With Casino shares trading in line with our SOTP-derived valuation
for the first time in 18 months, and with financial risk now likely
receding, our Underweight call has run its course – we move EW.
On new estimates and marked-to-market SOTP, Casino now screens as
more or less fair value. We forecast EPS of €2.89 in 2015 (consensus €3.22)
and €3.44 in 2016 (consensus €3.62) – including the €0.42 dilutive impact of
Casino's two perpetual bonds, but excluding the €0.37 dilutive impact of
Monoprix's convertible. This implies that the shares are trading on a P/E of
12.3x in 2015 and 10.3x in 2016. A potential disposal of operations in Asia
could lead to pro forma EPS dilution of €0.55-0.60 in 2016 (~17%), we
estimate, such that at the current share price of ~€35.2, Casino would trade on
a 2016 P/E of ~12.4x. In our marked-to-market SOTP, we get to €38.0 per
share, valuing the French operations on 7.7x underlying 2016 EBITDA (€768m),
in line with the European food retail average.
Why aren't we more constructive? 1) Casino shares are trading at a small
discount to their SOTP-derived value. This is fair, in our view, given the Group's
increased complexity (particularly post the GPA/Exito share transfer in 2015),
limited disclosure (e.g. on real estate capital gains), tax leakage and the need to
upstream cash flow to Casino's parent, Rallye. 2) We see earnings/FX risk for
Casino's subsidiary in Brazil. 3) The proceeds from a disposal of Casino's Asia
operations may be lower than the market anticipates, as there are reportedly
very few bidders and the only official bidder so far (the Chirathivat family)
already has a ~25% stake in Big C (which could deter other potential bidders).
4) While Casino and Rallye's liquidity profiles look fine, we think Casino's
ability to deleverage (ex. M&A) will remain limited for the forseeable future
(FCF at the HoldCo of ~€100m in 2016e), and its loan-to-value ratio will
remain decently high (close to 50% post disposal of operations in Asia).
What could we be missing on the upside? 1) M&A may well remain a
feature. We would view positively Casino transferring its remaining shares in
Grupo Pão de Açúcar (GPA) to Exito as this would simplify the Group's
structure. 2) Another positive would be a rapid and meaningful decline of
Cnova's operating losses (~18% potential EPS accretion in 2016e). 3) Casino
would benefit from a more favourable FX and macro environment in LatAm
(we calculate a ~17% potential impact on Casino's SOTP if COP and BRL revert
to their rate vs EUR on 1st January 2013).