* We initiate on Carrefour (TP €23) with an Underperform rating: We
believe the market is being too generous in pricing in continued margin
expansion in France and top-line growth in Brazil. There are integration risks
with the DIA acquisition, a reliance on financial services margin, high capex,
and overall low FCF generation. We are particularly concerned about how
hypermarkets, which represent over 70% of total space, will stay profitable.
We forecast flat sales and a -5bp margin decline for hypermarkets until 2018.
We are 2.5%, 8.5% and 10.0% below consensus on recurring EBIT for FY1,
FY2 and FY3 respectively.
* We initiate on Casino (TP €55) with an Outperform rating: We think the
bad news (margin pressure in France and high exposure to emerging
markets) is largely priced in, while the good news (organic sales growth in all
of its French banners and its relatively small footprint in hypermarkets) is not.
Recent corporate transactions are positive steps in simplifying the corporate
structure and have reduced parent company debt. We are in line with the
most recent consensus numbers for FY1, and are 25% and 15% above
consensus respectively on group share of earnings in FY2 and FY3, driven
primarily by our EBIT margin recovery expectations in France.
* Valuation: For Carrefour, we use a 50/50 weighting of our DCF model and
Credit Suisse HOLT® valuation to arrive at our target price. For Casino, we
use a 50/50 weighting of our sum-of-the-parts methodology and HOLT yo arrive at our
target price