Picard : The extreme cold alert may be over

In this report, we take a fresh look at the Picard credit following the refinancing and dividend recap in December. Beyond the fundamental analysis, in light of the future change in control of the company, we have reviewed the various possible options, their consequences on the bonds and the covenants associated with the bond documentation. - >Support factors - - Picard is the undisputed leader in frozen foods in France with 18.9% market share in 2016 and boasts an excellent reputation in the French market (among the top three most popular banners), thanks to its quality and reliability, its extensive offering and its capacity for innovation.- Picard's model generates far wider margins than other food retail groups (12% EBIT margin in the previous financial year) and has a good track record, showing strong resilience during downturns.- The ability to generate free cash flow is one of the group's main strengths (nearly 30% of adjusted EBITDA) thanks to its strong operating margin, moderate capex (< 3% of sales) and structurally negative WCR, generating cash as the store chain expands. - This ability to generate recurring free cash flow has in the past made for steady deleveraging (about 0.5 pts annually). - The refinancing in December will generate interest expense savings of around € 10m p.a. despite increased leverage following the return of cash to shareholders.Points to watch - - A model that remains predominantly focussed on France (98% of sales) with varying degrees of success abroad (that said, the conservative step-by-step international expansion strategy has enabled the group to maintain a firm grip on its earnings).- The refinancing and shareholder payout in December increased the pro forma net leverage ratio to 7.2x at 30 September 2017 vs. 5.4x previously (6.5x including the PIK loan).- Major uncertainty about changes to the ownership structure with a probable change of control in 2018, seeing that Aryzta (48.7% of the share capital) has announced its intention to sell its stake whereas three years earlier it was seen as the future buyer of 100% of Picard's capital.- Fairly flexible covenants in the bond documentation (restricted payments, and incurrence tests) which could in theory make for another payout or increased leverage in H1 2018 up to as high as 0.6x in our estimates (although this is not our preferred scenario at this juncture).