benefit over the next 3 years, thanks to lower cash taxes; the dividend for HB's minorities should be in line with HB's EPS growth (i.e. flat pay-out). a dividend payment of ~60% of equity free cash flow and 50% of stated net profit. At the end of 2008, we expect debt to decline towards the EUR270m mark, after reaching EUR350m in 2006 and EUR300m in

19 FCF, dividends and pay-out (EUR m, EUR)) 2005E 2006E 2007E 2008E Cash flow Capex (103) (100) (105) (108) WC change, tax credits and others Equity FCF consolidated Dividends HB minorities (39) (50) (65) (80) Equity FCF after minorities Equity FCF yield (%) 3.5% 4.3% 5.3% 5.4% Dividends Valentino (26) (34) (44) (54) DPS Dividends/FCF 59% 62% 61% Dividends/Net profit 50% 50% 50% 19

20 Valentino Fashion Group IFRS FY to 31/12 (Euro m) E 2006E 2007E Profit & Loss Account Sales % Change 11.4% 9.1% 9.0% Staff costs (266.6) (320.0) (329.6) (336.2) Other costs ( ) ( ) ( ) ( ) EBITDA % Change 9.3% 17.4% 14.8% Depreciation (71.2) (65.0) (70.0) (75.0) EBITA % Change 17.2% 20.7% 17.1% Goodwill amortisation before OP Goodwill amortisation [impairment test] Non recurring operational items EBIT Net financial items (16.0) (15.0) (11.0) (10.0) Non recurring financial items Other exceptional items Tax (52.2) (57.4) (71.6) (83.9) Goodwill amortisation (16.8) Discontinuing activities Goodwill amortisation (16.8) Net profit [loss] before minorities Dividend to preferred shares Minorities (42.5) (51.8) (61.0) (69.1) Net attributable profit [loss] Restatement [impairment test] Adj. for exceptional items (48.4) Net attrib. profit [loss], restated (*) % Change NS 30.2% 22.7% Cash Flow Statement Cash flow % Change 27.4% 18.7% 15.1% Change in WCR 14.0 (5.0) (15.8) (16.9) Capex (65.5) (103.0) (100.0) (105.0) o/w Growth capex Net cash flow Financial investments (6.0) Net buyback of treasury shares Disposals Dividend paid 0.0 (65.2) (83.8) (109.1) Capital increase Other cash flow (61.0) Dec. [inc.] in net debt Balance Sheet Shareholders' equity [group share] Minority interests Pension provisions Other provisions Net debt [cash] Gearing [%] Capital invested Goodwill Intangible assets Tangible assets Financial assets Associates Working capital requirement WCR as a % of sales Capital employed * before goodwill for historical data 20

21 Valentino Fashion Group IFRS FY to 31/12 (Euro) E 2006E 2007E Per Share Data (at 8/3/2006) EPS before goodwill % Change NS 30.1% 22.7% EPS, reported % Change 39.0% 30.1% 22.7% Goodwill per share Dividend per share Cash flow per share % Change 27.4% 18.7% 15.1% Book value per share No. of shares, adjusted Av. number of shares, adjusted Treasury stock, adjusted Share Price [Adjusted] Latest price High Low Average price Market capitalisation Enterprise value Valuation P/E NS P/E before goodwill NS P/CF NS Attrib. FCF yield [%] P/BV NS Enterprise value / Op CE Yield [%] EV/EBITDA, restated EV/EBITA, restated EV/Sales EV/Debt-adjusted cash flow Financial Ratios Interest cover NS NS Net debt/cash flow EBITDA margin [%] EBITA margin [%] Net margin [%] Capital turn [Sales/ Op. CE] Gearing [%] Payout ratio [%] Return [%] Pre-tax RoCE RoCE after tax ROE [%] Return on equity, restated NS

22 Important Disclosures Applicable disclosure clauses Company Closing Price Rating Disclosures Valentino Fashion Group EUR /Outperform None A - One or more companies in the Crédit Agricole S.A. group owned more than 1% of the total issued share capital of the Company as of the end of the second most recent month preceding the publication date of this report. B - One or more companies in the Crédit Agricole S.A. group owned more than 5% of the total issued share capital of the Company as of the end of the second most recent month preceding the publication date of this report. C - The Company owned more than 5% of the total issued share capital of Crédit Agricole SA as of the end of the second most recent month preceding the publication date of this report. D - One or more companies in the Crédit Agricole S.A. group held, as of the end of the second most recent trading day, a net sales position higher than 1% of the total issued share capital of the Company. E - The trading portfolio of one or more companies in the Crédit Agricole S.A. group contained shares of the Company as of the end of the second most recent trading day. F - Crédit Agricole Cheuvreux and/or a company in the Crédit Agricole S.A. group is a market maker or a liquidity provider for the financial instruments of the Company. G - Calyon and/or a company in the Crédit Agricole S.A. group has been involved within the last three years in a publicly disclosed offer of or on financial instruments of the Company. H - Calyon and/or a company in the Crédit Agricole S.A. group has concluded or is party to a non confidential agreement relating to the provision of investment banking services (except publicly disclosed offers mentioned under G) to the Company during the past 12 months or that has given rise during the same period to the payment of compensation or to the promise to get a compensation paid. I - This research has been communicated to the Company and following this communication, its conclusions have been amended before its dissemination. J - A director or a board member of the Crédit Agricole S.A. group is an officer, director, or board member of the Company. None. Specific disclosure clauses Cheuvreux's rating and target price system Ratings are built for a 6 to 12 month time horizon. 1/ Selected List Expected to outperform the market and is in our country selected list 2/ Outperform Expected to outperform the market 3/ Underperform Expected to perform at best in line with the market 4/ Sell No Rating or Suspended Target price methodology Expected to underperform the market substantially The investment rating and target price have been suspended. Such suspension is pursuant to Cheuvreux's policy in circumstances when Cheuvreux's parent company, Calyon, is acting in an advisory capacity in a merger or strategic transaction involving this company or when Calyon or Crédit Agricole has a beneficial interest in this company and in certain other circumstances. Cheuvreux's target prices are derived from one or more of the following methodologies : DCF, SOP, peer comparison and EVA. 22

23 Breakdown by rating category (as at 30/09/2005) Number of companies in each category /Selected List 2/Outperform 3/Underperform 4/Sell Number of companies in each rating having received Calyon investment banking services within the last 12 months Share price trend and dates of changes in rating and/or target price Dates of changes in target price and/or rating N Date Rating Target price 1 07/07/2005 EUR /01/2006 2/Outperform EUR /01/2006 EUR /05 10/05 01/06 Share price Rating change Target price change Local regulatory authorities Country Cheuvreux legal entity Regulatory authority France Crédit Agricole Cheuvreux SA Autorité des Marchés Financiers (AMF) Germany Crédit Agricole Cheuvreux Niederlassung Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin) Frankfurt Branch Italy Crédit Agricole Cheuvreux Italia SIM SpA Commissione Nazionale per le Societa e la Borsa (Consob) The Netherlands Crédit Agricole Cheuvreux - Amsterdam Branch Autoriteit Financiële Markten (AFM) Spain Crédit Agricole Cheuvreux Espana SV SA Comisión Nacional del Mercado de Valores (CNMV) Sweden Crédit Agricole Cheuvreux Nordic AB Finansinspektionen Switzerland Crédit Agricole Cheuvreux - Zurich Branch Swiss Federal Banking Commission (SFBC) United Kingdom Crédit Agricole Cheuvreux International Ltd Financial Services Authority (FSA) 23