September 5, 2017

Breakingviews: Pirellis Mooted IPO Valuation Looks Overinflated

by Breakingviews

Pirelli is back. The Italian maker of Formula 1 racing tyres, now controlled by Chinese state-owned firm ChemChina, is planning to relist its shares in Milan next month. Pirelli’s focus on the high-end consumer tracks may deserve a premium to some peers, but a mooted valuation of up to 12 billion euros looks overinflated.

New investors will get a company much souped-up since ChemChina delisted it in 2015, alongside longtime manager and shareholder Marco Tronchetti Provera. Back then it derived nearly a quarter of its revenue from lower-margin sales to industrial clients, which have now been folded into the Chinese conglomerate. Take that unit out, and the implied enterprise value of Pirelli’s consumer segment, the bit now being listed, was nearly 8 billion euros, Mediobanca analysts reckoned, or around 7.5 times forward EBITDA.

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Fast forward to 2017. Analysts at Banca IMI, a bookrunner for the planned IPO, say the company could be worth up to 9 times forecast 2018 EBITDA after adjusting for one-off costs, giving an enterprise value of 12 billion euros. Industry leader Nokian enjoys a multiple of 9.5 times EBITDA, but other large listed tyremakers trade on less.

Such a price may be a tad optimistic. True, Pirelli is more profitable than most other tyremakers, but its current EBITDA margin of 20 percent lags Nokian’s, which is nearly 30 percent. An 8 times multiple would be easier to justify. Assume Pirelli can grow sales at say 6 percent, in line with the last three years, and 2018 revenue would be around 5.6 billion euros. If it can also boost margins to say 23 percent, then the firm would be worth about 10.3 billion euros.

Pirelli reckons it can do better than that, both in terms of sales growth and its EBITDA margin. But investors would be taking that on trust. And they have other reasons to be cautious. Pirelli’s debt level of 4.2 billion euros looks racy, and its ownership structure is complex, with Tronchetti Provera, ChemChina and Rosneft still keeping stakes alongside the 40 percent free float. However slick the new Pirelli, its owners ought not to overestimate its charms.


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