Alain Afflelou : Clearer view on regulatory outcome, Buy recommendation maintained on attractive yields

Publication date 25/04/2018 11:03 - Writing date 25/04/2018 11:02 - Shareholders - Lion Capital - 38.5% - Apax France - 13.7% - Caisse Dépôts et Placements Québec - 29.2% - Alain Afflelou and family - 13.4% - Management - 5.1% - - Secondary market spreads - - Issuer - Rating - Maturity - Coupon - ASW - Algeco - B2/B- - 02/23 - 6.500 - 547 - Afflelou - B3/B - 10/23 - E+4.125 - 500 - Afflelou - B3/B - 10/23 - 4.000 - 441 - Selecta - B3/B - 02/24 - 5.375 - 518 - Burger King - B3/B- - 05/24 - 6.000 - 357 - Source : Bloomberg - / - / - Mid-june : 3Q 2017/18 results - 4 July : Credit lunch with Oddo - / - - - - - - - - - - - - - - - The two Afflelou bonds plummeted after press reports cited tense negotiations between opticians and the government over the introduction of "zero co-payment" with a potentially massive impact of € 1bn on the sector. Even so, bonds picked up after the government ditched its most detrimental measure concerning eyeglasses renewals. - We recap in this report on the French market operating mode, sometimes very much criticised, but it actually shows no major gaps in prices with comparable markets or returns for opticians. Additionally, we are going to analyse the impact of the proposed reform on the sector and Afflelou. We calculate a € 7m impact on 3AB's EBITDA (<10% of EBITDA) which remains manageable, especially as it is likely to be offset by market share gains and further international expansion. - After an initial period of uncertainty, the main outcomes of the reform emerged and the regulatory framework seems to be stable again (pending final announcements by mid-June). We therefore maintain our Buy recommendation. - >Following regulators' pressure, the French optics market waned in recent years but major brands outperformed - Our analysis of the French optics market and reforms undertaken ("responsible" insurance contracts, healthcare networks) reveals several reassuring factors about the capacity of the sector and Afflelou to hold up well:- The French market boasts a larger size compared to peers, linked above all to volume and mix effects while prices play only a small role.- Manufacturers capture 40% of market value and are set to share some of the future price cuts.- Brands such as Afflelou took advantage in part from price pressure linked to care networks, by taking market share from independent players.Savings anticipated under the zero co-payment measure seem to be manageable for the sector - The sector should in principle cope with Emmanuel Macron's promise of "zero" co-payment for eyeglasses but announcements on substantial cost savings to finance hearing aids and dental care changes the state of play. However, we expect an impact limited to € 400m (vs. € 1bn cited in press reports), especially after the main measure on renewals extension has been ditched. In line with previous reforms, the impact is set to be spread over time in the light of political and social issues.The reform is set to have a strong impact on Afflelou but the group has a number of strengths to offset it and especially time to prepare - Afflelou's fairly narrow model makes it particularly sensitive to the proposed reform The group's sales and especially profitability are concentrated in the segment affected by the reform. The net immediate impact on EBITDA of the bond issuer 3AB could reach on a preliminary basis € 7m, i.e. just below 10% of total EBITDA. Even so, the group has several strengths (attractive price positioning, bargaining power with manufacturers, significant own-brand offer) that should enable it to hold up well and continue to take market share from independent players. The group's financial situation is also healthy with leverage of 5.0x, down 1.5x for the past three years, and positive FCF set to benefit in the future from savings generated by the recent refinancing.