Inditex: FX torment should ease from here
We expect ITX to present rather weak Q1 results (June 13), dragged down by hefty FX headwinds. We forecast sales growth in constant currency to reach a rather respectable 9%, evenly split between space and LfL and in line with the performance posted in the first weeks of the quarter. Still we expect FX to bring growth in EUR down to just 3%, which coupled with a 30bp GM drop and a deterioration in the expense ratio of 44bp should lead to 1%/2% YoY drop for EBITDA/earnings. There is no consensus available yet but we think the FX story is well known by the market and thus we would not expect the weak Q1 results to come as a surprise. In this note we have nudged up our EBITDA/net income forecasts for ‘18e-‘20e by an avg of 1.6%/1.5%, mostly on a 25bp GM upgrade linked to a small easing on the FX front. Valuation wise, this has been offset by a small upward revision to capex and by the recent payment of a Eur0.375 DPS, leading to reduction of our FV from Eur27.3 to Eur26.9. We reiterate our Neutral rating. The shares have rebounded 15% from April lows (vs. +9% for the SXRP Index) and are trading in line with our valuation. We do expect earnings growth to rebound over the next quarters on a lower drag from FX but the shares are already trading at a 1-yr FWD P/E of 23.6x, which we think is about fair for what we see as ITX’s new earnings growth potential of around 8% in a more typical year.Industria de Diseno Textil Inditex is the parent company of a group engaged in apparel and footwear manufacturing and retailing. The Group is made up of fashion retail chains, textile manufacturing, purchasing and fabric treating companies, logistics and construction companies which are responsible for store refits and manufacturing structure. Products include men's, women's and children's wear collections, footwear, and women's lingerie which are sold through the Group's retail store chains of: Zara, Kiddy's Class, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, and Oysho and Zara Home.
Haitong is the first international Chinese investment bank and our goal is to be the primary channel for capital flows into and out of China. During 2015 the Senior Management Team in London was expanded significantly to focus on this objective and to provide a full-service cross-asset markets business coupled with sector-focused investment banking. We work closely with our world-wide network of offices to bring a true depth of understanding to all client situations.
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