SAFILO - UBI Banca 18 March...Safilo Group’s portfolio of licensed sunglasses and prescription frames is broad and diverse. Stripping out the LVMH brands closed to expiration (Dior,

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SAFILO

Initiation of Coverage Hold

18 March 2020 – 8:30 AM MARKET PRICE: EUR0.599 TARGET PRICE: EUR0.66

Luxury goods

Data

Shares Outstanding (m): 275.7

Market Cap. (EURm): 165.1

Enterprise Value (EURm): 396.2

Free Float (%): 30.6%

Av. Daily Trad. Vol. (m): 1.78

HAL Holding: 49.8%

Reuters/Bloomberg: SPL.MI SPL IM

52-Week Range (EUR) 0.577 1.602

Source: FactSet, UBI Banca estimates

Performance

1m 3m 12m

Absolute -47.5% -44.8% -17.8%

Rel. to FTSE IT -8.7% -9.5% 9.9%

Source: FactSet

Analysts

Oriana Cardani, CFA Senior Analyst [email protected] Tel. +39 02 6275 3017 www.ubibanca.com/equity-research

Reshape the brand portfolio in a tough scenario

We initiate coverage of Safilo with a Hold rating and a target price of EUR0.66 per share (10% upside potential). Safilo is the second biggest global player in the eyewear industry. It can rely on 140 years of eyewear manufacturing experience, product creation and development capabilities, as well as a deep worldwide distribution network. However, Safilo’s historical core strategy to concentrate on organic growth and particularly on the development of wholesale activities in the luxury end of the market, made the Group vulnerable to pressures coming from brand owners. Therefore, the 2020-2024 strategic plan presented in Dec-19 reinforced the digital transformation of the Group and introduced a new acquisition strategy aimed at strengthening the portfolio of proprietary brands, mainly in affordable lifestyle&fashion segments, as well as the digital marketing skills and the e-commerce. In our view, the experienced management team should be able to drive the Group’s transition to a less volatile business model and overcome the 2020-2021 exit of LHMH licences Dior, Givenchy and Fendi (EUR200 million sales and double digit EBITDA margin) by 2023. However, we believe that the risk of delay in the turnaround due to COVID-19 and the financial stretched position caused by recent acquisitions will continue to jeopardise the performance of the stock price.

> By the end of 1Q20, Safilo is about to close the acquisition of a 70%-stake in Blenders Eyewear and of a 61.34%-stake in Privè Goods (closed in February) for a total amount of around EUR120 million. They are both mass consumer brands in the US generating approximately EUR55 million revenues in 2019 (6% of 2019 reported sales),

> We believe that the 2020-2024 business plan is feasible in the long-term: we expect Safilo’s revenues to increase at a CAGR 20E-24E of 1.2%, reaching EUR1 billion by the end of 2024 (broadly in line with +1/2% YoY management’s guidance @ USD 1.12) and we forecast an Adjusted EBITDA CAGR 20E-24E of 8.1% to EUR96 million compared to management’s target range of EUR78-103 million.

> However, as an effect of COVID-19, we expect 2020 target to be missed and a 1-year delay in the recovery of profitability.

> Our DCF valuation (WACC 9.7%, g 1.5%) gives a fair value of EUR1.10. However, we apply a 30% liquidity discount and a 10% discount justified by the increasing operative risk in the turnaround. We therefore obtain a target price of EUR0.66, which warrants a Hold rating.

> Main risks are: 1) execution risk in restructuring plan; 2) deterioration of the macro-economic scenario; 3) currency volatility.

Financials

2019A 2020E 2021E 2022E

Revenues (EURm) 939,1 931,4 888,1 920,0

EBITDA (EURm) 26,1 32,7 65,0 83,4

EBITDA margin (%) 2.8% 3.5% 7.3% 9.1%

EBITDA Adj. (EURm) 65,4 62,7 65,0 83,4

EBITDA margin Adj. (%) 7.0% 6.7% 7.3% 9.1%

Net Income Adj. (EURm) -13,6 -7,2 -3,9 15,6

Debt post IFRS16

Priced on 17 March 2020

2019A* 2020E 2021E 2022E

P/E Adj. (x) 0,0 0,0 0,0 10.6

P/CF (x) 10.0 9.4 3.7 3.5

P/BV (x) 0.8 0.5 0.5 0.5

Dividend Yield (%) 0.0% 0.0% 0.0% 0.0%

EV/EBITDA Adj. (x) 5.5 6.3 5.8 4.3

Debt/Equity (x) 0.22 0.64 0.58 0.49

Debt/EBITDA (x) 2.87 6.16 2.79 1.91 Source: Company data, UBI Banca Estimates *based on 2019 average price

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Safilo FTSE Italia All-Share

SAFILO 18 March 2020

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Index

1

INVESTMENT CASE

4

2

COMPANY PROFILE

10

3

RECENT DEVELOPMENT

13

4 SWOT ANALYSIS 17

5 FY19 RESULTS 18

6 FINANCIAL PROJECTIONS 19

7 VALUATION 22

8 APPENDIX A – MANAGEMENT TEAM 25

9 APPENDIX B – SAFILO AT A GLANCE 26

10 APPENDIX C – ESG PICTURE 27

11 DISCLAIMER 30


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Key Financials

(EURm) 2019A 2020E 2021E 2022E 2023E 2024E

Revenues 939,1 931,4 888,1 920,0 963,9 1.003,7

EBITDA 26,1 32,7 65,0 83,4 90,3 96,3

EBITDA Adjusted 65,4 62,7 65,0 83,4 90,3 96,3

EBIT -271,7 -14,5 20,0 39,3 46,7 53,0

EBIT Adjusted 3,7 15,5 20,0 39,3 46,7 53,0

Net Income -328,3 -31,5 -3,9 15,6 20,7 27,4

Net Income Adjusted -13,6 -7,2 -3,9 15,6 20,7 27,4

NOPAT -271,7 -14,5 13,4 26,4 31,3 35,5

Operating Cash Flow 26,0 17,5 45,2 46,6 50,6 57,7

Net Capital Employed 416,3 515,9 492,7 487,6 483,9 479,9

Shareholders’ Equity 341,4 309,9 306,1 321,7 342,4 369,7

Net Financial Position 74,8 201,3 181,1 159,4 133,8 101,1 Net Financial Position pre IFRS16 27,8 154,3 134,1 112,4 86,8 54,1

Source: Company data, UBI Banca estimates

Key Profitability Drivers

2019A 2020E 2021E 2022E 2023E 2024E

Net Debt/Ebitda (x) 2.9 6.2 2.8 1.9 1.5 1.0

Net Debt/Equity (x) 0.2 0.6 0.6 0.5 0.4 0.3

(EBITDA-CapEx)/EBITDA (%) -57.3% 23.4% 61.5% 70.0% 72.3% 74.0%

Free Cash Flow Yield (%) -5.8% -79.1% 12.6% 13.5% 16.0% 20.5%


Key Valuation Ratios

2019A* 2020E 2021E 2022E 2023E 2024E

P/E (x) 0,0 0,0 0,0 10.6 8.0 6.0

P/E Adjusted (x) 0,0 0,0 0,0 10.6 8.0 6.0

P/BV (x) 0.8 0.5 0.5 0.5 0.5 0.4

P/OpCF (x) 10.0 9.4 3.7 3.5 3.3 2.9

Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EV/Sales (x) 0.4 0.4 0.4 0.4 0.3 0.3

EV/EBITDA (x) 13.8 12.1 5.8 4.3 3.7 3.1

EV/EBITDA Adjusted (x) 5.5 6.3 5.8 4.3 3.7 3.1

EV/EBIT (x) 0.0 0.0 18.8 9.1 7.1 5.7

EV/EBIT Adjusted (x) 97.5 25.5 18.8 9.1 7.1 5.7

EV/CE (x) 0.8 0.7 0.7 0.7 0.6 0.6

Source: Company data, UBI Banca estimates *Based on 2019 average price Key Value Drivers

(%) 2019A 2020E 2021E 2022E 2023E 2024E

Payout 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

NWC/Sales 24.5% 26.5% 26.9% 27.0% 26.9% 26.8%

Capex/Sales 3.3% 2.6% 2.7% 2.6% 2.5% 2.4%



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INVESTMENT CASE

Safilo is the second-largest manufacturer of eyewear products worldwide in terms of turnover. In 2019, Safilo recorded EUR939 million net revenues (+3.1% on a like-for-like base, +0.9% at constant exchange rate). Pre-IFRS16 Adjusted EBITDA margin was 5.5% (7% reported) and net debt closed at EUR27.8 million (EUR74.8 million after IFRS16). In term of products, in 2019 sunglasses represented ca. 65% of sales. Main geographical markets are Europe (48% of consolidated revenues 2019) and North America (ca. 36%); Asia weights 8% of total.

Wholesale activities account for around 93% of total sales 2019. The residual part are generated by a Strategic Product Partnership Agreement (SPPA) signed in January 2015 with Kering to manufacture Gucci products for 4 years and recently renewed to end-2023. Licences are the key source of revenues (ca. 66% of total revenues 2019). At the beginning of 2020 Safilo acquired Blenders Eyewear and Privè Goods, which are American mass consumer brands; they generated approximately EUR55 million revenues in 2019 (6% of 2019 Safilo’s reported sales), mainly in North America.

Safilo Group’s portfolio of licensed sunglasses and prescription frames is broad and diverse. Stripping out the LVMH brands closed to expiration (Dior, Fendi and Givenchy), we estimate that the licence portfolio of Safilo has 4.9 year duration.

Figure 1 – Safilo Brand portfolio Safilo has been making eyewear products for 140 yea rs, designing manufacturing and distributing high-quality prescription frames, sunglasses and sports eyewear under licensing agreements for leading luxury and p remium brands as well as under its own brands. Market Owned brands Licences

Fashion luxury EUR3bn Safilo Jimmy Choe, Elie Saab,

Missori,

Retail price: >EUR200 (Dior, Givenchy, Fendi

exiting)

Premium, Lifestyle EUR10bn Smith, Carrera Hugo Boss, Kate Spade,

Fossil, Retail price: EUR80-200 Moschino, Levi’s Strauss,

Banana Republic,

Rag&Bone

Marc Jacobs, Tommy

Hilfiger,

Pierre Cardin, Juici Couture

Liz Calybon, David Beckman

Rebecca MinKoff, Max

Mara, Isabel Marant

Mass/Coll branded EUR2bn Polaroid, Blender Eyewear Havaianas, Under Armour Retail price: EUR30-80 Privè Goods

Source: UBI Banca estimates based on company data

In mid-2017, the shares embarked on an 18-month stock price collapse prompted by evidence that Safilo’s core strategy to concentrate on organic growth and particularly on the development of wholesale activities in the luxury end of the market, made the Group vulnerable to pressures coming from either brand owners and wholesalers. On one hand, the eyewear sector is structurally changing with some global luxury internalising the licensed brands. As a matter of fact, in December 2017 LVMH announced the creation of a JV with eyewear manufacturer Marcolin to directly design, manufacture and distribute eyewear licences of LVMH Group.


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On the other hand, in 2017 and 2018 Safilo’s business model was put in check by

the loss of a large portion of its luxury licences (Gucci in 2017, generating around EUR220 million sales, and LVMH’s license Celine in 2018) as well as by the expiration of EUR150 million revolving credit facility on 30 November 2018 and of EUR150 million equity-linked bond maturing on 22 May 2019. In April 2018 a new CEO, Mr Trocchia, was appointed and in August presented a 2018-2020 business plan concentrated on heavy cost-cutting plan in COGS and G&A (EUR70 million in 2019-2020, 11% of total COGS+G&A costs 2018) and moderate growth of top line (+4% 2018-2020 CAGR without SPPA) with actions aimed at increasing the Group's share of business in emerging markets, the weight of optical frames and the development of an omni-channel distribution strategy. The refinancing plan passed through share capital increase of EUR150 million approved in October 2018 and completed on 2 January 2019.

In 2019 the share price followed a recovery trend explained by: (1) the full subscription of the EUR150 million capital increase at EUR0.7 per share resolved by the EGM held on 29 October 2018. Following the subscription of 11.8% of the ordinary shares which remained unsubscribed at the end of the rights auction, controlling shareholder HAL Holding increased its stake in Safilo from 41.6% to 49.8%; (2) the closing of the disposal of its loss-making retail chain Solstice; (3) the release of 9M19 results which were supportive of the turnaround story; (4) the renewal for 5 years of all licences ex-LVMH expiring in 2019-2020 and the acquisition of 4 new licences (Missoni, Levis’s, David Beckam and Under Armour). YTD Safilo’s absolute price performance was still sharply down by approximately 46%, thus underperforming Euro Stoxx Consumer Goods by 15.5% and FTSE Italia All share by 11%. While the entire consumer sector has been under considerable pressure, from mounting concerns regarding a potential downturn of the outlook of global consumer spending after the coronavirus spread into Europe and America, Safilo’s underperformance reflected the perception of increasing operative risk in its turnaround.

Figure 2. Price performance vs. FTSE Italia All Share and EuroSTOXX Consumer Goods in the last 3 years

After falling to the issue price of the capital inc rease (EUR0.7), during 2019 the stock price has regained 59 % thanks to resolution of the financial issue and f irst positive evidence of the ongoing turnaround but the global c oncern of the COVID-19 effect on consumer spending propped a further collapse.

Source: Factset


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In our view, the structural concerns over excessive exposure to licences would be

overcome thanks to the key pillars of current 2020-2024 strategy plan: (1) enrichment of owned brand portfolio via M&A; (2) increase in new marketing skills, also thanks to acquisitions, to push the development of owned brands through online channel, especially in North America and (3) reduction of fixed cost via the downsizing of the Italian production capacity to face the new perimeter of luxury brand activity.

This plan is aimed at strengthening sales growth and increasing profitability by improving product mix and realizing costs optimization of around EUR45 million by 2024.

As for the ongoing business, in our opinion Safilo can rely on the following points of strength:

• The growth of eyewear market sales for prescription frames and

sunglasses is structurally sound due to the combination of some factors, including: (i) demographic factors, (ii) the development of emerging markets, (iii) the improvement of living standards and greater economic accessibility to some products, (iv) a shift towards branded products, of higher quality ("premiumization"), (v) a greater awareness of issues related to health and (vi) expansion of new sales channels (such as e-commerce). The market is estimated to be worth EUR51 billion in 2018 (Source: Safilo elaboration of Euromonitor International data and BCG analysis) and has grown at around 3-4% in the last three years. We believe that the market will continue to experience similar growth.

• The new CEO, Mr Trocchia, who joined the Group in April 2018, proved to be effective in restoring gross profit (+5.3% YoY in 2019, +100bp in gross margin at 50.8%), in reducing overhead costs (EUR15 million in 2019) and in reinforcing owned brands (+5.7% YoY sales growth in 2019 at constant forex vs +2.8% overall growth).

• The majority shareholders HAL is supporting the financial needs of the Group to rebalance the portfolio and consequently reduce the operating risk: it underwrote EUR80 million out of EUR150 million capital increase closed in January 2019 and granted EUR90 million loan expiring in 2023 to finance the acquisitions of Blenders Eyewear and Privè Goods. Safilo has the right not to pay interest accrued on the related payment date and capitalize it; the Group claimed its intention to exercise this right.

• We expect the new acquisitions to be helpful in developing e-commerce channel for Smith, in supporting the entry of Polaroid in American online market, where is not present now, and in providing marketing skills to use capsule collections marketing strategy.

• Thanks to 140 years of eyewear manufacturing experience, product creation and development capabilities, as well as a deep worldwide distribution, Safilo remains a point of reference in the competitive arena for gaining sizeable brand licences (above EUR10 million revenues).

• None of the licences expiring over the space of the next 3 years have a significant impact on the company P&L.


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Figure 3. Safilo brands – Expiration date and estimated % on sales 19

The loss of Fendi and Givenchy (ca. 6% of total sal es) has been completely offset by acquisitions. In February 2020 Safilo announced to have reached a 10 year glo bal agreement with Isabel Marant for both sunglasses th an optical frames in the high premium segment (price range of EUR170-230). Brands Expiration date % on sales 19

Dior (LVHM) end-2020 (not renewed) 13%

Givenchy (LVMH) end-2021 (not renewed) 1%

Fendi (LVMH) end-2022 (not renewed) 4-5%

Swatch end-2021 1%

Pierre Cardin end-2021 1%

Juici Couture end-2022 1%

Rag&Bone end-2022 1%

Jimmy Choo end-2023 3-4%

Max Mara end-2023 2-3%

Fossil end-2023 2-3%

Liz Claybone end-2023 1%

Rebecca Mirnoff end-2024 1%

Havaianas end-2024 1-2%

Levi's Strauss end-2024 new since 2020

Missoni end-2024 new since 2020

Elie Saab end-2025 1%

Moschino end-2025 2-3%

Tommy Hilfiger end-2025 5-6%

Hugo Boss end-2025 7-8%

Banana Republic end-2025 1%

Kate Spade end-2026 6-7%

Marc Jacobs (LVMH) end-2026 4-5%

Under Armour end-2026 new since 2021

David Beckman end-2029 new since 2020

Isabel Marant end-2030 new since 2021

Source: UBI Banca estimates on company data

Overall, we believe that the 2020-2024 business plan is feasible in the long-term. We expect Safilo’s revenues to increase at a CAGR of 1.2% in the 2020E-2024E period, reaching ca. EUR1 billion by the end of 2024 (broadly in line with +1/2% YoY management’s guidance @ USD 1.12). Based on our model, we forecast an Adjusted EBITDA CAGR of 8.1% in the 2020E-2024E period, from EUR65 million in 2019 to EUR96 million in 2024 compared to management’s target range of EUR78-103 million @ USD 1.12. The Adj EBITDA margin should rise from 7% in 2019 to 9.6% in 2024E. However, as an effect of COVID-19, we assume that 2020 targets would be missed and a 1 year delay in profitability recovery. We incorporate the expectation that the revenues loss due to the exit of LVMH licences (EUR200 million in 2020-2021) could be absorbed by 2023.

We forecast CAPEX at EUR24 million per year (average 2020-2024 CAPEX/Sales at 2.5%). In 2020 cash-out due to acquisitions are estimated in EUR119 million, plus EUR3 million expected transaction cost. We assume EUR30 million restructuring costs in 2020. Overall, 2020 is expected to be a transitional year with significant cash absorption (EUR126 million). In 2021-2023 we assume FCF at ca EUR20-25 million while in 2024 we forecast ca. EUR35 million.


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Figure 4 – Comparison of Safilo’s target in the 2020-2024 business plan vs our estimates

(EURm) 2019A 20E BP 20E UBI 24E BP 24E UBI 25E UB I

Products

Licences/Owned 70%/30% 50%

Sun/Optical 65%/35% 55%

Markets

Developed 83% 80%

Channels

Off-line 97% 85%

COGS as % Sales 48% 49% 43.5% 43.5%

Sellings as % Sales 39% 37% 41.0% 41.0%

G&A as % Sales 12.6% 12.4% 10.2% 9.8%

Net sales 939m 960m-1bn 931m 977m-1.03bn 1bn 1.05bn

Adj EBITDA Post IFRS16 65m 67-70m 63m 78-103m 96m 103m

Margin 7.0% 7.0% 6.7% 8-10% 9.6% 9.8%

Financial leverage* 1-1.5x

Net debt* 27.8m 67-105m 151m Debt free 46m Source: Company data and UBI Banca estimates *Leverage target is pre-IFRS16 and does not include EUR61 million cash out for Privè Goods

According to our model, in 2020 net debt/EBITDA ratio would reach 6.2x. We remind that covenants on bank loans are based on a ratio of net debt/EBITDA where net debt is pre-IFRS and excludes EUR90 million subordinated loan provided by HAL while EBITDA is adjusted by one-off costs. According to our projections the ratio is equal to 1x in 2020 and 0.7x in 2022 compared to respectively 2x and 1.8x set by covenants. In our simulation covenants breach in 2020 is at risk in case of fall of the 2020 Adj EBITDA to ca. EUR40 million.

Figure 5 – Leverage evolution 2020E-2024E (EURm, %) 2020E 2021E 2022E 2023E 2024E

Net debt 201,3 181,1 159,4 133,8 101,1

IFRS effect (47) (47) (47) (47) (47)

HAL loan (90) (90) (90)

Adj. debt 64,3 44,1 22,4 86,8 54,1

EBITDA 32,7 65,0 83,4 90,3 96,3

Adj EBITDA 62,7 65,0 83,4 90,3 96,3

Net debt/EBITDA 6,2 2,8 1,9 1,5 1,0

Adj debt/Adj EBITDA 1,0 0,7 0,3 - -

Covenant ratio 2.0 1.8 1.8 1.8 1.8

Source: UBI Banca estimates Overall, we don’t expect Safilo will face financial problems in 2020. However, we believe short term share price outperformance to be unlikely until more solid fundamentals materialise especially at the operating margin. Our DCF valuation (WACC 9.7%, g 1.5%), discounted by a 30% liquidity discount and by a 10% discount due to the low visibility of the business leads to a target price of EUR0.66, so we initiate coverage of Safilo with a Hold rating.


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Figure 6. Safilo – Valuation summary

We apply 2 different discounts to consider liquidit y and financial/operational risks.

Risks Fair value Discount (%) Discount (EUR)

Liquidity 1,10 -30% -0,33

Operation/Financial 1,10 -10% -0,11

Total 0.44

Source: UBI Banca estimates

The main risks are: 1) execution risk in restructuring plan; 2) deterioration of the macro-economic scenario; 3) currency volatility: the US Dollar/Euro exchange rate is relevant for Safilo as around 35% and 30% of Safilo’s revenues and costs, respectively, are booked in US Dollars. We estimate that when the exchange rate of the US Dollar against the Euro devaluates by a cent (for instance, moving from 1.10 to 1.11), the EBITDA of the Company falls by around EUR1 million. Gain/loss on forex generally weights 10-20bp on bottom line. Medium/long term upside may come from a potential disposal by HAL, which entered into Safilo in February 2010 and we estimate that up to now has invested EUR242 million to acquire a 49.8%-stake at an average price of EUR1.8 per share. Italian major players in the sector are Marcolin (owned by private equity firm PAI since 2012, EUR480 million revenues in 2018) and De Rigo (family owned, EUR430 million revenues 2018). EssilorLuxottica remains by far the largest player worldwide with >EUR17 billion sales in 2019.


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COMPANY PROFILE

Safilo is the second biggest global player in the eyewear industry with 140 years of

experience. The Group’s brand portfolio is composed of its own proprietary brands, used for prescription frames, sunglasses and sports goggles and helmets as well as licensed brands for collections of frames and sunglasses. The latter are managed with license agreements for an average of 4 to 6 years. The Group generally concludes global licensing contracts, except when the brand in question has a strong resonance limited to a specific region. The eyewear collections of each of Safilo licensed brands are designed, positioned and marketed to address a specific eyewear market segment and target consumer. Design studios are in Padua, Milan, New York, Portland and Honk Kong.

From a geographical point of view, over 36% of total sales are generated in North America; emerging markets represents ca. 15% of revenues.

Figure 6 – 2019 sales breakdown by geographic area Developed markets are core, representing ca. 85% of total revenues.

Source: Company data

Safilo incorporates the entire business cycle of product design, research and

development, production, marketing and communication up to distribution and logistics. Around 40% of Safilo’s production of sunglasses, prescription frames and ski goggles are carried out in its own facilities in Italy (Longarone, S. Maria di Sala and Bergamo), Slovenia (Ormoz), China (Suzhou) and the U.S.A. (Salt Lake City). Safilo sources finished product from suppliers in Asia, Italy and the US.. The Group has a wholesale-oriented business model and has one of the widest distribution networks in the industry: it operates in roughly 130 countries, of which over 40 are covered by direct sales branches, while the remainder are covered by over 50 independent distributors’ partners.


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Figure 8 – Safilo global distribution network Overall Safilo reaches 100,000 points of sale all over the world.

Source: company data

At the end of 2019 Safilo implemented a plan of non-organic growth which took

place by announcing two acquisitions by Safilo America (100% controlled by Safilo): (1) a 70%-stake in Blenders Eyewear (to be closed by end-March 2020) for USD63 million (2.1xSales19, which had jumped 40% in 2019) and (2) a 61.34%-stake in Privè Goods (finalized on 20 February) for USD67.5 million (5.5xSales19, which had grown 90% in 2019). They are both American companies, active in the wholesale and e-commerce distribution of sunglasses; Privè Goods produces also optical frames while Blenders Eyewear produces sky goggles, too. We estimate a combined 6% incidence on Safilo Group pro-forma consolidated turnover 2019. Both companies do not own production plants for the manufacture of glasses or components and outsourced to third party suppliers, mainly in the Chinese Republic.

Regarding financing, Multibrands Italy, which holds 49.84%-stake in Safilo, agreed to grant EUR90 million loan in two tranches: EUR30 million before the closing of the Privè Goods and EUR60 million before the closing of Blenders to finance the latest acquisition in full. The loan accrues interest equal to Euribor (with a minimum value equal to zero) plus a margin, have to be paid every 6-months. The initial margin for the first 12 months is equal to 6% per annum; afterwards the margin will be equal to 9% per annum. Safilo has the right not to pay interest accrued on the related payment date and capitalize it and claimed its intention to exercise it. HAL’s loan is subordinated one; therefore, is not incorporated to calculate covenants.


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Shareholder structure

The company is controlled with a 49.4%-stake by Multibrands Italy B.V., a

subsidiary of private equity fund HAL Holding. In the last 10 years, HAL has progressively increased its stake by financing both the growth than the restructuring phases of Safilo. Here’re the main steps:

1. on 19th October 2009, the BoD approved a recapitalization plan for the Company which was executed in connection with an investment agreement underwritten by HAL Holding N.V., Only 3T S.p.A and Safilo. In March 2010, with the positive conclusion of the plan, Multibrands Italy B.V. (100%-controlled by HAL Holding) became the reference shareholder of Safilo Group, with a 37.23%-stake.

2. In April 2012, Multibrands Italy B.V.'s stake in the share capital of the Company increased from 37.2% to 42.2%, following the underwriting of a reserved capital increase aimed to fund the acquisition of the Polaroid Eyewear business.

3. In January 2019, Multibrands Italy B.V.’s stake in the share capital of Safilo increased to 49.8% following the subscription of its option rights relating to the capital increase approved by the Shareholders' Meeting on October 30, 2018, as well as the subscription of the ordinary shares which remained unsubscribed at the end of the rights auction, which ended on 28 December 2018, in compliance with the commitment undertaken on 26 September 2018.

Figure 9. Shareholder structure

Safilo was listed in 2005. Total outstanding ordinary shares are 275,703,846

Shareholders # of shares (m) % stake

HAL Holding NV (via Multibrands Italy) 137,4 49,8%

BDL Capital Management 41,3 15,0%

Brandes Investment Partners 7,7 2,8%

Vittorio Tabacchi (via Only 3T) 4,9 1,8%

Market 84,4 30,6%

Total 275,7 100,0%

Source: Company data as at December 2019

The board of directors is composed of nine members of which four are independent. The total remuneration of the board in 2018 was EUR1.09 million.


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RECENT DEVELOPMENT

The future after Gucci and LVMH licences : the 2018-2020 business plan ...

In April 2018, a new CEO, Mr Trocchia, joined the Group. In August 2018, it was presented a 3-year business plan which incorporates a 2018-2020 CAGR of +2% organic growth of wholesale revenues (+4% without SPPA business) and a heavy cost-cutting plan equal to EUR70 million savings in 2019-2020 (EUR30 million in COGS, EUR10 million in lower obsolescence cost and EUR30 million in G&A).

The assumptions were based on the following interventions: (1) actions aimed at increasing the Group's share of business in emerging markets, with a particular emphasis on China (ca 2% of total sales), the weight of optical frames and the development of an omni-channel distribution strategy; (2) further acceleration on procurement efficiency, integrated supply chain approach, review of the logistics footprint and a significant reduction in costs of obsolescence, as well as actions aimed at achieving further reduction of overhead costs like optimization and simplification of work processes in local and central structures, also thanks to the completion of the IT roadmap.

Starting from 2019 there were some evidence that the turnaround was in place:

1. the full execution of the EUR150 million capital increase in January 2019 let Safilo to solve its financial issues: it repaid EUR150 million exchangeable bond expiring in May 2019 and finalised EUR150 million new credit line expiring on 30 June 2023. As at the end of 2019, net debt was EUR74.8 million, including EUR47 million new lease liabilities due to implementation of IFRS16; shareholders’ equity amounted to EUR342 million.

2. Safilo was able to redevelop the licence portfolio: Missoni, Levi Strauss, David Beckham and Under Armour were signed. In addition, all licences ex-LVMH expiring at the end of 2019 and 2020 were extended by at least 5-years: Tommy Hilfiger and Hugo Boss to 31 December 2025, Fossil to end-2023, Havaianas to end-2024 and Kate Spade until 30 June 2026. In addition, also LVMH brand Marc Jacobs, expiring at end- 2024, was renewed until end 2026.

3. On 1 July 2019, Safilo closed the disposal Solstice, its high-end sunglasses retail chain in the US, to Fairway for a cash consideration of USD9 million. Solstice recorded EUR9.2 million net loss in 1H19 and its disposal generated EUR17 million capital loss recorded in 1H19.

4. On 5 October 2019, Kering and Safilo signed a 3-year renewal of the Strategic Product Partnership Agreement (SPPA) started in January 2015.

... the restoring of profitability in 2019 ...

2019 results showed strong improvement of operations: net sales on a like-for-like base were up 3.1% YoY at EUR939 million (+0.9% YoY at constant forex). Adjusted EBITDA pre-IFRS16 was EUR51.8 million (EUR65 million reported under IFRS 16) vs EUR18 million in FY18 ex income for the early-termination of Gucci licence (EUR39 million). Adjusted EBITDA margin pre-IFRS was up 350bp to 5.5% (7% after IFRS 16) thanks to progress on gross profit margin (+100bp to 50.8%) and EUR15 million overhead cost savings.


14

Figure 10 – Evolution of revenues and Adj EBITDA since Safilo’s floation (EURk) Since 2017 the drop in revenues due to exit of important luxury licenses (Gucci and Celine) was significant and impacted on profitability. A recovery of margin is now in progress.

Source: UBI Banca elaboration of company data

... the acquisition of Blenders’s Eyewear ...

On 9 December, Safilo announced the acquisition of a 70%-stake in the Miami-based company Blenders Eyewear, one of America’s fastest-growing sunglasses brands. Price tag was set at USD63 million.

Blenders Eyewear was founded in 2012 by Chase Fisher in San Diego, Calif. and produces a wide range of men’s and women’s sunglasses and snow goggles. Its products are predicated upon a bold aesthetic that emphasizes progressive colourways aimed at an active lifestyle demographic. Blenders Eyewear has an advanced e-commerce business with unique digital and social media skills (approximately 95% online); it is present only in USA and in 2019 generated USD42 million sales (175% 3-year CAGR) and mid-teens EBITDA. Chase Fisher will remain CEO and full owner of a 30%-stake subject to reciprocal put and call options which can be exercised starting from 2023. Blenders Eyewear’s products are inspired by the California active and progressive lifestyle and offer a compelling price-to-value eyewear proposition, particularly appealing to a broad range of consumers with a focus on Millennials and Generation Z, both female and male. The brand, has fuelled its rapid growth through highly effective social marketing strategies, partnering with influencers, athletes, lifestyle enthusiasts, and product collaborations which have driven sales and brand awareness. The Group has an e-commerce driven business model and is at the forefront in the direct to consumer and omni-channel capabilities. It will enrich proprietary portfolio with new strong digital skills and a particular focus on key US market.

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15

... the shift towards a digital transformation strategy in the 2020 -2024 plan ...

On 11 December 2019 Safilo upgraded its business model through a more decisive shift towards digital. The management confirmed the strategic objective of a tight action plan on sales and cost control to recover top line growth and operating margins and added an acquisition strategy to increase owner brands such reducing operative risk profile. The M&A is focusing on brands with high exposure to e-commerce sales to acquire digital marketing skills and sustain the development of e-sales by own brands Smith (which already generates 15% of sales with e-commerce), Polaroid and Carrera.

In sum, Safilo outlined the following strategic priorities and target 2024:

- rebalancing the portfolio towards a greater exposure to owned brands (50% target vs. current 30%);

- strengthening the prescription business from 35% to 45% (vs. ca. 65% of sector average);

- develop emerging market to account 20% of total sales (vs. current 16% and >40% of sector average);

- push on online sales to lead them to represent 15% of total sales by 2024 (vs. 3% current).

As a consequence of the exit of the three LVHM licences (EUR200 million revenues loss and double-digit EBITDA margin) the Italian production volume over the next 2 years will be halved.

Therefore, Safilo announced 700 expected redundancies in Italy (out of 6,700 total employees) by downsizing Longarone plant and Padua Headquarter and by closing Martignacco plant in January 2020. Restructuring costs were quantified in EUR50 million. Overall, the Company targets ca EUR1 billion sales in 2024 at constant exchange rate (+1/2% 5-year CAGR) incorporating Blenders (EUR38 million sales 2019, expected double digit CAGR 2020-2024), 4% CAGR of wholesale revenues 2020-2024 (in line with the expected trend of worldwide eyewear market), 6% CAGR of revenues by Carrera, Smith and Polaroid thanks to digital initiatives and development of optical frames. In terms of market, the Group expects to achieve this goal through a mid-single digit growth in North America and low-single-digit upside in its main European markets, where Safilo is likely to suffer the acquisition of GrandVision by EssilorLuxottica. A higher contribution is then expected from the main emerging markets, in which some of the new brands in the license portfolio will play a significant role.

Adjusted EBITDA margin is expected to reach 9%-11% net sales in 2024 after EUR45 million savings. Restructuring cost would amount to EUR50 million. Safilo budgets EUR120 million 5-year cumulative CAPEX (ca 2.5% average CAPEX/Sales).

... and the acquisition of Privè Goods

On 10 February, Safilo announced the acquisition of a 61.34%-stake in the Miami-based company Privè Good from private equity fund TSG Consumer Partners and its affiliates, as well as from other equity holders. This transaction is part of the Safilo’s growth and development plan and constitutes an initiative of significant strategic value with particular reference to the acquisition of digital marketing skills by the Group.


16

Privé was founded in 2017 by David Schottenstein (current CEO and owner of a 15.5% stake) and operates mainly in the United States through a wholesale network and an e-commerce website. In the wholesale channel the products are mainly sold to a television broadcaster, department stores, optical retailers and internet players. In addition to traditional sunglasses, Privé has expanded its offer to blue light blocking glasses that reduce visual fatigue and reading glasses. The strengths of Privé's business model are mainly connected to the ability to interact with consumers on social media and to the effective use of digital marketing tools. This brand has been growing strongly in the American mass segment (USD30-60 range), strategically leveraging on the promotional activity by celebrities and influencers, in prevalence on social media, in order to increase visibility and sales. Since inception, Privé Goods has carefully curated relationships with celebrities who wear and endorse its products. According to Safilo, this strategy with celebrity capsule programs that can be introduced into various markets around the world. The Group closed 2018 with USD9 million sales, which jumped to USD20 million in 2019. And broadly EBITDA break-even. Privè is expected to have a zero net cash position by end December 2020. Privè does not own production plants for the manufacture of glasses or components and outsourced the production, mainly in the Chinese Republic, to third party suppliers. Privé's ownership structure is now the following: 61.3% Safilo America, 15.5% David Schottenstein and 23.2% managers, strategic partners and other investors like celebrities Jamie Foxx, Hailee Steinfeld and Ashley Benson. Put and call options are granted and may be exercised annually starting from 2023 and following the approval of Privé's annual results relating to the previous year. The BoD will be composed by David Schottenstein, a member appointed by him, two members appointed by Safilo America and an independent third member appointed by common agreement between David Schottenstein and Safilo America. The overall consideration for the 61.34% controlling interest in the Company is USD 67.5 million. The Transaction was financed for (i) EUR30 million through a loan granted by Multibrands Italy BV, controlled by HAL Holding NV, (ii) EUR15 million through the use of the revolving credit line in place with a pool of national and international banks, and (iii) EUR16.6 million through the use of cash. The acquisition of Privè Goods generated EUR55.5 million goodwill that Safilo will allocate according to the PPA process within 12 months. Transaction costs and financial charges related to the deal are estimated respectively in EUR1.5 million and EUR2.5 million. The deal is aimed at strengthening a marketing model strongly focused on the consumers and adding skills on social marketing through celebrities and co-branded capsule collections, which is particularly useful for Carrera. In addition, it is aimed at: (i) exploiting potential industrial synergies, also through the sharing of common suppliers, both as regards the procurement of products, components and raw materials, and as regards logistics, design and product development activities; (ii) exploiting potential commercial and distribution synergies, taking advantage of the consolidated and proven knowledge by the Safilo Group of wholesale customers and the various international markets in which it operates, directly, through its branches or, indirectly, through distributors.


17

SWOT ANALYSIS

Figure 11 – SWOT Analysis

Strenghts Weaknesses

Sound structural growth of eyewear sector

Brand portfolio too exposed to licenses (70% of revenues)

Rich portfolio of premium brands Limited exposure to e-commerce (3% of total sales 2019)

Average duration of license portfolio >4.5 years

High goodwill (we estimate EUR100 million at end 2020E equal to ca. 30% of market cap)

Good track record by new CEO in cost cutting and reshaping portfolio of brands

Low exposure to emerging markets (16% of total sales 2019)

Sizeable production capacity in Italy Weight of optical frames below sector average (ca. 35% vs 65%)

Opportunities Threats

Strong upside in e-commerce for own brands, particularly Smith and Polaroid, thanks also to synergies with Blenders

Execution risk of the restructuring

Double digit 5Y revenues CAGR expected for Blenders and Good Privè

Potential problem in supply chain due to COVID-19 spread-out in 2020

Potential expansion of license portfolio with sizeable new ones (above EUR10 million sales)

Potential global drop in consumer spending in 2020 due to COVID-19

Potential further M&A to enrich own brands Reduction of Gucci production volume since 2019



18

FY19 RESULTS

2019 results showed strong improvement of operations: net sales were up 3.1%

YoY at EUR939 million (+0.9% YoY at constant forex). Wholesale revenues (excluding SPPA with Kering) rose by 2.8% YoY; volume generated by Kering contract dropped by 18% YoY. In Europe sales ex SPPA increased by 3.2% YoY; in North America sales 2019 At constant forex were down 0.6% YoY but up 4.6% YoY considering dollar appreciation. Asia grew by 19.2% at constant forex to EUR78 million while RoW were up 1.1% to EUR78 million. Growth was strongly driven by 5.7% sales increase of its own brand (Carrera, Polaroid and Smith). Adjusted EBITDA pre-IFRS16 was EUR51.8 million (EUR65 million reported under IFRS 16) vs EUR18 million in FY18 ex income for the early-termination of Gucci licence (EUR39 million). Adjusted EBITDA margin was up 350bp to 5.5% thanks to progress on gross profit margin (+100bp to 50.8%) and EUR15 million overhead cost savings. Free cash flow generation was negative for EUR13 million mainly due to negative change in working capital due to inventories increase. Net working capital/sales was 26.7%. After EUR30.6 million investments in production supply and roll-out of new IT net debt pre-IFRS was equal to EUR27.8 million (EUR74.8 million after IFRS 16 impact). As an effect of the exit of LVMH licences a revision of the 2021-2023 expectations was approved by the BoD resulted in EUR227.1 million non-cash write down of the entire goodwill (EUR129 million allocated in Americas and EUR97 million in Europe assuming for the impairment test a WACC at 9.4% and g at 1.7% for EMEA and a WACC at 10.1% and g at 2.3% for Americas). In addition, in FY19 it was recorded EUR20.4 million non-cash write down of deferred tax assets, EUR9 million write-down of fixed-assets for the restructuring plan in Italy and EUR39.4 million non-recurring costs, of which EUR21 million due to the downsizing in the Italian production. Overall net result was negative for EUR328 million (EUR13.7 million adjusted net loss).

Figure 12 - 2018 and 2019 results of the continuing operations (ex Solstice)

Solstice generated EUR26 million net loss. (EURm) FY18 FY19 % change

Revenues 910.7 939.0 +3.1%

Europe 452.0 448.8 -0.7%

North America 319.1 334.0 +4.6%

Asia Pacific 63.3 78.0 +23.1%

Rest of the World 76.3 78.3 +2.7%

Gross Profit 453.2 476.9 +5.2%

Gross Profit margin 49.8% 50.8% +1.0%

EBITDA Adj. 57.3 65.4 19.3%

EBITDA Adj. margin 6.3% 7.0% +0.7%

EBITDA 51.5 26.1 -49.3%

EBITDA margin 5.7% 2.8% -2.9%

EBIT 7.6 -271.7 7.9%

EBIT margin 0.8% -28.9%

Net Profit/loss -19.8 -301.9 -29.7%

Net debt (32.9) (74.8)

Net debt (Pre IFRS16) (32.9) (27.8)



19

FINANCIAL PROJECTIONS

As illustrated in Fig. 13, we expect Safilo’s revenues to increase at a CAGR of

1.2% in the 2020E-2024E period, reaching EUR1 billion by the end of 2024 (broadly in line with +1/2% YoY management’s guidance @ USD 1.12). This growth forecast is underpinned by the following drivers:

• We expect that the EUR200 million revenues lost due to the exit of Dior, Givenchy and Fendi (we assume EUR75 million in 2020, EUR105 million in 2021 and EUR20 million in 2022);

• Regarding the new acquired companies, we forecast EUR70 million revenues 2020E and 20% revenues CAGR 2020-2024;

• We assume organic growth of 4.9% CAGR 2020-2024 for owned brands and 3% CAGR 2020-2024 for licences.

Figure 13 – Consolidated revenues evolution 2020E-2024E

(EURm, %) 2020E 2021E 2022E 2023E 2024E 5Y CAGR

Own brands 322,7 356,7 390,4 424,8 454,9 12.7%

Core brands 259,4 277,5 291,4 306,0 318,2 4.9%

% growth 4% 7% 5% 5% 4%

New acquisitions 63,4 79,2 99,0 118,9 136,7 20.0%

Kering SPPA 50,0 55,0 55,0 55,0 55,0 -4.7%

Licences 558,7 476,4 474,6 484,1 493,8 -4.4%

Total revenues 931,4 888,1 920,0 963,9 1.003,7 1.3%

% growth -0.8% -4.7% 3.6% 4.8% 4.1% 12.7%

% weight 100% 100% 100% 100% 100% 100%

Core brands 27% 28% 31% 32% 32% 32%

New acquisitions 0% 7% 9% 11% 12% 14%

Kering SPPA 7% 5% 6% 6% 6% 5%

Licences 66% 60% 54% 52% 50% 49%


Figure 14 – Expected evolution of revenues loss due to the exit of LVMH licences 2020E-

2024E

(EURm) 2020E 2021E 2022E 2023E 2024E

Revenues lost 75,0 105,0 20,0 0,0 0,0

Dior 75,0 65,0 0,0 0,0 0,0

Givenchy 5,0 5,0 0,0 0,0

Fendi 35,0 15,0 0,0 0,0


Based on our model, we forecast an Adjusted EBITDA CAGR of 8.1% in the 2020E-2024E period, from EUR65 million in 2019 to EUR96 million compared to management’s target range of EUR78-103 million @ USD 1.12. The Adj EBITDA margin should rise from 7% in 2020E to 9.6% in 2024E with a drop to 6.7% in 2020 due to COVID-19 effect.


20

Figure 15 – Sales, Adj EBITDA margin evolution 2019A-2024E Cost savings, organic and inorganic growth would sustain margin recovery but 2020 is expected to be hurt by COVID-19.

Source: Company data and UBI Banca estimates

This forecast margin improvement is driven by the following factors:

1. Manufacturing optimisation including new acquisitions and rationalisation of centralised functions which should improve time-to-market and increase production efficiency.

2. We expect a reduction in G&A expenses from 12.4% of sales in 2020E to

10.2% in 2024E and in COGS from 49% in 2020E to 43.5%in 2024E.

3. We assume a slight increase in A&P, from 37% in 2020E to 41% in 2024E to push on digital marketing.

Figure 16 – Evolution of costs 2019A-2024E

(EURm, %) 2019A 2020E 2021E 2022E 2023E 2024E

Sales 939 931 888 920 964 1.004

COGS 462 456 413 414 427 437

% sales 49.2% 49.0% 46.5% 45.0% 44.3% 43.5%

Gross margin 477 475 475 506 537 567

% sales 50.8% 51.0% 53.5% 55.0% 55.7% 56.5%

Selling&marketing 360 345 355 368 390 412

% sales 38.4% 37.0% 40.0% 40.0% 40.5% 41.0%

G&A costs 118 115 100 99 100 103

% sales 12.6% 12.3% 11.2% 10.7% 10.4% 10.2%

Adj EBIT (1.3) 15,5 20,0 39,3 46,7 53,0

% sales 1.7% 2.3% 4.3% 4.8% 5.3%


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21

We assume cost savings plan of EUR45 million and new acquisitions contribution should allow Adjusted EBITDA 2020-2021 to remain above EUR60 million, broadly in line with 2019 level despite the exit of LVMH-licences.

Figure 17 – Consolidated Adj EBITDA evolution 2020E-2024E

(EURm, %) 2020E 2021E 2022E 2023E 2024E CAGR

Licenses lost (18,8) (22,5) (4,3) - -

Acquisitions 3 3 4 4 4

organic growth 2 4 3 3 2

Savings 14 18 16 - -

Adj EBITDA 63 65 83 90 96 8.1%

Margin 6.7% 7.3% 9.1% 9.4% 9.6%


We estimate EUR30 million restructuring costs in 2020. Based on management’s business plan, we expect capital expenditure to decrease to EUR25 million yearly (average 2020-2024 CAPEX/Sales at 2.5% vs. previous 3%). In 2020 cash-out due to acquisitions are estimated in EUR119 million, plus EUR3 million expected transaction cost. Overall, 2020 is expected to be a transitional year with significant cash absorption (EUR127 million) which would lead net debt/EBITDA at 6.2x (2.4x net of EUR47 million IFRS effect and considering Adjusted EBITDA). Afterwards we assume FCF at EUR20 million in 2021 and 2022, EUR25 million in 2023 and EUR35 million in 2024.

Figure 18 – Evolution of leverage 2004A-2024E

We expect that the portfolio re-building will stretch the financial position of Safilo in 2020 but net debt/EBITDA is expected to turn >2x by 2024.


Below the EBITDA level, we forecast a decrease in D&A from EUR62 million in

2019 to EUR50 million in 2020 to EUR43 million in 2024. Our estimates of financial expenses move from EUR5.5 million in 2019 to EUR7.5 million in 2020 to the peak of EUR15 million in 2021; afterwards they are forecast to gradually fall until EUR5 million in 2024.

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22

VALUATION

To assess the fair value of Safilo we use a DCF method, discounted to consider liquidity risk (30%) and the low visibility of the turnaround due to macroeconomic headwinds (10%). We obtain a target price of EUR0.66 per share

Figure 19. Safilo – Valuation summary

We apply 2 different discounts to consider liquidit y and financial/operational risks.

Risks Fair value Discount (%) Discount (EUR)

Liquidity 1,10 -30% -0,33

Operation/Financial 1,10 -10% -0,11

Total 0.44


At our target price the stock would be traded at 8.2x EBITDA 20E. Figure 20 – Average valuation implicit multiples

(x) 2020E 2021E 2022E 2023E

P/E -2,7 -42,9 10,6 8,0

P/E adj -23,0 -42,9 10,6 8,0

EV/EBITDA 8,2 4,1 3,2 3,0

EV/Adj EBITDA 4,3 4,1 3,2 3,0

EV/EBIT -18,5 13,4 6,8 5,7


DCF valuation To calculate the company’s WACC, we used the following assumptions:

> a risk-free rate of 3.0%;

> a market risk premium of 4.5%;

> a debt/equity ratio of 39%;

> cost of net debt at 9% (equal to margin required by HAL in 2021)

> a beta of 1.56 (3Y beta in EuroStoxx calculated by Factset);

a terminal growth rate of 1.5% and an operating margin of 5.7% at terminal value. Figure 18 – WACC and embedded DCF assumptions

WACC assumptions Embedded DCF assumptions

Risk-free rate 3.0% Sales CAGR 2019-2022 (%) -0.7%

Cost of debt [net] (%) 9.0% Target EBIT margin 2022 (%) 4.3%

Market risk premium (%) 4.5% D&A. on sales (avg. 2019-2022) (%) 5.0%

Beta (x) 1.56 Capex on sales (avg. 2019-2022) (%) 2.7%

Cost of equity (%) 10.0% Sales CAGR 2022-2025 (%) 4.4%

Weight of Debt 33% Target EBIT margin 2025 (%) 5.7%

Weight of Equity 67% D&A. on sales (avg. 2023-2025) (%) 4.4%

WACC 9.7% Capex on sales (avg. 2023-2025) (%) 2.5%


We estimate a WACC of 9.7%, obtaining a theoretical value of EUR276 million.


23

Figure19. Cash Flow projections 20E-25E

(EURm) FY20E FY21E FY22E FY23E FY24E FY25E TV

Net Sales 931,4 888,1 920,0 963,9 1.003,7 1.046,8 1.018,7

growth yoy (%) -0,8% -4,7% 3,6% 4,8% 4,1% 4,3% 1,5%

EBIT 15,5 20,0 39,3 46,7 53,0 59,8 58,1

ROS % 1,7% 2,3% 4,3% 4,8% 5,3% 5,7% 5,7%

Cash taxes on EBIT (10,0) (10,0) (12,5) (14,6) (21,7) (22,5) (22,1)

NOPAT 5,5 10,0 26,9 32,1 31,4 37,3 36,0

D&A 47,1 45,0 44,1 43,6 43,3 43,2 38,3

(Capex) (25,0) (25,0) (25,0) (25,0) (25,0) (25,0) (36,2)

(NWC requirements) 1,3 3,3 (14,0) (14,9) (14,4) (12,4) (3,5)

Free Cash Flow 28,9 33,2 32,0 35,8 35,3 43,1 34,7

Implied ratios FY20E FY21E FY22E FY23E FY24E FY25E TV

Sales/Capital Employed 1,81 1,80 1,89 1,99 2,09 2,21 2,14

Capex/D&A 0,53 0,56 0,57 0,57 0,58 0,58 0,94

Capex/Sales 2,7% 2,8% 2,7% 2,6% 2,5% 2,4% 3,6%

Capex/CE 4,8% 5,1% 5,1% 5,2% 5,2% 5,3% 7,6%

NWC/Sales 26,8% 27,7% 28,3% 28,6% 28,9% 28,9% 23,1%


Figure 20. - DCF fair value estimate

Our Terminal Value represents 54% of Safilo’s EV. M inorities refers to Blenders and Priveè Goods, which we value at transaction price

(A) Discounted free cash flow 2020-2024 (EUR millio n) 205,7

FCF terminal year (EUR million) 34,7

WACC 9,7%

Terminal growth 1,5%

Terminal Value (EUR million) 423,7

(B) Discounted terminal value (EUR million) 243,4

(A+B) Operating activities Value (EUR million) 449,1

Cash (Net Debt) FY10 (EUR million) (74,8)

Minorities (EUR million) (71,0)

Indemnity funds (27,0)

Equity Value (EUR million) 276,3

Number of shares (million) 250,5

Value per share (EUR) 1,10


We have also carried out a sensitivity analysis by tweaking WACC and a terminal growth rate in a 0.5%-2.5% range.


24

Figure 21 - Sensitivity analysis

A 50 bps increase in WACC implies a 7% reduction in our fair value.

g/wacc 10,7% 10,2% 9,7% 9,2% 8,7%

2,5% 1,05 1,14 1,24 1,35 1,49

2,0% 1,00 1,08 1,17 1,27 1,39

1,5% 0,95 1,02 1,10 1,20 1,30

1,0% 0,91 0,97 1,05 1,13 1,23

0.5% 0,87 0,93 1,00 1,07 1,16

Source: UBI Banca estimates.


25

APPENDIX A – MANAGEMENT TEAM

Angelo Trocchia Angelo Trocchia has been Chief Executive Officer of Safilo since February 2018. After an MBA at the STOA'/MIT in Naples and a PHD in aeronautical engineering at the University La Sapienza in Rome, Angelo Trocchia began in 1991 an international career in Unilever, where he held various roles of increasing responsibility in supply chain and sales. In 2013-2018 he held the position of Chairman and CEO of Unilever Italia. Previously he was Chairman and CEO of Unilever Israel. Gerd Graehsler Gerd Graehsler has been Chief Financial Officer of Safilo since December 2014. Previously he was Director of new business development and corporate strategy in Safilo. He received an undergraduate degree from the University of Vienna and an MBA from CEMS The Global Alliance in Management Education.

APPENDIX Figure 22 – Historical sales breakdown by ge


Figure 24 – Historical sales breakdown by distribution channel (%)


Figure 26 – Brand portfolio (%)

Source: Company presentation

APPENDIX B – SAFILO AT A GLANCE eography (%)

Figure 23 – Historical sales breakdown by geography (EURm)


Historical sales breakdown by distribution channel

Figure 25 – Historical sales breakdown by distribution channel (EURm)

Source: Company data)


26

Historical sales breakdown by geography (EURm)

Historical sales breakdown by distribution channel


27

APPENDIX C – ESG PICTURE

Corporate Governance Checklist

Does the company have a combined Chair/CEO? No

Percentage of independent directors? 33% (3 out of 9)

Does the company have loyalty shares? No

Does major shareholders have a “shareholders pact” in place? No

Are “poison pill” or “change of control” clauses adopted? No

Potential dilution from stock options outstanding + not yet granted? No

CEO remuneration detail (fixed salary) EUR474k

Chairman remuneration detail (fixed salary) EUR300k

Is the share price included in the MBO criteria? No

Percentage of treasury shares? 0%

Climate related risk Checklist

Has the company defined GHG-emissions targets? Starting from 2015, Safilo has implemented several energy saving projects in order to decrease energy consumption and CO2 emissions6. In 2018 the installation of the first solar panel system of the Group has been completed by the Chinese plant. in 2018 Safilo has also started the ISO 50001 energy management system certification.

How does the company assess climate-related risk? In 2018 Safilo has for the first time performed the LCA (Life Cycle Assessment) study. In November 2018, Safilo introduced production processes with nickel-free treatment at its Longarone facility.

Social Responsibilities Checklist

Does the company publish a separated Sustainability report? Yes

Does the company have a Chief SRI/CSR officer (or a committee)? No

Does the Chief SRI/CSR officer votes in any of the committee? No

Is the Investor Relation officer a different person from CFO (or other officers)? Yes

Is the ESG strategy integrated in the Business Plan (or in the group strategy)? No

Does the company have an ethical code? Yes

Percentage of female directors? 33% (3 out of 9)

How is the cybersecurity issue managed? Not disclosed, but the company is fully

compliant with EU GDPR regulation


28

Income Statement

(EURm, %) 2019A 2020E 2021E 2022E 2023E 2024E

Revenues 939,1 931,4 888,1 920,0 963,9 1.003,7

EBITDA 26,1 32,7 65,0 83,4 90,3 96,3

EBITDA margin 2,8% 3,5% 7,3% 9,1% 9,4% 9,6%

EBITDA Adjusted 65,4 62,7 65,0 83,4 90,3 96,3

EBITDA margin adjusted 7,0% 6,7% 7,3% 9,1% 9,4% 9,6%

EBIT -271,7 -14,5 20,0 39,3 46,7 53,0

EBIT margin -28,9% -1,6% 2,3% 4,3% 4,8% 5,3%

Net financial income/expense -5,5 -7,4 -13,1 -11,7 -10,2 -5,1

Associated & Others 0,0 0,0 0,0 0,0 0,0 0,0

Profit before taxes -277,1 -21,9 6.9 27,6 36,5 47,9

Taxes -24,9 -9,0 -10,0 -11,0 -14,6 -19,2

Minorities & Discontinuing ops. -26,2 -0,6 -0,8 -1,0 -1,2 -1,4

Net Income -328,3 -31,5 -3,9 15,6 20,7 27,4

Net Income Adjusted -13,6 -7,2 -3,9 15,6 20,7 27,4

Source: Company data, UBI Banca estimates Balance Sheet

(EURm) 2019A 2020E 2021E 2022E 2023E 2024E

Net Working Capital 229,7 246,9 239,1 248,7 259,2 269,2

Net Fixed Assets 240,6 323,5 308,6 294,5 280,8 267,5

M/L term funds -54,0 -54,5 -55,0 -55,6 -56,2 -56,7

Capital Employed 416,3 515,9 492,7 487,6 483,9 479,9

Shareholders’ Equity 341,4 309,9 306,1 321,7 342,4 369,7

Minorities 0,1 4,7 5,5 6,5 7,7 9,1

Shareholders’ Funds 341,5 314,7 311,6 328,2 350,1 378,8

Net Financial Debt / (cash) 74,8 201,3 181,1 159,4 133,8 101,1


Cash Flow Statement

(EURm) 2019A 2020E 2021E 2022E 2023E 2024E

NFP Beginning of Period 32,9 74,8 201,3 181,1 159,4 133,8

Group Net Profit -328,3 -31,5 -3,9 15,6 20,7 27,4

Minorities 0,0 0,6 0,8 1,0 1,2 1,4

D&A 341,8 47,1 45,0 44,1 43,6 43,3

Change in Funds & TFR 22,7 0,0 0,0 0,0 0,0 0,0

Gross Cash Flow 36,2 16,3 41,9 60,7 65,5 72,1

Change in Working Capital 0,4 1,3 3,3 -14,0 -14,9 -14,4

Other -10,6 0,0 0,0 0,0 0,0 0,0

Operating Cash Flow 26,0 17,5 45,2 46,6 50,6 57,7

Net CapEx -41,0 -25,0 -25,0 -25,0 -25,0 -25,0

Other Investments 0,0 -119,0 0,0 0,0 0,0 0,0

Free Cash Flow -15,0 -126,5 20,2 21,6 25,6 32,7

Dividends Paid 0,0 0,0 0,0 0,0 0,0 0,0

Other & Chg in Consolid. Area -44,4 0,0 0,0 0,0 0,0 0,0

Chg in Net Worth & Cap. Incr. 17,5 0,0 0,0 0,0 0,0 0,0

Change in NFP -41,9 -126,5 20,2 21,6 25,6 32,7

NFP End of Period 74,8 201,3 181,1 159,4 133,8 101,1



29

Financial Ratios

(%) 2019A 2020E 2021E 2022E 2023E 2024E

ROE -66.5% -18.9% -1.3% 5.0% 6.2% 7.7%

ROI (pre-tax) -49.6% -3.1% 2.7% 5.4% 6.4% 7.4%

Net Debt/Equity (x) 0.22 0.64 0.58 0.49 0.38 0.27

Net Debt/EBITDA (x) 2.87 6.16 2.79 1.91 1.48 1.05

(EBITDA-CapEx)/EBITDA (%) -57.3% 23.4% 61.5% 70.0% 72.3% 74.0%

NWC/Sales 24.5% 26.5% 26.9% 27.0% 26.9% 26.8%

CapEx/Sales 3.3% 2.6% 2.7% 2.6% 2.5% 2.4%

Payout 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


Stock Market Ratios

(x) 2019A* 2020E 2021E 2022E 2023E 2024E

P/E 0,0 0,0 0,0 10.6 8.0 6.0

P/E Adjusted 0,0 0,0 0,0 10.6 8.0 6.0

P/OpCFPS 10.0 9.4 3.7 3.5 3.3 2.9

P/BV 0.8 0.5 0.5 0.5 0.5 0.4

Dividend Yield (%) 0,0% 0.0% 0.0% 0,0% 0,0% 0,0%

Free Cash Flow Yield (%) 21.9% 64.0% 58.1% 48.6% 38.2% 26.7%

EV 360,8 396,2 377,0 356,3 331,7 299,9

EV/Sales 0.72 0.42 0.44 0.46 0.50 0.55

EV/EBITDA 13.84 12.13 5.80 4.27 3.67 3.11

EV/EBITDA Adjusted 5.52 6.32 5.80 4.27 3.67 3.11

EV/EBIT 13.84 12.13 18.85 9.06 7.11 5.66

EV/EBIT Adjusted 97.51 25.51 18.85 9.06 7.11 5.66

EV/Capital Employed 0.77 0.69 0.69 0.66 0.61 0.56

Source: Company data, UBI Banca estimates *Based on 2019 average price Growth Rates

(%) 2019A 2020E 2021E 2022E 2023E 2024E

Growth Group Net Sales -2.5% -0.8% -4.7% 3.6% 4.8% 4.1%

Growth EBITDA -37.5% 25.3% 98.9% 28.5% 8.2% 6.7%

Growth EBITDA Adjusted 37.6% -4.1% 3.7% 28.5% 8.2% 6.7%

Growth EBIT 0,0% 0.0% 0.0% 96.7% 18.6% 13.6%

Growth EBIT Adjusted 0,0% 319.8% 28.8% 96.7% 18.6% 13.6%

Growth Net Profit 0,0% 0,0% 0,0% 0.0% 32.9% 32.2%

Growth Net Profit Adjusted 0,0% 0,0% 0,0% 0.0% 0.0% 32.9%



30

DISCLAIMER

Analyst Declaration

This research report (the “Report”) has been prepared by Oriana Cardani (the “Analyst”)

on behalf of UBI Banca S.p.A. (“UBI Banca”) in the context of the ancillary service provided

by UBI Banca named “Investment research and financial analysis or other forms of

recommendation relating to transactions in financial instruments” under Paragraph 5),

Section B, Annex I of the Directive 2014/65/EU (“MiFID II”). UBI Banca is an Italian bank

under art. 4 (1)(27) of MiFID II and it is supervised by the European Central Bank and duly

authorised to provide investment services pursuant to Article 1, Paragraph 5, letter a), b),

c), c-bis), e) and f) of the Legislative Decree 24 February 1998, n° 58 under the supervision

of the Italian Authority for the financial markets (Consob). UBI Banca has its head office at

Piazza Vittorio Veneto 8, 24122 Bergamo.

The Analyst who prepared the Report, and whose name and role appear on the front page,

certifies that:

a. The views expressed on the company, mentioned herein (the “Company”)

accurately reflect his personal views, but does not represent the views or

opinions of UBI Banca, its management or any other company which is part of or

affiliated with UBI Banca group (the “UBI Banca Group”). It may be possible that

some UBI Banca Group officers may disagree with the views expressed in this

Report;

b. He has not received, and will not receive any direct or indirect compensation in

exchange for any views expressed in this Report;

c. The Analyst does not own any securities and/or any other financial instruments

issued by the Company or any financial instrument which the price depends on,

or is linked to any securities and/or any financial instruments issued by the

Company.

d. Neither the Analyst nor any member of the Analyst’s household serves as an

officer, director or advisory board member of the Company.

e. The remuneration of the Analyst is not directly tied to transactions for services

for investment firms or other types of transactions it or any legal person, part of

the same group performs, or to trading fees it or any legal person that is part of

the same group receives.

f. The analyst named in this document is a member of AIAF and CFA charterholder.

General disclosure

This Report is for information purposes only. This Report (i) is not, nor may it be construed,

to constitute, an offer for sale or subscription or of a solicitation of any offer to buy or

subscribe for any securities issued or to be issued by the Company, (ii) should not be

regarded as a substitute for the exercise of the recipient’s own judgement. In addition, the

information included in this Report may not be suitable for all recipients. Therefore the

recipient should conduct their own investigations and analysis of the Company and

securities referred to in this document, and make their own investment decisions without

undue reliance on its contents. Neither UBI Banca, nor any other company belonging to the

UBI Banca Group, nor any of its directors, managers, officers or employees, accepts any

direct or indirect liability whatsoever (in negligence or otherwise), and accordingly no

direct or indirect liability whatsoever shall be assumed by, or shall be placed on, UBI

Banca, or any other company belonging to the UBI Banca Group, or any of its directors,

managers, officers or employees, for any loss, damage, cost, expense, lower earnings

howsoever arising from any use of this Report or its contents or otherwise arising in

connection with this Report.


31

The information provided and the opinions expressed in this Report are based upon

information and data provided to the public by the Company or news otherwise public,

and refers to the date of publication of the Report. The sources (press publications,

financial statements, current and periodic releases, as well as meetings and telephone

conversations with the Company’s representatives) are believed to be reliable and in good

faith, but no representation or warranty, express or implied, is made by UBI Banca as to

their accuracy, completeness or correctness. Past performance is not a guarantee of future

results. Any opinions, forecasts or estimates contained herein constitute a judgement as of

the date of this Report, and there can be no assurance that the future results of the

Company and/or any future events involving directly or indirectly the Company will be

consistent with any such opinions, forecasts or estimates. Any information herein is subject

to change, update or amendment without notice by UBI Banca subsequent to the date of

this Report, with no undertaking by UBI Banca to notify the recipient of this Report of such

change, update or amendment.

Organizational and administrative arrangements to prevent conflicts of interests

UBI Banca maintains procedures and organizational mechanism (physical and non-physical

barriers designed to restrict the flow of information between the unit which performs

investment research activity, and other units of UBI Banca) to prevent and professionally

manage conflicts of interest in relation to investment research in accordance with art. 23

of Directive 2014/65/EU and under art. 34 (3) and art. 37 of the Regulation 2017/565/EU.

UBI Banca is organized in such a way as to minimize conflicts of interest and has within the

meaning of art. 20 (1) of the Regulation (EU) No 596/2014/EU and has adequate control

procedures in place to counter infringements of the obligations laid down in Article 20 (1)

of the Regulation (EU) No 596/2014. More specifically, UBI Banca has established,

implements and maintains an effective conflicts of interests policy aimed at preventing

and managing the potential conflicts of interest that could occur during the performance

of the investment research services.

Insofar as the above mentioned organizational and administrative arrangements

established by UBI Banca to prevent or manage potential conflicts of interests are not

sufficient to ensure, with reasonable confidence, that risks of damage to the interests of

the client will be prevented, UBI Banca engages to provide a clear disclosure of the specific

conflicts of interests arising from the performance of investment research services,

including a description of the sources of those conflicts and the steps undertaken to

mitigate them, taking into account the nature of the client to whom the disclosure is being

made.

For further information please see UBI Banca’s website (www.ubibanca.com/equity-

research - “Informativa sintetica sull’attività di ricerca”) and (www.ubibanca.com/Mifid -

“Policy sintetica conflitti di interessi”). More details about the conflicts of interests policy

will be provided by UBI Banca upon request.

Disclosure of interests and conflicts of interests pursuant to Delegated Regulation

2016/958/EU

On the basis of the checks carried out no interest/conflict of interest arose.

Frequency of updates

UBI Banca aims to provide continuous coverage of the companies in conjunction with the

timing of periodical accounting reports and any exceptional event that occurs affecting the

issuer’s sphere of operations and in any case at least twice per year. The companies for

which UBI Banca acts as Sponsor or Specialist are covered in compliance with regulations

of the market authorities.

For further information please refer to www.ubibanca.com/equity-research

Valuation methodology

UBI Banca’s analysts value the Company subject to their recommendations using several

methods among which the most prevalent are: the Discounted Cash Flow method (DCF),


32

the Economic Value Added method (EVA), the Multiple comparison method, the SOP

method and the NAV method.

The analysts use the above valuation methods alternatively and/or jointly at their

discretion. The assigned target price may differ from their fair value, as it also takes into

account overall market/sector conditions, corporate/market events, and corporate

specifics (i.e. holding discounts) reasonably considered to be possible drivers of the

company’s share price performance. These factors may also be assessed using the

methodologies indicated above.

For further information please refer to www.ubibanca.com/equity-research.

Ranking system

UBI Banca’s analysts use an “absolute” rating system, not related to market performance.

The explanation of the rating system is listed below:

Buy: if the target price is 15% higher than the market price, over the next 12 months.

Hold: if the target price is 15% below or 15% above the market price, over the next 12

months.

Sell: if the target price is 15% lower than the market price, over the next 12 months.

No Rating: the investment rating and target price have been suspended as there is not

sufficient fundamental basis for determining an investment rating or target. The previous

investment rating and target price, if any, are no longer in effect. Alternatively, No Rating

is assigned in certain circumstances when UBI Banca is acting in any advisory capacity in a

strategic transaction involving the Company.

Target price: the market price that the analyst believes that the share may reach within a

one-year time horizon.

Market price: closing price on the day before the issue date of the report, appearing on the

first page.

Distribution

Italy: This document is intended for distribution in electronic form to “Professional Clients”

and “Qualified Counterparties” as defined by Legislative Decree 24 February 1998, n. 58

and by Consob Regulation n. 20307 dated 15 February 2018, as further amended and

supplemented.

Spain: This document is intended for distribution in electronic form to “Professional

Clients” and “Eligible Counterparties” as defined by Royal Legislative Decree 4/2015, of 23

October, approving the revised text of the Securities Market Act, as further amended and

supplemented.

IN THE UNITED KINGDOM, THIS DOCUMENT IS BEING DISTRIBUTED ONLY TO, AND IS

DIRECTED ONLY AT PERSONS WHO (A) ARE (I) PERSONS FALLING WITHIN ARTICLE 19 OR

ARTICLE 49 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL

PROMOTION) ORDER 2005 (AND ONLY WHERE THE CONDITIONS CONTAINED IN THOSE

ARTICLES HAVE BEEN, OR WILL AT THE RELEVANT TIME BE, SATISFIED) OR (II) ANY OTHER

PERSONS TO WHOM IT MAY BE LAWFULLY COMMUNICATED; AND (B) ARE QUALIFIED

INVESTORS WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE

(DIRECTIVE 2003/71/EC), (ALL SUCH PERSONS BEING REFERRED TO AS "RELEVANT

PERSONS"). THIS DOCUMENT MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO

ARE NOT RELEVANT PERSONS.

IN FRANCE, THIS DOCUMENT IS BEING DISTRIBUTED ONLY TO, AND IS DIRECTED ONLY AT

PERSONS WHO ARE CONSIDERED AS PROFESSIONAL CLIENTS WITHIN THE MEANING OF

ARTICLES L. 533-16 AND D. 533-11 ET SEQ. OF THE FRENCH CODE MONETAIRE ET

FINANCIER (THE FRENCH FINANCIAL CODE) OR AS ELIGIBLE COUNTERPARTIES, AS DEFINED


33

IN ARTICLES L. 533-20 AND D. 533-13 ET SEQ. OF THE FRENCH FINANCIAL CODE.

IN IRELAND, THIS DOCUMENT IS BEING DISTRIBUTED ONLY TO, AND IS DIRECTED ONLY AT,

PERSONS WHO ARE QUALIFIED INVESTORS WITHIN THE MEANING OF ARTICLE 2(1)(E) OF

THE PROSPECTUS DIRECTIVE (DIRECTIVE 2003/71/EC, AS AMENDED FROM TIME TO TIME,

INCLUDING BY DIRECTIVE 2010/73/EC) ("QUALIFIED PERSONS"). THIS DOCUMENT MUST

NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT QUALIFIED PERSONS.

Copyright

This Report is being supplied solely for the recipient’s information and may not be

reproduced, redistributed or passed on, directly or indirectly to any other person or

published, in whole or in part, for any purpose without prior written consent of UBI Banca.

The copyright and intellectual property rights on the data are owned by UBI Banca Group,

unless otherwise indicated. The data, information, opinions and valuations contained in

this Report may not be subject to further distribution or reproduction, in any form or via

any means, even in part, unless expressly consented by UBI Banca.

By accepting this Report the recipient agrees to be bound by all of the forgoing provisions.

Distribution of ratings

Equity rating dispersion in the past 12 months

Buy Hold Sell No Rating

84.4% 9.4% 3.1% 3.1%

Proportion on issuers to which UBI Banca has supplied investment banking services

relating to the last 12 months

Buy Hold Sell No Rating

74.1% 33.3% 100% 100%

For further information regarding yearly and quarterly rating statistics and descriptions,

please refer to www.ubibanca.com/equity-research.

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