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Special Situations: Carrefour (CA FP)

trade action flash – raising target to Eur 40+ and still a BUY

CA FP: EUR 26.5; target: Eur 40+

May 9, 2014

We have been bullish on Carrefour since early 2012 on the assets values, and particularly on the restructuring potential brought about by the new CEO, Georges Plassat, that came on board in May 2012.  At the time, the market yawned and it took a number of non-core disposals for the stock to start to move up.  A couple weeks ago, the Motier family – descendants of the Galeries Lafayette department stores founders, announced they had acquired in the market a 6.1% stake in the company, thus bringing credibility to the long term turnaround of Carrefour.  Bernard Arnault remains the largest shareholder through two holding companies owning 8.6% of the capital, while Colony owns 5.7%.  Although the shares are up significantly from our initial recommendation, we remain very positive and increase our target from 35 to 40+.  The asset story is still there and is being confirmed at each disposal or deal. The turnaround at the core French operations seems to proceed satisfactorily and could bring an even higher valuation.  Thus the risk could be on the upside rather than the downside.  The stock has corrected from a recent high of near 29 to almost 26 on no real material news.  We consider the current correction in the stock as an excellent opportunity to increase/initiate exposures to this investment. 

As an aside trade, we also recommend to short the Casino French stub – going short Casino and long Pao Acucar (PCAR4 BZ) and Mercyalis (MERY FP) pro-rata of the capital structure.  Casino owns 65% of the share capital of Pao de Acucar and 50% of Mercyalis.  These two listed assets account for Eur 4.5bn, thus valuing the French supermarket business on 5.6bn (Casino’s total market cap is 10.1bn).  We calculate that this French business is being implicitly valued on a EV of 0.74 for operating margins of 3.5%.  This would make it one of the most overvalued food retailing stocks.  We note that both Pao Acucar and Mercyalis are undervalued.  The trade is roughly long 10 PCAR4, long 5 MERY FP / short 10 CO FP.

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