The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Although FILA Holdings’ dependence on the US and Europe is likely to weigh upon its share price in the short term, we believe that its 2020E P/E of 5.8x represents an excessive undervaluation. While its debt-to-equity ratio looks high versus the industry average, the firm should face no difficulty in repaying near-term (less than one year to expiry) debt obligations.
If Covid-19 issue dissipates, share price should rebound significantly
Considering both the global consumption slowdown caused by Covid-19 and the possibility of a drop in ASPs, we downwardly adjust our 12-month forward EPS estimate for FILA Holdings by 28%, in turn lowering our TP by 28% from W68,000 to W49,000.
Based on the company’s Mar 19 share price of W21,050, its 2020E P/E sits at just 5.8x -- a level we view as an excessive undervaluation when considering the firm’s global brand value. Of course, its high dependence on the US and Europe (US and global FILA-brand royalties represented 50% of overall FILA brand-related OP in 2019) is likely to weigh upon its share price in the near term. However, if the Covid-19 issue eases, a significant rebound is possible. Meanwhile, due to its relatively high debt-to-equity ratio of 102%, concerns are emerging towards FILA Holdings’ financial soundness amidst the current market instabilities. But, with cash assets of W100bn and surplus cash flow estimated at W140bn, the company should face no difficulty in repaying near-term (less than one year to expiry) borrowings and bonds (W135.5bn, non-consolidated basis). In addition, we note that all accounts receivable (W54bn) are insured by credit guarantee.
4Q19 review: Shift in channel focus from mid-tier to low-tier
On a consolidated basis, FILA Holdings posted 4Q19 sales of W789.5bn (+4% y-y) and OP of W85.1bn (+3% y-y), with OP missing consensus by 13%. The FILA brand performed sluggish, with sales of W355.6bn (-4% y-y) and OP of W51.8bn (-22% y-y). Sales in the US and Europe fell short of expectations due to a peaking out in demand for hit item Disruptor brand shoes. In the US, the portion (%) of mid-tier sales fell to the low teens. However, strong sales (+70% y-y) continued in China, and Korea enjoyed solid sales (+23% y-y) on the back of robust sales of Fleece. Acushnet recorded healthy sales of W433.8bn (+11% y-y) and OP of W33.3bn (+65% y-y), helped by warm weather and rising demand for new products.