- The market is missing the continued acceleration in written orders that will show up in operating results in 2021. We are at just shy of $5/share in EBITDA for 2021.
- The private market value of this business, including the esteemed global Natuzzi brand, is in excess of $47/share. There are a number of reasons why this gap will close.
- The reasons for Natuzzi’s historical underperformance are fading.
- We are highly aligned with insiders who own over 56% of the company.
We previously highlighted the Natuzzi story here.
To summarize, Natuzzi has no research coverage and is off the radar. Natuzzi is one of the best-known quality furniture brands globally. Natuzzi is the premier Italian furniture brand with a six decade history. Natuzzi has pivoted away from private label and lower margin business to ~90% branded. What has plagued the company in years past is having excess manufacturing capacity and too many employees, most of whom have union representation. For years NTZ has been working with the government and unions to right size its labor force. Coming into 2020, NTZ remained overstaffed and quite bloated compared to competitors. But, given the large tailwinds in the furniture sector and a huge increase in backlog combined with an accelerating written order growth, NTZ’s over staffing and excess capacity issues are being fully absorbed as the company has recently stated they are operating at “near full capacity” (as supply chain issues are being resolved).
At the end of the fourth quarter, the company’s backlog was up triple digits from the year prior. NTZ recently stated that the order flow thus far in 2021 has increased significantly. Historically, ~46% of the company’s sales have come from Europe and the remainder from North America and APAC. Many European countries such as the UK and Italy have faced stricter lockdowns and the UK has had retail shops closed for nearly 90 days.
The UK stores open on Monday, April 7th. There is substantial pent-up demand and written orders are going to increase dramatically. UK furniture company DFS Furniture is projecting as much as ~50% order growth in 2021 upon reopening. DFS also noted “Prior experience in the first national lockdown showed order intake for the 13 weeks following resumption of trading of +64%.” UK sell side firm Peel Hunt wrote in a note yesterday that they anticipate the bounce back in customers may be “even more pronounced” than when restrictions were lifted previously and there remains pent-up demand in lots of categories, along with consumers that have cash to spend.
NTZ said the North American business is accelerating. Branded order flow is up 39% sequentially versus Q4 and retail volumes up 29% sequentially - this is huge acceleration. Q1 wholesale order flow was up 67% yoy and retail stores up 124%.
As the President of Natuzzi North America said, “when I look into our history for our retail group, in 2018 and 2019, our best 5 to 7 stores were averaging about $2.5 million. Today, as we sit here in Q1, if we annualize our Q1 volumes, our best stores are pacing at $4 million.”
This is a 60% increase in SSS versus 2019. In our estimates below, we conservatively project 13% consolidated revenue growth in 2021 versus 2019.
NTZ’s Italian plants are now “almost at full capacity” as supply chain issues and COVID safety measure headwinds fade.
Apparently, nobody is modelling the written order growth hitting the P&L.
With 13% growth in revenues from 2019 and 33.8% gross margins (2.4 points of expansion yoy) NTZ should do $4.88 in EBITDA per share.
NTZ will add €111M in revenues versus 2020 – a year in which gross margins were 31.4%. The gross margins on this incremental revenue are likely to be at least 41% as NTZ will leverage fixed costs. That means €45.5M in incremental gross profit contribution in 2021, or a 2.4 point increase in GMs yoy.
These assumptions are backed up by the huge backlog, written order growth acceleration, and the recent return to near full operating capacity. NTZ is also lapping China tariff expenses, and for its secondary brand - NTZ has outsourced more operations to (cheaper) Vietnam and Romania, providing further margin tailwinds.
NTZ will invest its cash flow into growing its Directly Owned Stores (DOS) in the US. NTZ North America is led by Jason Camp who recently guided to opening at least 150 stores over the next decade – with 6 or 7 opening this year.
NTZ also says they could add ~100 stores in China over the next few years.
NTZ indicated they are close to a partnership deal on further expansion into the southeast Asia region.
NTZ also said their cash position is strong and will continue to build (€46M cash vs. ~€18M in debt – primarily mortgages on properties – and ~€27M outstanding on an AR securitization facility). They are opening 2-3 additional stores next quarter in Australia where the Natuzzi brand recognition is very high.
Importantly, these growth initiatives will help mute the overstaffing and excess capacity NTZ has historically had in its manufacturing operations.
We agree that NTZ’s US opportunity is an extremely attractive growth story for the following reasons:
- A proven successful operator is leading the charge. In 4Q19, NTZ hired Restoration Hardware's former CMO Jason Camp as president of Natuzzi North Americas.
- With NTZ being vertically integrated, the economics of these stores are good. NTZ captures good margins and generates positive cash flow a couple months after opening.
- The white space (150 store potential) is large and there is room for more than just RH to win, NTZ has one of the highest quality furniture brands providing an edge over its luxury peer group.
- The US housing and home renovation sectors have secular tailwinds.
- 150 stores doing $2.7M in revenue each, equates to $405M in revenue, four wall EBITDA margins are likely to be high teens, and using a conservative 13% EBITDA margins for the US DOS segment we believe NTZ can add over $50M in EBITDA. At a discounted 5x multiple, we believe the US growth opportunity adds $250M in value. Across 11M ADRs this is an INCREMENTAL $22.73 per share in value.
Furniture Comp set
NTZ Fair Value
1x 2021 sales for existing Natuzzi business = $47.7/share
- Annual Distributions from minority interest in KUKA China JV = ~$7M at a 10x multiple = $6.36/share
- US DOS additional growth opportunity, achieving additional $50M/yr in EBITDA, at a 5x multiple = $22.73
Fair Value for NTZ = $76.79/share
Poltronesofà – Poltronesofà is an Italian furniture company that is very similar to Natuzzi. The main difference between the two is that years ago Poltronesofà opted to outsource its Italian manufacturing to various manufacturing companies in Italy, while Natuzzi opted to control the manufacturing. Poltronesofà made the wiser move and has reaped the benefits with double digit net income margins.
Natuzzi has historically suffered due to overstaffing in its manufacturing operations, as noted, this headwind is fading as these costs are being utilized.
Other than how the two companies handle Italian manufacturing, there is no structural reason NTZ cannot mirror Poltronesofà’s margins.
Pasquale has been unwilling to rip the band aid off and restructure NTZ’s manufacturing footprint. Although he made the following statement in this week’s earnings release,
With the recent sale of the Italy-based foam company to a third-party player we have taken a further step towards de-verticalization of our operations. We will continue to review our supply chain and manufacturing footprint to get a leaner structure of the Group.”
We believe Natuzzi will have a great year in 2021 and into 2022. Pasquale Natuzzi turns 82 years old next month, we believe there is a decent chance he will elect to sell the company, there are a few reasons: The NTZ business will be on track and therefor in position to achieve fair market value from a buyer, Pasquale is very old and has been breaking his back at NTZ for decades – he can finally sell the company for north of $500M, exit a winner, and spend his remaining years thoroughly enjoying life. I am quite sure Pasquale Jr. would like to have a couple hundred million in liquidity to play with as well. Pasquale is seen as a business Titan in southern Italy - he has been unwilling to take big, necessary steps to outsource manufacturing – by selling to a strategic or financial buyer he will finally get fair value for his company and not have to make the hard decisions.
We believe this is a highly coveted brand/asset that has significant potential.
Based on our due diligence, a buyer will likely have to pay €50-€60M in one-time restructuring costs. In order to rid Natuzzi of excess labor and restructure NTZ’s manufacturing footprint to an outsourced model using manufacturers around Italy. NTZ has stated they have €25M+ in non-core assets they could sell. This would help fund the operational restructuring.
We are convinced that NTZ can mirror Poltronesofà’s operating model and can reach consistent double digit net income margins under new ownership.
We believe there are buyers that would happily pay 1x sales for this premier brand and asset, which would equate to a sub 10x proforma P/E multiple, plus obtaining the ability to significantly grow DOS stores in the US and other attractive markets such as southeast Asia.
A precedent transaction related to Natuzzi would be comp Poltrona Frau. Poltrona is/was (2016) the #3 Italian furniture brand, NTZ #1. In 2014, privately held Haworth purchased 58% of Italian furniture maker Poltrona Frau for $190 million. This represented an EV/EBITDA multiple of about 9.5x and over 1.1x sales (company valuation multiples have expanded since). The company did about $35 million in EBITDA and $300 million in revenue. Poltrona Frau – “The commercial structure of the Group's companies covers the main geographical markets, reaching over 65 countries with a network of over 70 monobrand and multibrand stores (including 24 DOS) and over 1000 high-quality multibrand retailers. As at 31 December 2013, the Group had approximately 900 employees. The Group's manufacturing structure consists of two main facilities in Italy: one in the Marche region at the parent's site in Tolentino (MC) and one in the Brianza district at the historic site of Cassina in Meda (MB), plus one in Detroit (USA).”
A sale of NTZ at 1x 2021 sales ($47.7/sh) would represent a 38% discount to the fair value we calculated, but this leaves plenty of upside for buyers who could likely do even more with the premium brand. This is a 267% increase over the present stock price of NTZ.
Even if it is only a 40% chance Pasquale sell the company within the next 2-3 years, we still like that bet and ultimately think the shares get to fair value on their own as NTZ generates nearly $5/share in EBITDA this year.
This article was written by
Analyst’s Disclosure: I am/we are long NTZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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