After analyzing Moncler’s fundamentals last week (https://bsic.it/2013/11/30/piazza-affari-revival-moncler-ipo/), in this article we want to provide a more practical description of how it would be possible to profit from the hottest IPO of the year on Borsa Italiana.
We have investigated three different ways of benefitting from Moncler’s IPO:
• Underwrite the IPO or buy Moncler stocks on the first trading day
• Buy listed shareholders
• Buy luxury companies stocks or a derivative (i.e., ETF) that replicates the industry
Underwrite the IPO or buy Moncler on the first trading day
Last week, we stressed that Moncler is going to be listed at interesting multiples, especially if compared to its main peers: it is, therefore, feasible to expect a positive reaction from the market. This idea is also backed by the preliminary results of the IPO: on Monday 2, the demand for underwriting the stock was already 12 times the amount offered.
Consequently, we decided to perform a kind of “back-test” on some recent comparable IPOs, trying to find out whether these signals are really significant and can imply a positive return from this investment (of course, we are going to focus on first day performance only; long-term performance would require another type of analysis).
In particular, we are going to analyze the IPO results of Moleskine, Brunello Cucinelli, Salvatore Ferragamo and Yoox.
While Brunello Cucinelli and Salvatore Ferragamo are purely luxury companies, and so they appear to be the closest listed comparable companies, the other two have particular business models (Moleskine is a niche player who is moving also into luxury travelling accessories, whereas Yoox operates in the e-commerce arena). It is, however, reliable to assume that their IPOs can be relevant for our analysis since: 1) they are considered part of the luxury industry by the market; 2) they are growing at similar rates; 3) they are among the most recent IPOs on the market.
That said, let us come to our analysis.
In order to understand the potential reaction of Moncler, we have considered two variables in relation to the first day performance of the stocks (in excess of FTSE MIB return).
The first is the IPO price in comparison with the book-building interval, while the latter is the bid-to-cover ratio of the offer (measured as amount of stocks asked over the amount that was sold on the market).
There is a strong positive correlation in both cases.
Basically, the higher the IPO price positioning in the book-building interval, the higher the excess performance of the stock on its first trading day. The best case is Brunello Cucinelli, which was able to set a price in line with the maximum of the interval and consequently the stock rallied the first trading day.
The same concept is true for the bid-to-cover ratio: the higher the ratio, the higher the performance. Once again, Brunello Cucinelli outperformed all the other IPOs, with a bid-to-cover ratio of 15.39. In this case, we should also take into account market timing: YOOX (the first of the sample to go public) was listed in late 2009, while Moleskine (the last) traded for the first time during spring 2013. The perception of luxury companies has changed dramatically during the last four years: starting from the LVMH – Bulgari deal, the interest of investors for the industry has picked up and now fashion companies trade at multiples that were not even imaginable in the past.
On average, the first day performance of the sample has been 16.93%, with a median of 9.46%, whilst, more important, the first day excess performance has been 16.50%, with a median of 9.21%. We considered the excess performance to be more relevant for the analysis, due to the strong positive correlation that refers to the IPO first day return versus FTSE MIB return on that date.
The following graph is a good summary of what we have said so far. Market performance is on the horizontal axis, while IPO first day return is expressed on the vertical dimension. The bubble size is the bid-to-cover ratio.
Hence, history tells us that the IPO of Moncler is going to be high performing, at least during its first trading day: the high demand for stocks will likely drive the price up on December 16.
Nonetheless, besides being the best option for long investors, the choice of participating in the IPO is also the riskiest. The probability of getting the shares is very low (less than 1:12), and there is the possibility of losing other attractive opportunities offered by the market in the meantime.
So, either you feel unlucky and you don’t want to try the IPO lottery, or you do not want to bear the risk of buying the stock on the 16th (which will probably be very volatile for the down jackets maker shares), here you have some other trading ideas to benefit from Moncler IPO.
Buy listed shareholders
An interesting option to mitigate the risk and the exposure to Moncler, maintaining the chance of gaining from a high first day performance is buying listed firms that own a stake of the hottest Italian IPO of the year.
Before the decision of going public, we highlighted two companies listed on the Italian stock exchange that were holding a portion of Moncler: Mittel (ticker: MIT.MI) and Tamburi Investment Partners (ticker: TIP.MI). While the first is among the selling shareholders, the latter has decided to maintain its entire position.
Mittel is an investment company that owns a small portion of Moncler equity: it holds a 25.20% stake in Brands Partners 2, which is a vehicle that possessed 4.994% of Moncler before the decision of going public. That stake will diminish to 1.26% once the IPO will be completed.
Mittel has performed well during the last 12 months, gaining more than 40% YoY: it could benefit also from next weeks development, but the stock is quite illiquid and the small stake that you would actually get of Moncler is quite irrelevant.
The case of Tamburi Investment Partners (henceforth TIP) instead is more interesting to our analysis.
TIP is an independent Italian investment – merchant bank, focused on “excellent” small and mid-caps. On August 5, 2013, the firm announced that it purchased a 14% stake in Ruffini Partecipazioni S.r.l., the company through which Remo Ruffini owns 32% of Moncler. The total investment made by TIP, which decided to put a covenant regarding a 6-year lock-up period, amounted to €103 million: if that valuation had been applied to the 100% of equity (without implying any additional control premium), it would have led to a total equity value of approximately €2.3 billion for Moncler. Taking into account that the initial market capitalization of the luxury down jackets maker will range from a minimum of €2,187.5 million to a maximum of €2,550 million, TIP will immediately benefit from the IPO (although it will not materialize the gain).
Albeit TIP has already outperformed the market since the deal announcement, having registered +50% since the beginning of August 2013, as well as having reacted very positively to the announcement of the IPO price range, it is possible to assume that it will continue to outperform the market, following a great performance of Moncler on its first trading day.
Trade the luxury industry
Finally, another opportunity refers to the chance of “buying” the entire luxury industry: this is a lower risk choice and it can be started earlier than the first trading day of Moncler. High correlation exists between luxury stocks performances and, so, Moncler can have an impact on the industry, as well as the opposite may happen (with a strong sector performance that may drive Moncler’s price). So far, it seems that most luxury stocks have positively reacted to the IPO book-building prices that were disclosed on November 26. An investor could either decide to pick selected luxury stocks (from the biggest world players, LVMH and Kering, to some Italian small caps that can be positively affected by speculative buy strategies, like Piquadro, passing through the closest comparable groups that we considered before), or replicate the industry through some specific ETFs. Of course, this is likely to be the most conservative option: the lower the risk, the lower the return.
The three strategies that we have described can be also combined to build a hedged strategy: generally speaking, long Moncler (or, if possible, underwrite the IPO),and short the overall luxury industry at the same time, should partially protect the investor from downturn risks. However, this risk reduction strategy should be carefully reasoned, since the enthusiasm about the sector is huge and it has not been affected that much by some not-as-good-as-expected recent quarterly results published by other players.
It is clear now that, if you will not be assigned some shares at the IPO, you still have other ways to play Moncler, just make your choice!