TheChek News Flow

#1 - The stock continues to trade at a premium to its SOTP valuation. Our marked to market valuation of Casino' SOTP (FX and market cap of listed subsidiaries) translates to a value of €69 per share, a 5% discount to the current share price, as can be seen in Exhibit 1 , a level at which we set our price target (from €71 previously). While Casino shares had historically traded at a discount to the Group's SOTP, the shares have been trading at a premium over the past 18 months or so, on our numbers.

One of the assumptions we make to reach a €69 per share SOTP is to value the French retail operations 2015e EBITDA and EBIT at 7.3x and 14.2x, respectively (translating to a valuation of €5.8bn). This compares to 7.9x and 13.4x for the European food retail sector today, a valuation currently supported by a number of potential M&A transactions (such as a potential Ahold-Delhaize tie up, as discussed in our May 13 note, and Tesco's disposals).

Should poor top line trends persist in France, this could require us to assign lower valuation multiples for French operations, and thus potentially lower our price target (applying a 12x multiple on Casino's French EBIT would translate to a theoretical share price of €60.70, we calculate, given the Group's high financial leverage). However, should macro prospects in Emerging Markets (particularly Brazil and Thailand) improve, and should French volumes evolve more favorably, this could lead us to turn more positive on Casino shares.

#2 - Earnings momentum at key subsidiary CBD Pão de Açúcar (~52% of 2015e consolidated EBIT) remains muted. As followers of CBD Pão de Açúcar (covered by Franco Abelardo) will be aware, the company's consensus earnings forecasts for 2015e and 2016e have been consistently revised downwards over the past 12 months. While consensus was forecasting R$6.51 EPS for 2015 in May 2014, R$5.80, broadly in line with MSe of 5.82.

This downwards earnings revision appears to be partly a function of strong macro headwinds (with our Latin America Economics team currently expecting a 1.5% GDP contraction in Brazil, as indicated in their May 15 note). But company-specific issues may have also contributed, related to relative underperformance vs. a number of peers, among them Carrefour, CBD's largest competitor. As seen in Exhibit 4 , LFL sales for CBD Pão de Açúcar's food retail formats were up only +3.4% on a Trailing Twelve Month basis (despite Food CPI being up +8.6% y-o-y during the period) vs. +9.5% for Carrefour. This is one of the widest gap in over a decade. Among company-specific issues, we highlight:

a) Significant management turnover since Casino took full control of CBD Pão de Açúcar in June 2012. As shown in Exhibit 5 , a number of key executives have left since then, with only two members of the current Board of Executive Officers having been with the company for more than three years. In his 4 February report, our colleague Franco Abelardo writes: “We do not question the qualifications and experience of current management, but we do believe there can be a maturation curve until any new executives fully understand the minutiae of their areas inside CBD. In the meantime, CBD may encounter challenges executing its strategy and, more important, leave open room for competition.“

b) Format challenges: ~50% of CBD's food retail formats selling space is made up of hypermarkets (vs. ~25% only at Carrefour, as a comparison), a format that we believe may face a number of structural challenges – including unfavorable demographic trends. While this format mainly caters to large families, the fertility rate has been declining in Brazil over the past 30 years. Today, with 1.8 children per woman of child-bearing years, it is below replacement rate (i.e. 2.1) and below that of France, as a comparison (see Exhibit 6 ).

c) Has CBD Pão de Açúcar focused excessively on cutting costs at its food retail formats over the past 3-5 years - and has this translated to a number of deteriorating metrics, such as stock availability? As Exhibit 7 shows, CBD Pão de Açúcar's food retail formats have posted an increasing EBITDA margin in recent years: while EBITDA as a percentage of sales stood at 7.3% in 2010, it was 8.1% in 2014 (while at the same time during the period, LFL sales were barely above Food CPI, potentially indicating traffic loss). To put this 8.1% in context, Cencosud, Wal-Mart, Carrefour and Tesco posted EBITDA margins in calendar 2014 of respectively 6.9%, 7.5%, 5.0% and 4.7%.

#3 - Downside risk to value of Casino's stake in Big C, in our view. The value of Casino' stake in Thai retailer Big C (covered by Divya Gangahar Kothiyal) has increased significantly over the past five years: while it was worth €700mn in May 2010, it stands at €2.7bn today - see Exhibit8 . This increase in value was justified by the successful integration of Carrefour's assets in Thailand (acquisition finalized in Nov 2010), as well as the rerating of the stock (from a 12-month forward EV/EBITDA multiple of 4.8x in May 2010 to 12.6x today), as investors took some time to understand that Big C's shopping center assets (where rental income accounts for ~45% of consolidated EBIT) should be valued on higher multiples than retail assets. Also, the broader Thai consumer sector valuations have risen 71% (based on PE) during the same period driven by higher growth and profitability which increased sector attractiveness for investors.

However, we believe that there could be downside risk to the value of Casino's stake in Big C. This is due to a combination of factors:

a) The exchange rate of the Thai Bhat vs. the US dollar has been very stable over the past five years, and that has meant an appreciation vs. the Euro. However, Morgan Stanley's Thailand Strategy & Economics teams ”remain bearish on the THB in the medium term” and “expect USD/THB to trade to 34.5 by the end of 2015” - see Thailand: Most Vulnerable in ASEAN andThailand: Remains vulnerable for further details.

b) De-rating risk: the above reports highlight that “the Thai equity market risks de-rating in 2015 on account of rich valuations amidst weakening fundamentals” and that household consumption should remain lackluster, with private debt as a percentage of GDP (154% vs. 53% for Russia or 31% for Mexico) one of the highest in the world among emerging markets - see Exhibit 10

c) As is even more the case than in Brazil, Thailand's fertility rate has dropped significantly over the past two to three decades, translating to a substantial reduction in household size - see Exhibit11 . Divya cites this as one of the reasons why the convenience store channel (7 Eleven, Family Mart, etc.) has been growing substantially faster in Thailand than the hypermarket channel over the past five years.

#4 - Dividend not currently at risk, but we believe potential risks may be skewed to the downside. As indicated in Exhibit 12 , Casino's dividend payout ratio has steadily increased over the past 15 years, reaching 65% in 2014. Casino paid a dividend of €3.12 (stable vs. the previous year) on underlying EPS of €4.80 (down 10% vs. the previous year). Including the negative impact on Casino's EPS from the potential dilutive effect of the Monoprix convertible bond (ORA), Casino's EPS stood at €4.40 (implying a payout ratio of 71%).

In 2015, we expect Casino's payout ratio could increase to over 75%, excluding the dilutive impact of Monoprix' ORA and assuming a stable dividend of €3.12 (our base case), given that we expect a further decline in Casino's underlying EPS (to €4.12). As shown in Exhibit 13 , this would put Casino at the high end of the main listed European food retailers (we expect a range of 26% to 76% this year). This high payout ratio currently translates to a respectable dividend yield (4.2%, based on the €3.12 dividend paid earlier this month) and has provided some support to the shares, we believe.

Given Casino's current debt rating (BBB- with stable outlook, as per Fitch), liquidity (the Group's gross cash position amounted to €2.2bn in December 2014 and its average maturity was 6.2 years) and ability to refinance itself cheaply, we would not expect Casino to cut its dividend in the medium term - something the Group has not done over the past 15 years.

However, we believe the following two elements may indicate more downside risk potential than upside risk:

a) Our calculations indicate the “HoldCo” may be at risk of “burning cash”. Over 90% of Casino's Group net debt is located in France (see Exhibit 1 ), and, over the past three years, the dividends paid by the Casino Group (~€300m per annum on average over the past three years) to shareholders of the parent company were only slightly lower than the operating cashflow generated by Casino's domestic French operations (~€230m) and recurring dividends received by Casino from its listed subsidiaries (~€170m) combined. In 2015, the dividend paid to the parent company would exceed the combined French CF and dividends received by listed subsidiaries by ~€50m, based on our calculations. We believe that this could influence management’s view on dividend policy going forward.

b) Casino's controlling shareholder Rallye (48.4% of economic interest but 60.4% of the voting rights) is able to refinance itself at much lower rates, given the current environment, and is expected to stop burning cash in two to three years (this is already the case for Rallye's parent company, Fonciere Euris). As a result, it is possible that, in the medium term, Casino Group decides to prioritise balance sheet strength over dividend payment.