IT Holding by pengxiuhui


									IT Holding
Price: €4.00                                                                         HOLD
Y/E December                    1998       1999        2000       2001E      2002E        2003E
Sales               €m             336       371        433           516        590         720
Net profit          €m               28        26          5           13         18           23
EPS                 €           0.139      0.129      0.026         0.066     0.088        0.116
EPS adjusted        €           0.137      0.102      0.030         0.066     0.088        0.116
CEPS                €           0.178      0.177      0.143         0.199     0.238        0.299
DPS                 €           0.026      0.026      0.026         0.066     0.087        0.116
P/E                 x             29.2      39.1      N.M.           60.6       45.6        34.4
P/CF                x             22.5      22.7       27.9          20.1       16.8        13.4
Yield               %               0.6       0.6        0.6          1.6        2.2          2.9
Market capitalisation:            €801m    Comit Index:          1,722 Rel perf:     1m      -4%
52-week range:                 4.60-3.58                                             3m    +16%
Major shareholders:           GTP, 70%     Reuters:            ITH.MI              12m      +5%

•     IT Holding’s investment in the development of own brands and the consolidation of
      the licensing business will weigh on the bottom line in the medium term. According
      to our multiple comparison, IT Holding is fairly valued (the valuation excludes the
      potential consolidation of the Gianfranco Ferre’ business). We maintain our HOLD
      recommendation, with a €3.8 target price.
•     We believe that the acquisition of 90% of Gianfranco Ferre’ by GTP Holding, IT
      Holding’s parent company, should benefit IT Holding by taking the group further
      up-market. Gianfranco Ferre’ is one of the most prestigious global pure luxury
      griffes, and Mr. Ferre’ is set to remain the creative director.
•     IT Holding will present its business plan outlining the future prospects of Gianfranco
      Ferre’ by June. Currently, the most likely outcome seems to be the gradual
      consolidation of the Ferre’ business, as its licensing agreements expire. In the longer
      term, we believe that IT Holding could list the division on the stock market.
•     IT Holding’s plan to decrease the relative dependence on licences is proceeding as
      planned. In 2000, we estimate that licences accounted for 65% of total turnover (vs.
      our 1999 estimate of 78%). Management has set a target of 50% of turnover from
      licences as a medium-term goal (2002/03).
•     We believe that less dependence on licences will improve operating margins in the
      longer term, once the restructuring and re-launch of the own brands business is
      completed. We estimate that licensed products will still make a dominant contribution
      to operating profit, however.
•     IT Holding’s 2000 results reflected the costs of restructuring its brands, in particular
      Malo. EPS adjusted decreased to €0.030 (vs. €0.102 in 1999). The operating margin
      was 4.9% (vs. 7.5% in 1999).
•     In 2001E, we expect a gradual improvement in the gross operating margin to 11.4%
      (10.3% in 2000), as IT Holding starts to exploit production synergies within the
      group, with 19% sales growth due to a solid performance of the own brands business.

    Marta Caprini                                                   Milan, 39 02 7751 2613                                                       10 April 2001
IT Holding trades a              We have compared IT Holding with peers in the luxury goods sector.
premium to its peers             As the table below shows, IT Holding’s multiples are above the sector
                                 average. However, we regard the shares as fairly valued given the
                                 excellent long-term potential for exploiting the brands.
Table 1: Valuation comparison
                              EV/Sales          EV/EBITDA               EV/EBIT                 P/E         PEG
Stock            Price   2000 2001E 2002E     2000 2001E 2002E      2000 2001E 2002E      2000 2001E 2002E 01-03
Bulgari      €    11.2    5.0    4.2   3.6     22.5 18.4 15.7        27.8 21.6 18.5        30.8 26.5 22.9 0.97
Gucci        $    83.6    2.8    2.5   2.3     13.8 11.1   9.6       19.4 19.2 15.5        20.5 24.4 19.8 0.61
Tod's        €    43.8    4.3    3.6   2.9     17.6 14.2 11.4        26.9 19.6 14.6        65.9 38.7 29.0 0.56
Hermès       €   141.0    4.8    4.3   3.8     19.6 16.7 14.9        22.6 19.2 16.9        35.3 30.0 26.4 -0.30
LVMH         €    57.4    3.1    2.8   2.5     14.3 12.2 10.6        17.7 15.0 13.0        31.2 25.9 21.3 1.22
Hugo Boss    €    355     2.2    1.9   1.7     11.1  9.5   8.3       12.6 10.8   9.3       24.9 21.5 18.8 0.64
IT Holding   €     4.0    2.1    1.8   1.6     21.2 16.1 13.6        44.0 29.8 24.3       N.M. 60.6 45.6 0.80
Marzotto     €    13.2    1.4    1.2   1.1      8.2  7.1   6.2       10.6  9.1   7.9       15.9 12.8 11.6 0.57
Burani       €     7.0    1.6    1.2   1.0     19.5 11.6   9.3       45.3 19.1 13.8       N.M. 33.8 23.1 0.35
Average                   3.0    2.6   2.3     16.4 13.0 11.1        25.2 18.1 14.8        32.1 30.5 24.3 0.60
Source: Banca IMI estimates, IBES consensus estimates

Valuation does not               Our valuation does not include the potential consolidation of the
reflect the potential            Gianfranco Ferre’ business. This is because management will present a
consolidation of Ferre’          business plan by June; as yet, there is no visibility on the method and
                                 timing of the consolidation of the licensing business, or the related costs
                                 for the re-launch or possible restructuring of the fashion house (see
                                 section on Gianfranco Ferre’, on page 9).
DCF: €3.84 per share             Our DCF valuation is €3.84 per share, on the following assumptions:
                                 Table 2: DCF assumptions
                                  Market capitalisation (€m)                                                 801
                                  Net debt                                                                   124
                                  Company value                                                              925
                                  Equity                                                                    87%
                                  Debt                                                                      13%
                                  Post-tax interest rate                                                   4.0%
                                  Risk-free rate                                                           5.1%
                                  Equity risk premium                                                      3.5%
                                  Beta                                                                      0.92
                                  Required return                                                          8.3%
                                  Discount rate                                                            7.8%
                                 Source: Banca IMI estimates

                                 Table 3: DCF valuation summary
                                  Value of forecast cash flow (€m)                                           269
                                  Terminal value                                                             624
                                  Total net present value                                                    893
                                  Net cash/(debt)                                                          (124)
                                  Total value                                                                769
                                  Number of shares (m)                                                       200
                                  Value per share (€)                                                       3.84
                                 Source: Banca IMI estimates

Share price data updated to 6 April 2001
All references in this document to Banca IMI refer to Banca d’Intermediazione Mobiliare IMI SpA
                       Table 4: Sensitivity
                       Rate/growth                 2.0%           2.5%            3.0%               3.5%            4.0%
                       6.8%                         4.28           4.65            5.12               5.74            6.58
                       7.3%                         3.77           4.06            4.41               4.85            5.43
                       7.8%                         3.35           3.57            3.84               4.17            4.59
                       8.3%                         3.00           3.18            3.39               3.64            3.95
                       8.8%                         2.70           2.84            3.01               3.21            3.45
                       Source: Banca IMI estimates

                       Figure 1: Share price performance
                                                           ITTIERRE HOLDING
                         5.20                       FROM 6/ 4/00 TO 6/ 4/01 DAILY









                                APR   MAY   JUN    JUL   AUG   SEP   OCT    NOV   DEC       JAN    FEB   MAR   APR
                            PRICE         HIGH 4.60 20/4/00, LOW 3.58 20/12/00, LAST 4.06
                            PRICE REL. TO MILAN COMIT GENERAL                                     Source: DATASTREAM

Uncertainty over Mr.   Luigi Giribaldi, an Italian financier based in Monaco, has gradually
Giribaldi’s stake      raised his stake in IT Holding and has now a 20% holding (vs. 10% in
                       July 2000). Mr. Giribaldi’s interest in the luxury goods sector is not
                       new, and he has often been at the centre of market speculation in the
                       sector. Given his reputation, which is that of a purely financial investor,
                       we do not believe that he has a real industrial interest in the group.
                       There is uncertainty over the impact on the share price, particularly if
                       Mr. Giribaldi should decide to take a profit.
                       Recent market rumours have also reflected concern over the potential
                       expiry of the Dolce & Gabbana licence (which we estimate represents
                       20% of total turnover). We believe that the rumours are unfounded, as
                       the licence is to expire in 2004 and negotiations for renewal will start in

                          IT Holding’s strategy is divided into two parts:
                          •   Develop its own brands. In 1999, the company acquired Malo,
                              GentryPortofino, Romeo Gigli (and Husky, which the company
                              considers as its own brand). With Exte’, IT Holding’s own creation,
                              launched in 1996, and the potential future consolidation of
                              Gianfranco Ferre’, the group has a total of six major brands which
                              have been, or are in the process of being, re-launched.
                          •   Consolidate its core business with existing licensers (i.e. Versace,
                              Dolce & Gabbana, Roberto Cavalli and Husky), while at the same
                              time signing up and developing new licences. The main focus is to
                              develop the product lines distinctly, through a parallel production
                              system but avoiding cannibalisation and overlap of product styles.
Building its own-brand    IT Holding has established a more stable position by building up a
portfolio                 portfolio of brands of its own. Indeed, we believe that to date the
                          group’s relative dependence on licensing agreements has been a
                          disadvantage, even if the long-term nature of the licensing agreements
                          (see Table 9 on page 11) and IT Holding’s role as an integrated ‘one-
                          stop shop’ provide considerable protection.
                          IT Holding’s newly acquired own brands should bring a number of
                          advantages, such as:
                          •   Reducing the group’s dependence on its licensers.
                          •   Commanding higher margins, not least because no royalty
                              payments have to be made (up to 15% of sales, on average).
                          •   Taking the group further up-market, in part because of the nature of
                              the brands acquired. Also, brand ownership is perceived by the
                              stock market as providing a more stable revenue base.
                          •   Offering plenty of development potential, both by increasing
                              geographical reach and by broadening the product range.
Aiming to reach 50% of    IT Holding’s plan to decrease the relative dependence on licences is
total revenues            proceeding as planned. In 2000, we estimate that licences accounted for
                          around 65% of total turnover (vs. our 1999 estimate of 78%).
                          Management has a target of 50% of turnover from licences as a
                          medium-term goal (2002/03).
Broadening the product    IT Holding has plans to develop each brand by expanding the presence
range, while exploiting   into other product categories, particularly in high-margin accessories
production synergies      and perfumes, but also − thanks to the recent acquisitions which have
                          brought important production know-how to the group − in cashmere
                          and knitwear, through Malo, and eyewear, through Allison.
                          •   Accessories. The group has already expanded the Malo brand into
                              accessories – highly effectively, in our view, as such accessories
                              typically command higher margins and returns on capital than
                              clothing, an argument which explains their increasing importance
                              for the other brands as well.

                           •   Knitwear and cashmere. IT Holding intends to concentrate the
                               manufacture of high-quality knitwear (across a range of brands) at
                               its Malo plants. At the same time, the Bologna plant produces for
                               Exte’, Romeo Gigli and Malo.
                           •   Eyewear. The acquisition of Allison (see page 12) has given IT
                               Holding direct manufacturing capacity and a distribution network
                               for eyewear, which can be used for all the company’s brands
                               (owned and licensed). In particular, Allison is the licensee for
                               production of Romeo Gigli and Exte’ eyewear.
                           •   Perfumes. The group is currently considering potential joint
                               ventures or partnerships for the production of perfumes to be
                               extended to Ferre’, Malo, Romeo Gigli and Husky.
                           Table 5: IT Holding’s brand positioning
                           Level                                                             Brands
                            High luxury                                                         Malo
                            Fashion luxury                                                      Exte’
                            Creative luxury                                             Romeo Gigli
                            Contemporary luxury                                       GentryPortofino
                            Technical luxury                                                  Husky
                           Source: IT Holding

Expanding the direct       While IT Holding is likely to continue to distribute a large part of its
retail distribution        goods through third-party multi-brand retailers (see the chart below),
                           we expect it to place growing emphasis on direct retail distribution.
                           Acquisitions in 1999 have taken important steps in this direction with
                           the monobrand boutiques for Malo and Gigli, but also with the six
                           monobrand retail outlets acquired in Hong Kong linked to Ferre’, Dolce
                           & Gabbana and Versus (Versace).
                           We expect IT Holding to further strengthen Malo’s direct retail
                           distribution, opening five or six monobrand shops. For the other brands,
                           the group will continue to apply the multi-brand boutique formula.
                           Figure 2: 2000 sales breakdown by retail network

                           Multi-brand boutiques

                                                                    Single-brand boutiques

                           Source: IT Holding

A website for each brand   Husky started online sales in July 2000 in Italy and, depending on its
                           success, the company will extend internet commerce to each brand.
                           Products are highly recognisable, such as jackets and helmets for
                           motorbikes, and are offered in standard sizes. Prices are in line with the
                           retail offer and no competition is seen with traditional retail, from
                           which the company derives 99% of revenues.

Rapid business                IT Holding has come a long way in a short time. Founded in the early
development                   1980s as a producer principally of jeans and related clothing, the
                              company has blossomed to become the trusted partner of a number of
                              Italy’s most celebrated design houses, creating and distributing for them
                              a full range of clothing and accessories under licence.
                              Table 6: IT Holding – main events since listing
                              Date Event
                              1996    IT Holding listed on the Milan Stock Exchange
                              1998    Romeo Gigli’s first collection (under licence initially)
                              1999    Mac Malo (cashmere) acquired for Lit 100bn (€51.6m)
                              1999    Romeo Gigli brand name purchased for Lit 60bn (€31.0m)
                              1999    Allison & Optiproject (eyewear) acquired for a total of Lit 18.3bn (€9.5m)
                              1999    Licence agreement signed with Roberto Cavalli
                              1999    Exclusive worldwide licensing rights to the Husky brand acquired
                              1999    GTP (IT Holding’s parent) purchased a 21% stake in Gianfranco Ferre’
                              2000    GTP signed a letter of intent with to develop its internet interests
                              2000    GTP (IT Holding’s parent) purchased a 90% stake in Gianfranco Ferre’
                              Source: IT Holding, Banca IMI

Group reorganisation          IT Holding has reorganised the group in terms of location, management
                              and production structure, to reflect the transition into a multi-brand
                              group. In particular, last year the group changed its name from Ittierre
                              to IT Holding, to reflect through the word Holding the group’s focus on
                              the creation and development of owned brands, and head office was
                              moved from the provincial town of Isernia (Molise) to Milan, to be
                              closer to the fashion business.
Relative importance of        IT Holding no longer breaks down its sales by licensed brand, but we
licensing business set to     estimate that Versace accounted for just over 36% of 1999’s total
decrease as own brands        turnover, while the faster-growing Ferre’ reached 14% and Dolce &
are consolidated              Gabbana just over 26% (see Figure 7). Acquisitions during 1999
                              significantly reduced the relative importance to the group of licences, as
                              shown below.
Figure 3: Breakdown of sales in 1999 and 2000
    Licences                                                        64%

                                     Own brands
                                                                                               Own brands

Source: Banca IMI estimates

                          Figure 4: 2000 breakdown of sales by product category
                                                     Skirts     7%
                                                      3%               Trousers
                                        Jackets                           6%
                                            11%                                      Jeans
                                     Shirts                                           16%


                                         Knitwear                                    Glasses
                          Source: IT Holding

Europe accounts for       In terms of geographical coverage, IT Holding, with around three
76% of turnover           quarters of its sales in Europe, including 39% from Italy, is exposed less
                          to the Far East and the US, and more to Europe, than almost all other
                          quoted luxury goods groups (for whom Europe typically accounts for
                          less than half the total).
                          The most important European countries for IT Holding at present are,
                          unsurprisingly, Italy, the UK, Germany, France, Spain and Switzerland,
                          while Japan and Hong Kong are the major contributors to sales in the
                          rest of the world.
                          Figure 5: Geographical breakdown of sales in 2000

                                     Europe                                               11%

                          Source: IT Holding

Production is developed   The six divisions are developing the product lines horizontally, for both
in parallel...            the licences and owned brands. Avoiding cannibalisation between lines
                          is the main priority, minimising potential product and style overlaps
                          between different licences. Each brand is assigned a dedicated in-house
                          team, which develops the product collections directly, in close
                          consultation with the licenser, while maintaining physical and
                          operational separation from all the other brands.
…through outsourcing      Production is then outsourced (almost all of it on the basis of orders
                          received) to some 300 independent sub-contractors. Many of them work
                          exclusively for IT Holding, which maintains direct control over certain
                          critical phases of the production process and is responsible for overall
                          quality control.

Table 7: Acquisitions in 1999
Acquisition            Date                                                          Details   Sales (€m)            Cost (€m)
Mac Malo             30 March 1999     Cashmere: Malo and GentryPortofino brands                              52                     52
Romeo Gigli           14 April 1999                 Romeo Gigli brands acquired                                -                     31
Allison                 7 May 1999                                      Eyewear                                7                      6
Optiproject             7 May 1999                                      Eyewear                                7                      4
Source: IT Holding

                                 Figure 6: IT Holding Group

                                                                 IT Holding

                                      Production          Licences                         Maisons                 Market

                                              ITR SpA                  Versus                        Malo                    Italy
                                              MGM SpA                Jeans couture                   Romeo                  France

                                              Mac MALO                 D&G                                                   UK
                                              ITC SpA
                                                                     Just Cavalli                    Gentry                 Switz
                                              Allison                  G Ferre’
                                                                        Jeans                        Husky                  USA

                                                                                                                            Far East


                                 Source: IT Holding

Gianfranco Ferre’ is a      IT Holding has already taken a big step forward, as it is now compared
pure global luxury griffe   with the pure luxury global players. Gianfranco Ferre’ is one of the few
                            pure global luxury griffes, renowned worldwide and with enormous
                            potential for expansion. Moreover, we believe that the designer himself,
                            Mr. Ferre’, will add considerable value as he will remain the creative
Acquisition cost not a      GTP Holding of Tonino Perna, IT Holding’s parent company, is the
burden for IT Holding       actual acquirer of 90% of the maison. The cost of the acquisition was
                            not officially disclosed, but widely circulated market and press rumours
                            are that it was around Lit 350bn.
                            The acquisition was the successful result of long-standing negotiations
                            by Tonino Perna to convince Gianfranco Ferre’ to sell its stake. The
                            maison was split between Franco Mattioli, a partner of the stylist, and
                            Gianfranco Ferre’ himself. In December 1999, GTP Holding bought
                            21% of the maison from Mr. Mattioli, and it took one year to be able to
                            purchase the rest.
The official business       The official business plan for Gianfranco Ferre’ will be presented to the
plan will be presented by   financial community by June 2001. At the moment, there seem to be
June                        two potential outcomes for the Italian maison:
                            •   Consolidation into IT Holding’s accounts.
                            • Listing on the stock market.
                            Currently, the most likely outcome seems to be consolidation of the
                            Ferre’ business, while considering a potential listing of the division in
                            the longer term. We believe that either plan would require a phased
                            re-launch of the Gianfranco Ferre’ brand.
Gianfranco Ferre’,          Completely dependent on licensing agreements for its production, the
a licensing business        Ferre’ business should enjoy significant synergies as licences expire and
                            are brought in-house. In 2000, Gianfranco Ferre’ revenues were around
                            Lit 98bn, while the total business, which includes licence revenues, is
                            estimated to be around Lit 400bn.
                            We expect consolidation to start in 2002, when the first licences start to
                            expire, and to be completed in 2004. The most significant licence is
                            held by Marzotto, for the production of five clothing collections,
                            expected to expire completely in 2003.
In need of re-launch, but   We believe that the restructuring of the Ferre’ business should be
not restructuring           limited, as IT Holding has the production capacity to bring production
                            in-house, especially for apparel, eyewear and even perfumes, should it
                            announce a joint venture soon. However, we believe significant
                            investments in the brand’s re-launch will be necessary in terms of
                            advertising and control of the distribution.

                                 The licensing business
‘One-stop shop’ for              The role that IT Holding undertakes for its licensers is that of a ‘one-
designers                        stop shop’, encompassing and integrating the work that would
                                 otherwise be done by numerous suppliers, from initial design through to
                                 final distribution.
                                 IT Holding has built its reputation as a strategic partner for prominent
                                 fashion houses. The group has demonstrated its ability to develop and
                                 manage second-line collections for fashion houses, such as Versace,
                                 Dolce & Gabbana, Gianfranco Ferre’, Roberto Cavalli and Husky.
                                 The table below shows the brands for which IT Holding currently holds
                                 the licence.
Table 8: IT Holding’s brands under licence
Brand                   Age                                                          Style                   Main competitors
Versus Gianni Versace         22-35                        Strong colours, innovative            Emporio Armani, cK, Oliver by
Versace Jeans Couture         18-30              Jeans sportswear, casual fashion                 Armani Jeans, Moschino Jeans
Versace Jeans Signature       30-50                          Luxury prêt à porter                                  Chanel, Dior
D&G, Dolce & Gabbana          18-32            Mediterranean colours, provocative              Emporio Armani, Miu Miu, DKNY
Gianfranco Ferre’ Jeans       22-40                           Spirited but classic                                   Polo Jeans
Gianfranco Ferre’ Sport       22-40                           Classic sportswear                     Polo Sport, Tommy Hilfiger
Just Cavalli                  18-40                New generation, colourful and                Armani Jeans, DKNY, Moschino
                                                                      flamboyant                                          Jeans
Husky                         30-60                  Classic English countrywear                                       Barbour
Source: IT Holding

Figure 7: Breakdown of sales by brand, 1999E and 2001E
                              Versace                                        D&G
                               37%                                                                           Versace
                                                                               21%                             26%

                                         Eyewear (Allison)
                                                 3%                   Ferre'
                                                                                                                    Eyewear (Allison)
                                         GentryPortofino                                                                   7%
           Ferre'                                2%                    Cavalli                                     GentryPortofino
            15%                                                          8%
                                        Malo                                                                             1%
                                         4%                                    Husky
                                       Gigli                                                                 13%
                                        3%                                             Exte'
                               Exte'                                                                  5%

Source: Banca IMI estimates

                                 The Versace, Dolce and Gabbana licences date back to the early 1980s
                                 and early 1990s, respectively, and have contributed strongly to building
                                 up the company’s reputation. The Gianfranco Ferre’ licence has just
                                 been acquired. We now look at details of the last two licence
                                 agreements signed, which have consolidated the group’s licence
Roberto Cavalli licence          The five-year world-exclusive licence agreement with the designer
                                 Roberto Cavalli (renewable for a further five years) has strengthened IT
                                 Holding’s traditional licence-based business, by bringing on board one
                                 of Italy’s brightest up-and-coming designers.

                           Dedicated to ‘new generation fashion’ for men and women, sales began
                           with the autumn-winter 2000 season. IT Holding estimates that turnover
                           during the first five years should exceed Lit 200bn (€103m, or some 4%
                           of group sales).
Husky                      Husky is actually a licence, but IT Holding treats it under all criteria as
                           an owned brand. This is because Husky has long-term strategic
                           importance within IT Holding, which intends to purchase the brand at
                           the contract’s expiry. The agreement is significantly long-term, 16
                           years, and covers the entire Husky range, from clothing to accessories
                           and perfumery.
                           Husky is the first foreign brand (UK) in IT Holding’s licence portfolio,
                           and also the first one with a classic style, although IT Holding already
                           operates directly in that sector with its owned brands, Malo and
                           GentryPortofino. IT Holding has sub-divided the brand into three:
                           Husky, Siberian Husky and Golf Husky.
Table 9: Licence expiry dates
Licence                Start Initial length   When Expiry date             Negotiations on renewal
                        date        (years) renewed  (autumn)                     (years to expiry)
Versus Gianni Versace     1989              5        1996          2002                               1
Versace Jeans Couture     1989              5        1996          2002                               1
Versace Jeans Signature   1989              5        1996          2002                               1
D&G, Dolce & Gabbana      1993              5        1997          2004                               3
Gianfranco Ferre’ Jeans   1995             10           -          2006                      Automatic
Gianfranco Ferre’ Sport   1997              8           -          2006                      Automatic
Just Cavalli              2000              5           -          2005         5-year extension clause
Husky                     2000             16           -          2016                               1
Source: IT Holding

                            Own brands
Malo                       IT Holding has an ambitious plan to develop Malo into an all-Italian
                           pure luxury brand (equivalent to the French Hermès). Malo is therefore
                           seen as the jewel in the crown and is the group’s main priority.
                           With Malo, IT Holding has achieved in a short time the successful
                           repositioning and expansion of the brand. Indeed, when it was acquired
                           in 1999, Malo was not a well-known brand, despite its market-leading
                           position and products’ premium positioning. We believe that the
                           group’s development plan is proceeding successfully to date:
                           •   IT Holding has strengthened Malo’s market visibility through
                               increasing advertising spending, which was previously practically
                           • Malo has been extended from its knitwear niche to other new
                               products, such as clothing, leather goods, shoes, accessories,
                               houseware and childrenswear.
                           • Retail distribution is expanding with the opening of five or six
                               monobrand shops per year, similar to the flagship store in Milan.
                           In 1999, cashmere accounted for the majority of turnover, with knitwear
                           making up most of the rest. In 2000, we expect this breakdown to
                           change significantly. Malo (together with GentryPortofino) came into
                           the group with the March 1999 acquisition of Manifatture Associate
                           Cashmere (Mac), a company renowned for the high quality of its
                           cashmere knitwear (in which it claims world leadership).

                                  The acquisition also included Mac’s three integrated plants (in central-
                                  northern Italy: Florence and Piacenza), with 500 employees and
                                  technological and production know-how and capacity (easily
                                  expandable), which is now being put to work for IT Holding’s other
                                  luxury brands.
Table 10: Malo monobrand stores
Italy                       Europe                                               America
Bologna (Galleria Cavour)               Munich (Maximilianstrasse)               Aspen (East Durant Street)
Capri (Via Vittorio Emanuele)           Paris (Avenue Montaigne)                 Bal Harbour (Collins Avenue)
Cortina (Corso Italia)                  St. Moritz (Platza del Mulin)            Chicago (N. Michigan Avenue)
Forte dei Marmi (Via Carducci)          Sylt (Hauptstrasse)                      New York (Wooster Street)
Milano (Via della Spiga)                Lugano (Via Nassa)                       New York (Madison Avenue)
Porto Cervo (Piazzetta del Cervo)                                                Palm Beach (Worth Avenue)
Portofino (Calata Marconi)
Porto Rotondo (Via del Molo)
Venezia (Calle delle Ostreghe)
Source: IT Holding. The following stores are franchised: Capri, Porto Cervo, Porto Rotondo, Venice, St. Moritz, Lugano.

GentryPortofino                   Relative to Malo, GentryPortofino is small, with around Lit 20bn
                                  (€10m) of annual sales.
                                  IT Holding’s main priorities for GentryPortofino include extending the
                                  distribution network through multi-brand retailers and expanding the
                                  product range away from its knitwear roots to embrace other kinds of
                                  clothing, although remaining in tune with the brand’s young, sporty and
                                  informal image.
Romeo Gigli                       IT Holding’s collaboration with Romeo Gigli started in 1997 with a
                                  licensing agreement with the designer, and culminated in the acquisition
                                  of the Romeo Gigli brand name in April 1999. An exclusive contract
                                  with the designer has ensured his collaboration for the next twenty years
                                  in designing the collections.
                                  IT Holding plans to resolve Romeo Gigli’s licensing agreements and
                                  verticalise production, by bringing the production in-house. For the
                                  women’s collection, it is utilising its production facilities at Bologna
                                  (which also produce for Exte’ and the couture collection for Romeo
                                  We expect IT Holding to take the following steps:
                                  •   Increase IT Holding’s exposure to the important Japanese market,
                                      where the Romeo Gigli brand name is especially well regarded. At
                                      present, however, the licence for that country remains in the hands
                                      of Takashimaya.
                                  • Augment Gigli’s presence in other product categories. The group is
                                      already producing eyewear under the Romeo Gigli brand name, and
                                      will expand it to perfumes and accessories as well.
Allison                           With the acquisition of Allison, IT Holding has acquired an in-house
                                  base to expand its production and sales of eyewear, in particular for its
                                  own brands. For example, Allison has developed the Gigli and Exte’
                                  range of eyewear, and expects to do the same for Malo.
                                  Table 11 shows the main features of the two companies, whose
                                  activities are complementary. Allison’s production capacity and skills
                                  mesh well with Optiproject’s strengths in design, distribution and

Table 11: Allison and Optiproject at a glance
Allison                                     Optiproject
Produces over a million frames per annum                   Strong distributor of eyewear
Allison house brand, third-party production for Nike       Two groups of agents serving over 3,000 outlets in Italy
No limits and Body Glove brands under licence              Exclusive agents and distributors for major foreign markets
Will develop eyewear for Romeo Gigli, Exte’ and Malo       Works mostly with own brands (e.g. extra-light Try)
Two integrated full-service production plants (ISO 9001)   Uses third parties for manufacturing
Founded 40 years ago                                       Founded three years ago by experienced management team
150 employees                                              30 employees
Based near Mantua (Volta Mantovana)                        Based near Padua
1998 turnover of Lit 13.3bn                                1998 turnover of Lit 13bn
Source: IT Holding

Exte’                             Exte’ was launched directly by IT Holding in 1996, and by 1999 it had
                                  already reached sales of some €38m, or 10% of the consolidated group
                                  total. Characterised by avant-garde design, combined with the use of
                                  innovative materials, Exte’ has successfully carved itself a distinctive
                                  market niche, or really three niches, as the sub-brands are presented
                                  separately as Exte’, J’s Exte’ and Acht Exte’.
                                  Fundamental to the success of Exte’ success has been the intuition and
                                  skills of IT Holding’s in-house designers, in particular Antonio Berardi,
                                  who is the chief designer in overall control of the brand, and charged
                                  with giving the label greater authority and visibility. Exte’ has
                                  consistently refused offers to license its name to third parties, preferring
                                  to maintain total control over the brand.
                                  Strengthening the product range and the distribution network with the
                                  re-styling of the existing monobrand stores is the main area for strategic
                                  development of this brand. Exte’ has already been extended to high-
                                  margin accessories, such as eyewear, now produced in-house by
                                  Allison. We believe that the brand could be extended further to
                                  encompass perfumes and watches. In terms of geographic expansion,
                                  Exte’, which is currently present only in Europe, is expected to enter the
                                  US market soon.
                                  Table 12: Exte’ monobrand stores
                                  Milan                                                                 Via della Spiga
                                  Capri                                                                  Via Camerelle
                                  Tokyo                                                                            N.A.
                                  Source: IT Holding. Note: the Rome store is franchised.

Table 13: IT Holding’s principal own brands
Brand                 Age                                               Style                      Main competitors
Exte’                       22-35          High-end; asymmetrical designs                Jenny, Byblos, Calvin Klein
J’s Exte’                   22-35              Creative, urban, innovative          Armani Jeans, Calvin Klein Jeans
Acht Exte’                  22-35         Innovative use of unusual fabrics             Polo Sport, Tommy Hilfiger
Romeo Gigli                 30-55                     Luxury prêt à porter          Gucci, Ferragamo, Prada, Armani
Gigli                       20-35                      Young prêt à porter            Armani Jeans, Moschino Jeans
Malo                        35-70                        Luxury cashmere                                 Ballantyne
GentryPortofino             20-40                  Natural precious fabrics                    Numerous and various
Source: Banca IMI

                         2000 net profit decreased to €5m (vs. €26m in 1999), impacted by a
                         higher than expected tax rate of 35% (vs. 20% in 1999).
4Q impacted by           Operating margins decreased to 4.9% (vs. 7.5% in 1999), affected by
restructuring costs
                             •    Higher depreciation and amortisation costs (€24m, vs. €16m in
                             •    A seasonal factor, due to 2Q and 4Q having lower revenues in
                                  combination with higher costs related to the restructuring of the
                                  group. IT Holding was working to integrate and reposition the
                                  newly acquired brands, in particular expanding Malo.
                         Table 14: 2000 quarterly results
                         (€m)                        1Q            1Q      1H       3Q     4Q     2000
                         Turnover                          115      93     208      137      88     433
                         Operating costs                 (102)    (82)   (184)    (121)    (83)   (388)
                         Gross operating profit             13      11      24       16       5       45
                         Amortisation & depreciation        (6)    (4)    (11)       (6)    (7)    (24)
                         Operating profit                  6.5       7      13       10     (2)       21
                         Net interest & other             N.A.     (3)      (3)      (6)    (4)    (13)
                         Pre-tax profit                   N.A.      10      10         4    (7)        8
                         Tax                              N.A.    N.A.    N.A.     N.A.     (3)      (3)
                         Minorities                       N.A.    N.A.    N.A.     N.A.     (0)      (0)
                         Net profit                       N.A.    N.A.    N.A.     N.A.     (9)        5
                         Turnover growth                      -      -        -        -      -     +17
                         Operating profit growth              -      -        -        -      -     -24
                         Net profit growth                    -      -        -        -      -     -80
                         Gross margin (%)                 11.0    11.9    11.4     11.8     5.7    10.3
                         Operating margin (%)               5.7    7.2      6.3      7.3   -2.4      4.9
                         Net margin (%)                       -      -        -        -      -      1.2
                         Source: IT Holding, Banca IMI

Sales up 17%             Consolidated sales increased by 17%. We estimate that there was a flat
                         performance from the licence business and a strong increase from own
                         brands, boosted by the full consolidation of Malo and Allison.
Net financial position   Group net debt reached €125m (vs. €80m in 1999), representing a
                         debt/equity ratio of 90%, compared to 56% in 1999. The higher net debt
                         position was the result of higher investments, in line with company’s
                         expansion strategy.
Dividend                 The group announced a dividend of €0.026 per share, the same in 1999.

                            The 2000 results came in below our expectations, indicating that despite
                            a significant sales growth (+17%), the group may need to wait a little
                            longer for synergies to come through. We expect an adjusted net profit
                            this year of €13m (vs. €6m in 2000).
Revenues driven by own      We expect revenues to rise by 19% in 2001, driven by the own brands
brands                      and in particular by double-digit growth for Malo, Allison and Romeo
                            Gigli. In licences, we expect Roberto Cavalli to contribute strongly,
                            with full-year consolidation and a solid performance as the brand
                            benefits from its ongoing sales momentum. Like-for-like, we expect
                            licences to grow by 8% and own brands by 20%.
Forecasts do not include    The potential consolidation of Ferre’ is not included in our forecasts, as
Gianfranco Ferre’           we are waiting for the official business plan, which we believe will also
                            be significant in terms of IT Holding’s future priorities in brand
Gradual improvement in      Gross operating margins are forecast to improve gradually, thanks to
margins                     better leverage of synergies, which we believe would be further
                            enhanced by the potential announcement of a joint venture for
                            expansion in the perfumes product category. In 2001, we expect gross
                            operating margins to improve to 11.4% (vs. 10.3 % in 2000).
Higher tax rate             The tax rate in 2001 is forecast to be over 30% (vs. 20% in 1999). This
                            reflects the unfavourable mix of higher labour costs and lower financial
                            income, which already impacted the 2000 results.
Capex to support the        We expect €25m of investments to support the expansion strategy,
expansion strategy          including Malo shop openings and potential brand restructuring.
Working capital to sales    We forecast that working capital/sales will rise to 11.2x (10.7x in
should increase             1999), due to increasing involvement in direct retail distribution.
Stable net debt             Following these investments, we expect net debt this year to stabilise at
                            €120m, approximately the same as last year.
                            Figure 8: IT Holding’s margin trend
                                            1998         1999        2000        2001E     2002E

                                             Gross operating         Operating       Net
                                             m argin                 margin          m argin
                           Source: IT Holding, Banca IMI estimates

Table 15: Profit & loss account
(€m)                                      1998     1999     2000     2001E     2002E     2003E
Turnover                                    336      371      433       516       590       720
Operating costs                           (289)    (327)    (388)     (457)     (520)     (634)
Of which labour costs                      (24)     (44)     (58)      (70)      (80)      (97)
Gross operating profit                        48    43.2       45         59       70        86
Depreciation & amortisation                  (9)    (16)     (24)      (28)      (32)      (39)
Operating profit                              39       28       21        31        38       47
Net interest                                 (4)      (6)    (11)      (12)      (12)      (12)
Foreign exchange                               2        5      (2)         0         0         0
Associates                                     2     0.6         0         0         0         0
Extraordinary items                            1        7      (1)         0         0         0
Pre-tax profit                                40       33        8        19        26       35
Tax                                        (12)       (7)      (3)       (6)       (8)     (12)
Minorities                                   (0)      (1)      (0)       (0)       (0)       (0)
Net profit                                    28       26        5        13       18        23
Number of shares (m)                        200      200      200       200       200       200
EPS (€)                                   0.139    0.129    0.026     0.066     0.088     0.116
Adjustments                                  (0)      (5)        1         0         0         0
Adjusted net profit                           27       20        6        13        18       23
EPS adjusted                              0.137    0.102    0.030     0.066     0.088     0.116
Cash earnings                                36        35      29         40       48        60
CEPS                                      0.178    0.177    0.143     0.199     0.238     0.299
Dividend                                  0.026    0.026    0.026     0.066     0.087     0.116
Turnover growth (%)                            7       10       17        19        14       22
Gross operating profit growth (%)             13       -9        4        32        18       23
Operating profit growth (%)                   21     -28      -24         47        23       24
Pre-tax profit growth (%)                    27      -15      -76       137        37        35
Net profit growth (%)                         22       -7     -80       154        33        33
Adjusted net profit growth (%)                29     -25      -70       117         33       33
Earnings per share growth (%)                 23     -25      -70       117         33       33
Cash earnings per share growth (%)            15       -1     -19         38        20       26
Dividend growth (%)                            0        0        0      154        33        33
Gross operating margin (%)                 14.1     11.7     10.3      11.4      11.8      11.9
Operating margin (%)                       11.5      7.5      4.9        6.0      6.4       6.5
Pre-tax margin (%)                         11.7      9.0      1.9       3.7       4.4       4.9
Net margin (%)                               8.2      7.0      1.2       2.6      3.0       3.2
Adjusted net margin (%)                      8.1      5.5      1.4       2.6      3.0       3.2
Tax rate (%)                               29.3     20.3     34.6      30.0      32.0      33.0
Return on capital employed (%)             26.9     13.7       8.1     11.0      13.3      16.7
Return on equity (%)                       26.2     16.0      4.4        9.3     11.9      15.2
Source: IT Holding, Banca IMI estimates

Table 16: Cash flow
(€m)                                      1998   1999   2000    2001E    2002E    2003E
Net profit                                  28     26       5       13       18       23
Non-cash items                              13     21      27       27       30       36
Minorities                                   0      1       0        0        0        0
Funds from operations                       41     48      32       40       48       60
Working capital                           (28)     10     (1)     (10)     (14)     (23)
Tax                                          0      4       0        0        0        0
Other items                               (13)     29       4        5        6       11
Dividends paid                             (5)    (5)     (5)      (5)     (13)     (17)
Free cash flow                             (6)     85      29       29       27       31
Capital expenditure                        (8)   (27)     (7)     (25)     (18)     (18)
Investments                                  0    (1)     (8)        0        0        0
Intangibles                                (5)   (80)    (25)        0        0        0
Surplus after capex                       (19)   (22)    (11)        4        9       13
Sale of assets                               4    (0)       0        0        0        0
Share issues                               (1)      1       0        0        0        0
Consolidation changes                      (0)   (26)     (6)        0        0        0
Other                                      (2)      9    (28)        0        0        0
Net funds inflow                          (19)   (38)    (45)        4        9       13
Net cash/(debt)                           (41)   (79)   (124)    (120)    (111)     (99)
Net debt/equity (%)                         36     56      90       82       74       63
Source: IT Holding, Banca IMI estimates

Table 17: Balance sheet
(€m)                                      1998   1999   2000    2001E    2002E    2003E
Fixed assets                                71    191    207      207      196      180
- Financial                                  3      7       9      10       12       14
- Tangible                                  26     48     49       66       76       84
- Intangible                                41    136    149      130      109       82
Current assets                             248    237    294      367      460      595
- Stocks                                    47     64     98      119      149      197
- Trade debtors                             89     78      73      90      112      148
- Other debtors                             76     68     87       94       98      105
- Cash and deposits                         36     27     36       65      101      145
Total assets                               320    428    501      574      656      775
Shareholders' funds                        116    141    138      146      151      157
- Capital and reserves                     116    139    138      146      150      156
- Minorities                                 0      2     0.4       0        0        0
Long-term liabilities                        9     18     18       20       22       24
- Severance fund                             4      9      10      11       11       11
- Other liabilities                          4      8       8       9       11       13
Total debt                                  78    106    160      184      212      244
- Long-term debt                            34     16      58      66       76       88
- Short-term debt                           43     90    103      118      136      156
Current liabilities                        118    164    184      223      271      350
- Trade creditors                           86    103    125      152      190      251
- Other creditors                           32     61      60      71       81       99
Total liabilities                          320    428    501      574      656      775
Source: IT Holding, Banca IMI estimates



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Worldwide, these activities are conducted through the following companies:

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D’INTERMEDIAZIONE                 20121 Milan                                                               1930 Luxembourg
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                                  Tel: (39 02) 7751 3999                                                    Tel: (352) 4045751
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