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Folli-Follie Group (FFG), Athens

|Includes: FBL Financial Group Inc. (FFG)
Folli-Follie Group (NYSE:FFG) is a retailer headquartered in Greece with three different operating divisions, each with quite dissimilar business characteristics.
About 25% of FFG revenue comes from their majority ownership of Hellenic Duty Free shops.  As the name suggests, this division sells goods in duty-free shops throughout Greece.  Follie-Follie has an exclusive contract in every airport and port of entry into Greece to sell duty free goods until 2048.  This business is a slow-growth but extremely stable cash cow.  I estimate 50% of this business is derived from non-Greek persons.  50% of FFG revenues come from a jewelry design and retail business under two brand names, Folli-Follie and Links of London.  These brands are high-margin growth engines for FFG boasting double-digit same store sales (even throughout 2009), as well as benefiting from steady new store openings funded by the duty-free cash.  Most of this business, about 60%, comes from Asia with the majority of the remainder coming from Europe ex-Greece.  The final piece of FFG, about 25%, is called Elemec Sport, which has exclusive rights to sell branded sports apparel in Greece and Romania.  This business is 75% Greek, was acquired in 2008, has modest operating income but significant real-estate assets. 
I established a position at an average cost of €13.50 which represents less than 5x earnings and less than 6x EBITDA.  I think this is less than half of fair value given the stability and growth prospects of this group retail model.  Consider that in 2008, an atrocious year for retail and travel, earnings growth of 6% and 30% earnings growth in 2009.  My research has revealed support for strong double-digit growth for this year and beyond.   
I have identified three misperceptions (in addition to the complicated structure which, as of last week, has been entirely simplified) in the market that drove this business to a large discount to fair value in 2008 and then snubbed the recovery to more reasonable multiples in 2009.  1) Folli-Follie cannot succeed if retail and travel are suffering, 2) A non-immaterial amount of debt comes due in 2010 (due to bad timing on 2008 Elemec acquisition), 3) This is a Greek retailer and Greece is going bankrupt. 
Folli-Follie market misperceptions one and two began to evaporate in the second half of 2009, only to be reversed with the ignition of misperception three. 
Here is why these fears are unfounded: 1) Folli-Follie actually grew earnings in 2008 due to the company’s focus on more affordable jewelry and global regions with the best growth.  The duty-free cash cow did not disappoint either, despite the travel slump due to their monopoly position and ability to sell their core products (tobacco, perfume, liquor and sweets) for the lowest price available[1].  2) Debt indeed was a four-letter word in 2008/09, however FFG group has very stable cash flows and even if the debt markets stop getting better (or get worse) FFG has two monetizable assets (Links of London, through a listing, and the real estate of Elemec group, valued at almost the same amount as the purchase price).  3) The Greek government is bankrupt but the citizens are not (the strong black market economy is actually a large source of the government woes), additionally, less than 40% of sales are actually to the Greek. 
I believe that the gap to fair value will close after the debt is refinanced[2] and growth trends are proven sustainable. Folli-Follie shares currently trade at €18.00 


[1] The proposed tax increases in Greece will make the price gap even wider further favoring HDF
[2] The debt refinancing was recently announced at the AGM and is subject to final approval of the merger plan
 


Disclosure: Long