Jun 10 - Prada's planned flotation in Hong Kong is likely to price at the middle of its indicative range, as strong interest in the luxury brand is offset by concern about valuation and jittery markets, fund managers said.

Prada store in Milan (Photo: Corbis)

Prada's IPO, one of the biggest in history for the luxury sector, is expected to raise more than $2 billion, valuing the group at between $11.5 billion and $15.8 billion.

The Milan fashion house, known for bright-colored shoes, long boots and leather handbags, has its fingers crossed that its latest flotation effort will go off without a hitch after a handful of previous attempts, including one after the September 11, 2001 attacks and another in 2008 as the credit crisis worsened.

"According to Prada's communication, their IPO for the moment is staying on course even though the markets have been on a downward trend in the past five to six days," said Laurent Belloni, co-manager of Pictet's Premium Brands Funds with 1 billion euros ($1.5 billion) of assets under management.

"I don't think it will come at the top of the range but more in the middle ... the middle of the range looks fair but above it looks rich," he added.

Two other fund managers with long positions in the luxury sector agreed that Prada was unlikely to reach top valuations but expected it to be priced toward the middle of its HK$36.5 to HK$48 per share range.

"It is clear that the market is a bit nervous," said Scilla Huang Sun at Swiss and Global Asset Management, specialized in luxury goods. "People are not ready to pay any price."

Prada's price range puts it on a multiple of 21 to 27 times current-year earnings, a premium to the European luxury sector which is on 19 to 20 times.

The middle multiple of 24 times this year's earnings would still value Prada at around 9 billion euros and price it at a higher multiple than LVMH, which trades at 19 times this year's earnings, and Tod's, at 21 times.

Prada's presentations to investors will continue until June 15 with an announcement on pricing expected on June 17. Shares are expected to start trading on June 24.

VERY ACHIEVABLE

Fund managers said they were attracted by Prada's margin growth prospects. Its Ebitda (earnings before interest, tax, depreciation and amortization) margin stood at around 26 percent last year and is expected to reach 29.7 percent in 2012.

Investors also said they thought Prada had leeway to raise retail prices, partly to reflect the higher cost of raw materials such as leather. It had been handling markdowns better recently while keeping marketing costs under control.

"The guidance they give is very achievable and I think the stock will behave well," said Juan Mendoza of Clariden Leu's Luxury Goods Equity Fund, which manages some $220 million.

"I think the long-term prospects of Prada and Miu Miu are attractive. It is a solid story and we will start a position."

Prada owns the Miu Miu brand aimed at younger buyers, as well as shoemaker Church's.

Prada's sales growth ambitions are also eye-catching, investors said. The group sees revenue growth of around 22 percent this year and 19.3 percent in 2012.

Hermes, which enjoys some of the highest growth rates in the luxury sector together with Louis Vuitton, saw sales rise 25.5 percent in the first quarter in spite of Japan's nuclear crisis.

Prada plans to open 80 shops a year over the next three years, many in Asia, bringing the total to 560 -- an important move since margins from its directly operated stores are about 10 percentage points higher than those generated from department and multi-brand stores, analysts estimate.

One possible challenge for Prada is the need to communicate clearly and reliably to outside interests, having little experience in such matters and having at times even expressed outright resistance to doing so, some investors said.

"One possible worry with Prada is that management will have to communicate more openly," Mendoza said.

Founded in 1913, Prada is 95 percent owned by designer Miuccia Prada and her husband Patrizio Bertelli and will stay controlled by the pair. They plan to float around 20 percent.

Prada intends to use the funds to repay debt and roll out stores. Some 5 per cent of the equity is in the hands of Italian bank Intesa Sanpaolo, which will keep a small stake.

Goldman Sachs, Credit Agricole's CLSA brokerage, UniCredit and Intesa's Banca IMI unit are joint bookrunners and global coordinators of the IPO.

By Astrid Wendlandt and Antonella Ciancio
(Editing by Christian Plumb and David Holmes)