According to its own projections, Safilo will be able to generate free cash flow on average for the whole of 2019. Because of the cyclical nature of its business, the company's cash flow is predicted to be negative at the start of the year, with the build-up of working capital, and to turn positive toward the middle of the year.
Between 2014 and 2017, Safilo suffered a cumulative cash burn of €23 million, excluding two €30 million installments paid in 2015 and 2016 by Kering for the early termination of the Gucci license.
Delivering on the pledge of becoming cash-generative is the next main foreseeable milestone for the new chief executive, Angelo Trocchia, who took up his role on April 1. Under its newest business plan, Safilo expects to boost cash generation thanks to improved Ebitda, lower inventory absorption and a moderate level of investments. The group sees the Ebitda margin reaching 8-10 percent by 2020, compared with an adjusted margin of 5.1 percent in the first half of 2018, thanks to sales growth and cost savings.
Trocchia's stewardship has started with flying colors. He rapidly drafted a reviewed version of the group's business plan, setting more realistic objectives, obtained surprisingly good terms in the debt restructuring package and – last but not least – managed to renew the Kate Spade license, which was widely seen as lost to Luxottica after the brand was bought by Tapestry. Luxottica holds the eyewear license for Tapestry's key brand, Coach.
Safilo's positive streak has continued with news that production levels have picked up, especially for metal models, thanks to “very good” order volumes. To respond to the surge in demand, the company's site in Longarone, which specializes in metal frames and has a staff of over 900, will be working also on Saturdays for eight weeks until Dec. 1, 2018.
Nevertheless, the group's future remains blurred by the possible loss of licenses for Dior and other brands owned by LVMH. The issue is not addressed in the current business plan as Dior expires at the end of 2020, Givenchy at the end of 2021, Fendi in 2022 and Marc Jacobs in 2024. Safilo already lost the license for LVMH's Céline brand in 2017.
On aggregate, the LVMH brands represent about one quarter of Safilo's revenues. The eyewear group has a couple of years to either secure the licenses, find valid replacements or streamline its cost base to face the potential loss in revenues.
So far, investors have given the company a thumbs-down, with the share price losing about 90 percent of its value since early 2014. Going back a decade the drop is even more abysmal. At the end of October, Safilo had a market capitalization of less than €115 million, while net assets stood at €529.8 million at the end of June.
The group also had a tax credit of €78.3 million at the end of the first half this year. It represents about 70 percent of its stock market value, which only represents slightly more than 0.1 times forecast revenues for 2018.
According to the consensus on the investment site Simply Wall St, Safilo is expected to post sales of €985 million this year, €1,016 million in 2019 and €1,019 million in 2020, in line with the group's own guidance.
Analysts anticipate the operating cash flow to be a negative €22 million this year, a positive €47 million in 2019 and a positive €68 million in 2020. Safilo is expected to incur a net loss of €21 million this year and €24 million in 2019 before posting a net profit of €13 million in 2020.
Simply Wall St gives an intrinsic value of €3.31 per share for Safilo, while the news agency Bloomberg has a consensus target price of €2.68.