Fourlis (FRLr.AT) Outperform

Piraeus SecuritiesFourlisPerhaps the major risk concerning Fourlis investment case relates to the loss of the license to operate IKEA stores in Greece and Cyprus. It is ourunderstanding that Fourlis’ license is valid for at least 10 years from the opening of each store. We believe that the aforementioned risk is bothremote at this stage and also small given the success of Fourlis in managing the license, as well as, IKEA franchisee/franchisor relations in othercountries. The risk is further reduced by the new shareholding agreement between Fourlis and IKEA in Bulgaria. We therefore believe that there isterminal value for Fourlis’ IKEA franchise and we choose to prudently estimate it on a 0% perpetuity growth rate. On our new estimates, IKEA isworth EUR1,062.62mn or EUR20.85 per Fourlis’ share.Electrics/electronics wholesale & IntersportWe value the wholesale business using a spot market 2008f P/E multiple of 10.0x. We value Intersport at a target 2007e PEG of 1.0. Note thatthe value of Intersport’s operations in the Balkans is no longer included under the wholesale division, since Fourlis reports them under Intersportas of the start of 2006.Based on company guidance, Intersport is targeted to achieve total sales of EUR100.00mn in the next couple of years and operate on an EBTmargin of 10%. Our current estimates call for 2008f Intersport sales of EUR69.73mn (including Bulgaria, Romania, and Cyprus) and an EBTmargin of 9.2%.Non core assetsWe value Fourlis’ real estate at cost (EUR29.55mn) – no capital gains to arise, and the remaining 10% stake in Kotsovolos at the price capturedfor the stake sold in 2Q07 (EUR22.30mn). Given that Fourlis has the option to sell the stake in September 2008 and that the price will bedetermined on 2007 performance, we believe there is upside risk on our targeted price (Kotsovolos’ performance is quite strong y-t-d). Weestimate the total capital gains to be booked in FY08 and FY09 at EUR10.71mn and EUR7.01mn respectively (as it was the case with theprevious stake sale in FY06 and FY07). Finally, we subtract from the group’s equity value EUR5.21mn to account for the parent company’s netdebt and operating expenses.Risks on our estimates and valuationOur earnings and cash flow estimates (hence the notional fair value of the group) are subject to industry/sector specific risks, financial, economic,political, management and execution risks.We highlight the following major risks for Fourlis:• Losing the IKEA license• Keeping the license on worse terms (regarding procurement of merchandise and royalties on sales)• Delaying the rollout of new IKEA stores or failing to get respective building permits at all• Further margin erosion in wholesale operations• Tax charges on previous fiscal years• Working capital overshootingPotential for further earnings upgradesSigns of continuing strength in IKEA performance (rising sales and improving margins), a transformation of the athletics retail andelectric/electronic equipment wholesale activities, as well as faster introduction of new (let alone more) IKEA stores would justify further earningsupgrades and higher valuation for the group, in our view. New business ventures and/or licensing agreements could be the major catalysts in themedium term.Please read important disclosures at the end of the report Page 8