Ferrari shares expected to burn rubber on Wednesday IPO

Although other IPOs had faltered recently and many investors questioned the timing of the share issue as China appears to be hitting the skids, Ferarri's spin-off by owner Fiat Chrysler Automobiles (FCA) was oversubscribed roughly tenfold.

FCA was hiving off a 10% stake in Ferrari, offering 17.18m existing ordinary shares priced with a $48-$52 range per share in addition to an over-allotment option, or greenshoe, to the book-runners of another 1.7m shares. No new shares were to be issued in the IPO.

There had been some criticism of what was seen as a pricey offer for a company that might find it a burden to match its finances with the iconic and much-loved brand.

With an average price of $50 per share, the IPO was seen generating $860m and value the Italian stallion company at $9.8bn.

But interest in the IPO accelerated after it was first announced last year and looked odds-on to take the initial price above the $52 upper end of the estimated price range.

"Retail traders love brands and admittedly Ferrari is a glamorous and exclusive name to have in an investment portfolio," said Ipek Ozkardeskaya, analyst at London Capital Group.

"After all, Ferrari is a luxury brand and we wouldn’t be surprised to see investors ready to pay the high price to acquire its exclusive shares. Investors should tighten their belts before the potential race in Ferrari shares, which could easily take the stock price above $52 upper estimate."

Ozkardeskaya was one of many who saw the move as strategically shrewd for Fiat Chrysler, enabling the Italian-American company to turn the glamour and the exclusivity of Ferrari’s name into cash by selling a stake in the luxury carmaker on the New York Stock Exchange to drum up funds for its multi-billion-dollar growth plans for Jeep, Alfa Romeo and Maserati.

For Ferrari, the journey may be more onerous. The 'Prancing Horse' brand value was the result of scarce annual production of around 7,300 cars and long delivery times. But in its prospectus, Ferrari announced plans to expand production in the coming few years as well as as taking on €2.8bn in debt from Fiat and plans to issue an anticipated €2.128bn in debt to third parties.

"You do have to wonder about their timing – just as China really begins to hit the skids," said analyst Chris Beauchamp at IG.

"It might want to expand production to 9,000 units by 2019, but with China under pressure that looks a touch difficult.

"In a market of luxury products, Ferrari shares would themselves look rather expensive, at around 36 times earnings, which could easily prompt potential investors to choose something a little more mass-market, but still with the right cachet."

Assuming $2.8bn sales and $712m EBITDA for the current year, based on extrapolating first-half performance, Ferrari's total enterprise value is $8.66bn and its expected EV/EBITDA ratio of 12.2 times. This, pointed out Peter Garnry, head of equity strategy at Saxo Bank, was significantly higher than the global car industry's 5.9-times multiple.

On an earnings multiple, based on a $50 share price, its valuation of 36 times price-to-earnings dwarfs BMW at just under 10 times and Daimler at just over 11 times.

Comparing Ferrari to other luxury brands rather than carmakers put it only slightly ahead of their media EV/EBITDA of 11.2 times, which seems more realistic.

"But is Ferrari's valuation attractive for long-term investors?" Garnry wondered. "Insane mis-pricing can occur for extended periods and it could well be the case with Ferrari shares as the tight supply of publicly available shares could push up demand.

"But we seriously doubt that Ferrari can obtain growth rates in line with the general growth rate in the luxury sector as higher growth means quicker delivery times which deflates the value proposition for the ultra rich. So high margins and exclusivity cannot go hand-in-hand with high growth to satisfy the valuation."

Jasper Lawler of CMC Markets was more optimistic, believing the rising inequality gap across both developed and emerging worlds would keep Ferrari in top gear for some time yet.

"There’s a bit of a worry for European carmakers at the moment over the impact of China’s economic slowdown on demand. But Ferrari is a different beast from ordinary carmakers. Inequality is at record levels globally, so while the ‘Have-nots’ struggle along with car loans, the ‘Haves’ will be buying Ferraris."