Reiterate Neutral with any synergy upside offset by longer-term margin risk
We reiterate our Neutral rating despite a positive view on the merger itself, given our view of limited
further upside to synergy expectations and a cautious view on the group EBIT margin longer term.
However, we also see little downside with underlying near-term margins stable and a strong FCF yield
of 6.6% in our 2017 forecasts. We update our model today post the completion of the merger
between Ahold and Delhaize to reflect the combined businesses and the cost synergy expectations of
€500m by 2019E.
We think the merger should create value but further upside looks limited…
Overall we have a positive view on the merger between Ahold and Delhaize with announced costsaving
synergies of €500m helping to expand the group EBIT margin from 4.0% in 2016E to 4.6% by
2019E. However, we believe the combined group may see limited upside to the current synergy
expectations given the lack of brand integration and the scale of the two businesses. Together they
employ around 370,000 people in a low-margin industry where operating standards can be difficult to
maintain.
…and the margins in the US and Holland look at risk longer term
We think the longer-term margin outlook for US grocery retailers is beginning to look more pressured.
Wal-Mart has begun large-scale price investments and the discount formats continue to be a growing
concern. The Netherlands' EBIT margin also looks under pressure with margin compression from 7% in
2007 to 4.0% in 2015 given increasing promotional activity. However, cost cutting does offer some
stabilisation and we forecast synergies helping a recovery to 5.2% by 2019E.
Valuation: We value Ahold Delhaize on 11.5x EV/EBIT 2017E, in line with sector
We value the group on a SOTP basis with a DCF as a sense check to give us further confidence in the
11.5x EV/EBIT multiple we place on the group overall. This is in line with the European Food Retail
sector on 11.6x. Our base case applies a 11.5x EV/EBIT multiple to both the US businesses and 11% to
the Netherlands which we see as slightly more at risk of margin erosion vs competitors. We apply
12.0x to Belgium and the SSE and Asia business of Delhaize with a stronger margin outlook in these
regions.