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Morningstar | Casino Group Reports In-Line 3Q Sales With Deleverage Plan Ahead of Schedule; Shares Fairly Valued

Casino Group reported a third-quarter sales update with group sales up 3.3% on a same-store basis (5.4% organic growth), in line with our expectations. While we maintain our no-moat rating, we intend to update our model for a higher-than-expected adverse currency effect from Latin America (Brazil), but we do not anticipate a material impact to our EUR 32 fair value estimate. The two-year EUR 1.5 billion deleveraging plan that the company announced in June is progressing faster than guided, and management reiterated full-year guidance (10% group EBIT growth at constant currency and excluding tax credits, among others).

On the sales reading first, French sales were up 1.9% on a same-store basis, with Monoprix, Casino Supermarkets, and convenience growing 1.4%, 1.5%, and 3.2% like for like, respectively, a notable underperformance relative to Carrefour's 2.6% (supermarkets) and 4.7% (convenience) respective marks for the quarter. In contrast, Geant hypermarkets posted robust same-store growth (up 2.8% and 4.5% on food sales), vastly outperforming Carrefour's hypermarkets' flat sales performance in the same period. In Brazil, GPA Food's (more than 70% of Latin American sales) same-store sales were up 7% (versus 5.1% for Carrefour's Brazilian retail operations for the same period), with Assai (48% of GPA Food sales) growing by 8.2% like for like and 25.8% on an organic basis.

On the deleveraging plan, Casino has already announced a number of transactions amounting to EUR 1,108 million to date, which is EUR 358 million higher than the guided amount back in June (50% of EUR 1,500 million). Overall, and taking into account the current situation that Casino Group has found itself in, while we view this set of transactions as value-neutral to shareholders, we think that the execution and pace of the deleveraging plan is in the right direction and will help soothe short-term investor concerns for now.

More specifically, what's most important is the composition of those transactions and impact on the group's value and leverage. From that perspective, the sale and leaseback transactions (disposal of 69 Monoprix real estate assets will generate proceeds of EUR 745 million but increase annual rents by EUR 35.6 million) are essentially a form of financing, and the yield achieved (4.8%) is similar to Casino's borrowing costs (around 4.6% in fiscal 2017) and thus value-neutral to shareholders. Likewise, in the case of the 24% stake GreenYellow disposal, the transaction is roughly value-neutral (similar P/E multiple with the group) on our estimates.

Lastly, we note that Casino may exceed its EUR 1.5 billion proceeds target, which does not include the proceeds from a pending sale of Via Varejo stake.

In the short term, the benefits for Casino are the reduction of net debt in France by EUR 1 billion in fiscal 2018 (guidance) and a moderate boost on sentiment (putting a backstop on latest stock and bond losses). In the medium to longer term, though, we think Casino Group still faces serious structural issues: Monoprix's latest quarterly growth numbers attest to an intensified competitive landscape in the Paris area, while larger peers are boosting investment in online capabilities, where Casino's presence is still anaemic. On top of that, we believe that the group's complex ownership structure and Rallye's (Casino's parent) reliance on Casino's dividends (8% dividend yield; we expect dividends to remain materially higher than earnings for the foreseeable future) will continue to erode value for long-term shareholders.