A new, compelling story still undervalued by the market – very good entry points
* Update The group is due to release its Q1 16 sales on Friday 15 April. In France, we
expect LFL sales growth of -1.0% for hypermarkets excluding the petrol/calendar effect,
reflecting a slight deterioration vs Q4 15 (-0.7%) due to tough comps. Outside France, the
group should benefit from firm sales trends in Spain and Italy (SGe respectively 2.5% and
3.0%), while Brazil should remain very resilient (SGe +9.0%). Although the road to recovery
should be long, we expect China to see a slight improvement.
* SG view Following the publication of FY15 results, we have cut our EBIT forecasts by
c.6% on average for 2016-18e. This is mainly driven by more unfavourable forex
assumptions (in particular for Argentina and China) and more caution on Asia due to
difficulties in China (where management sees growing losses in 2016e vs 2015). That said,
we continue to see a compelling story that is still undervalued by the market, with: 1) The
start of a promising new phase. The group is already preparing to accelerate the rollout of
its multi-format strategy (store openings and tactical acquisitions). 2) An acceleration in
organic growth and plenty of potential margin leverage. 3) A likely jump in FCF. 4) An
attractive valuation with a 2017e P/E ratio of 12.7x vs 15.7x for the sector average.
* How we value the stock We have cut our TP from €38 to €35 to reflect our estimates cut.
Our TP is the average of a DCF (€36 vs €37.2, WACC of 8.3% vs 8.0%, unchanged
perpetuity growth of 1.5%, unchanged norm. EBIT margin of 4.0%) and a discounted SOP
* Events, catalysts & risks to price target, rating & recommendation Q1 16 sales on 15
April 2016. Risks to price target, rating & recommendation: Execution setbacks on Dia
France’s integration and difficulties improving profitability (SGe DIA EBIT, -€60m 2016e, €0m
2017e); fiercer price competition in France, driven by Leclerc and/or Auchan; further
deterioration in Brazil (14% of group sales in 2015 – all else equal, a 100bp erosion in the
EBIT margin in Brazil reduces total group EBIT by c.5%); failed turnaround in China (7% of
total group sales).