Source of opportunity
We believe Paris could be the next grocery market to be disrupted by online.
In our note published August 31, 2016 we highlighted the c25% price
differences between Casino’s Monoprix banners in central Paris and
competitor online offers just a few km away. Monoprix has around 40% of its
stores in Paris and the banner accounted for over 100% of Casino France’s (ex
property) EBIT in 2015. Our Casino valuation is very sensitive to Monoprix’s
EBIT margin; a 1pp fall decreases our valuation by 13%. According to IGD,
Auchan has opened an online warehouse that can deliver to Paris in 6 hours.
We believe online warehouses will lead to price disruption in Paris. Reiterate
Catalyst
In addition to Auchan launching an online only warehouse to serve Paris,
we note that Amazon Prime Now launched its home delivery option to Paris
in summer 2016 and Carrefour recently launched a one-hour home delivery
option in Paris. We think home delivery will become an increasing focus for
the Paris market and the price transparency from online will lead to
Monoprix having to invest in price, impacting margins. Thus future online
launches in Paris are the key catalyst for our stock call.
Valuation
Our 12-month price target rises to €40 (€39) as we mark to market Casino’s
listed subsidiaries in our SOTP. The implied downside is 14% vs average
downside of c.9% for our sector coverage. We value Casino using a DCF for
the French business (8.5% discount rate, 1% terminal growth). We value the
subsidiaries using their quoted market values.
Key risks
Faster return to profitability at the Geant format than currently forecast,
facilitating price investment without margin erosion at Monoprix; asset
disposals higher valuations than we assume and the absence of any launch
of a competitively priced home delivery grocery offer in Paris.