Medium term
Trade view / 07 March 2016 at 9:38 GMT

#SaxoStrats: Pandora flying too close to the sun?

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: PNDORA:xcse
Price target:
Market price:
SaxoStrats
 
Theme

Pandora is a most successful company in the global luxury industry outpacing all expectations over the past three years. In addition, collapsing gold and silver prices have helped boost margins and profits. 

However, analysts and investor sentiment have pushed the valuation to unsustainable levels given the company's expected sales slowdown and lower profitability on recently higher precious metals prices. 

Cash flow generation is deteriorating relative to two years ago and the high proportion of sales from new products poses a high execution risk for the company going forward.

Pandora

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Source: Saxo Bank 

Valuation

Pandora is valued at 12-month forward EV/EBITDA of 14x which is a 41% premium to global luxury brands. The valuation premium has continued to expand despite global economic weakness. 

The ROIC (45%) is around 4.2x larger than estimated WACC compared to an asset multiple of EV/IC (enterprise value / invested capital) of 16.4x – in other words, the profitability spread cannot justify the valuation even when factoring in the top line growth over the coming two years.

Pandora
Source: Saxo Bank  

Key risks

Disney partnership launch in several Asia countries to fuel growth for  another year in its Asia Pacific segment. Lower EUR would inflate overseas profits. Q1 earnings on May 10 which could again surprise to the upside. Higher global growth in North America and Asia could also lift sentiment again in Pandora shares.

Parameters

Entry: sell Pandora (PNDORA:xcse) at market.

Stop: set trailing stop at 1,107 with a step size of 24.

Target: we are not issuing a target per se, but the 600 level is not unreasonable to reach this year if Pandora fails against expectations in Q1 and Q2. We believe Pandora will do worse than its peers and global equities over the coming 12 months. As a result, even a flat share price in a rising market would characterise this trade as a success.


— Edited by Michael McKenna

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