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Equity Report – Inditex Date: 21/06/18 Ticker: ITX.MC FIGURE 1 – MARKET PROFILE Market Profile Closing Price (€)

29,44

52 Week H/L (€)

27,21

Average Volume (3M)

26,06Mn

Shares Outstanding

3,11Bn

Float

36%

P/BV

7x

P/E

27x

EV/EBITDA

16x

SOURCE: YAHOO FINANCE

Inditex is one of the world's largest fashion retailers, having started out as a small family business in a workshop making women’s clothing in 1963 and currently operating eight brands Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe and 7,475 stores in 96 markets around the world. Inditex's revenues have grown at a CAGR of 12% between 2014 and 2017 and currently stand at €25Bn. Inditex achieves substantial excess returns (18% vs 7% WACC) by leveraging on its supply chain competitive advantage: it employs an advanced demand forecast system, 48h maximum delivery time 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 discounts. 2017

2018F

2019F

2020F

2021F

2022F

25336 17% 13%

26349 18% 13%

27140 18% 13%

27954 18% 13%

28793 18% 13%

0.03x 2690

0.03x

0.03x

0.03x

0.03x

FCFF (€Mn)

4045

ROE

24%

23%

ROC

24%

EVA (€Mn)

2308

23% 2428

4423 22% 22% 2431

4560 21% 21% 2433

4701 20% 19% 2436

29657 18% 13% 0.04x 4846 19% 19% 2439

Revenues (€Mn) Price 29,93

35 30 25 20

Value 21,5

15

dez/17

jun/17

jun/16

dez/16

dez/15

jun/15

dez/14

jun/14

10

SOURCE: YAHOO FINANCE AND TEAM ANALYSIS

FIGURE 3 – DCF VALUATION SCENARIOS DCF Valuation Scenarios Optimistic – 4% excess returns, 3.8% growth in perpetuity Base – 2% excess returns, 2.8% growth in perpetuity Pessimistic – 0% excess returns, 1.8% growth in perpetuity SOURCE: TEAM ANALYSIS

€25.7 €21.5 €19.2

Target Price: €21.5 (-27%) Recommendation: Sell

Business Description

FIGURE 2 – SHARE PRICE AND VALUE 40

Current Price: €29.5 Market Cap.: €91B

Operating Margin Net Profit Margin Debt/EBIT

SOURCE: TEAM ANALYSIS

Investment Analysis Our analysis suggests Inditex is relatively overvalued at €29.5. Therefore, we issue a sell recommendation for Inditex shares based on a DCF estimated 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 margin near 18% until 2022 and in perpetuity and (2) the presence of perceived strong, sustainable competitive advantages (namely brand name and an effective logistical system) and considerable barriers to entry (substantial investment required) which allow Inditex to generate consistent excess returns of 2% in perpetuity. Our optimistic scenario (figure 3), considering higher excess returns in perpetuity and higher economic growth rates, yields an intrinsic value of €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

EBIT

P/E

20,3x

P/B

5,4x

EBT

4351 5 4346

EV/EBITDA

9,49x

Effective tax rate

25%

66033

Tax

1086 3260

Equity Value (Avg., €) Share Value (€)

€21.19

SOURCE: TEAM ANALYSIS

Interest

Net Income

2019F

2020F

2021F

2022F

4643

4783

4926

5074

5226

5

6

7

7

8

4638 23% 1160 3478

4777 23% 1194 3583

4919 23% 1230 3690

5067 23% 1267 3800

5218 23% 1305 3914

SOURCE: TEAM ANALYSIS

Balance Sheet

FIGURE 5 – DCF VALUATION DCF Valuation (Base Scenario) Enterprise Value (€M)

60385

Cash and NOA (€M)

6575

Firm Value (€M)

66960

Debt (€M)

121

Equity Value (€Bn)

66839

Shares Outstanding (Bn)

3117

Share Value (€)

21,45

(€Mn)

2017

2018F

2019F

2020F

2021F

2022F

Fixed Assets

8563

9576

10367

11181

12020

12884

-1494

-3070

-4697

-6377

-8111

-9901

1644

1644

1644

1644

1644

1644

4931 13522 121

6907 14923 134

9200 16367 146

11566 17853 160

14006 19384 173

16523 20961 188

Working Capital Non Operating Assets Cash Equity Debt*

SOURCE: TEAM ANALYSIS *DOES NOT INCLUDE OFF-BALANCE SHEET DEBT

SOURCE: TEAM ANALYSIS

Cash Flow Statement FIGURE 6 – WACC WACC Risk-free Rate

0,56%

Country Risk Premium

2,29%

Beta

0,81

Equity Risk Premium

5,16%

Cost of Equity

7,03%

Default Spread

0,54%

Cost of Debt

3,39%

WACC

7,03%

(€Mn)

2017

2018F

2019F

2020F

2021F

2022F

Net Income - ΔWC - Δ FA + Δ Debt -Dividends/Buybacks + Δ Equity (Issue) + Δ NOA = Δ Cash

3260 205 368 -5 1941 0 0 741

3478 -1576 1013 13 2076 0 0 1976

3583 -1627 790 13 2139 0 0 2293

3690 -1680 814 14 2203 0 0 2365

3802 -1734 839 14 2270 0 0 2440

3915 -1790 863 14 2337 0 0 2517

SOURCE: TEAM ANALYSIS

SOURCE: TEAM ANALYSIS, DAMODARAN

Corporate Finance Department | www.fepfinanceclub.org

Analysts Joana Fernandes Virgínia Corrente

Email [email protected] [email protected]

Director Miguel Guimarães

Email [email protected]

LinkedIn https://www.linkedin.com/in/joana https://www.linkedin.com/in/virginiacorrente/ LinkedIn www.linkedin.com/in/miguelftguimaraes

Copyright © 2018, FEP Finance Club, All rights reserved. This document has been prepared by FEP Finance Club. This document is provided solely to you and at your specific request. In consideration of FEP Finance Club providing you with this document, you hereby acknowledge and agree to the following terms and conditions: The Information represents our view as of the date hereof and is subject to change and/or withdrawal at any time without notice. The Information may be based on (a) data that may no longer be current, (b) estimates that may involve highly subjective assessments and (c) models that may change from time to time and be different from the assumptions and models used by other persons. The Information is not intended as an indicative price or quotation and the actual market price of the security referred to herein can only be determined when and if executed in the market. Consequently, the Information may not reflect hedging and transaction costs, credit considerations, market liquidity or bid-offer spreads. FEP Finance Club does not guarantee the accuracy, reliability or completeness of the Information (including any assumptions, modelling or back-testing used to develop such Information), which may have been developed based upon trade and statistical services or other third-party sources. Any data on past performance, modelling or back-testing contained herein is no indication as to future performance. The Information should not be the basis for determining the value of any security or in making any investing decision. The Information is illustrative. It is not intended to predict actual results, which may differ substantially from those reflected in the Information, and no assurances are given with respect thereto. FEP Finance Club does not represent that any Information in this document directly correlates with values which could actually be achieved now or in the future. The value of any investment may fluctuate as a result of market changes. Visit us on: https://www.fepfinanceclub.org https://www.facebook.com/FEPFinanceClub/ https://www.linkedin.com/in/fepfinanceclub/

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