Casino - conjuror at play
All,
Please find our unchanged analysis here.
As is typical with Casino results we are left with more questions than answers. Despite some sequential improvement, Q1 22 sales are weaker YoY and with inflation running at 3% in food retail in France, those numbers are uninspiring. The great conjurer then has a number of tricks up his sleeve to ensure we all spend more time untangling them again, but in the end, the limited quarterly financial disclosure has us chasing some significant figures.
The story of Casino remains the same - an underwhelming core business with opaque non-core assets that have the potential to be sold to deleverage the business. As noted before, performance in the last three months merely suggest that the timing may have shifted again.
Trick 1:
- As we had guided, the impact of the sale of the Mercialys stake has led to an increase in EBITDA for Q1 (& LTM EBITDA). This led to an increase Q1 22 over Q1 21 of €27m. On the call management said the impact was €28m in Q1 2022 itself, but I wish to relisten to the call to clarify that.
- The impact of GreenYellow Q1 22 over Q1 21 was an increase of €13m.
- This leaves the underlying EBITDA for France (Retail + cDiscount) to be €43m lower in Q1 22 versus Q1 21.
Trick 2:
- The Company called the June 22 bond early and has subsequently repaid it earlier this week. But by calling the bond prior to quarter-end, it enabled Casino to move the segregated cash onto the balance sheet, inflating the reported cash number by €339m.
- This has no impact on their covenants - the senior debt covenant is a gross covenant, and cash balances have minuscule impact on Interest Coverage but boosting the cash balance improves credit metrics.
Trick 3?
- Both covenants were met comfortably. With Senior Secured debt of €2.1bn and no drawings on the RCF, enabling Casino to incur €600m of additional debt (or has tolerance for a €166m reduction in EBITDA).
- On the Interest Coverage test, again reported figures indicate comfortably met, with a level of 3.4x versus covenant level of 2.5x. However, we require clarification on the calculation of LTM Interest bill. Reversing the covenant calculation implies a LTM interest bill of €225m, which is lower than what we expected.
Sales momentum:
- Casino France showed modest improvement on a sequential basis, but still remain negative like for like on a same-store basis for Q1. The last four weeks are showing positive lfl of 2%, but given food inflation in France is c.3%, this is not real growth. Company guided towards an improvement in Franprix and Monoprix, both Parisian banners, which has seen trading recover sharply in recent weeks.
- The company continues to accelerate its roll-out its strategy of further store openings with nearly 200 store openings in the quarter.
- We are not able to reconcile this reduction in top line with the statement from the Company that the Kantar market share data has been increasing since the beginning of the year.
Best Trick? Improvement of cashflow.
- The best tricks are the ones you don’t understand. And we can’t figure out the underlying cashflow improvement in Q1 22 versus previous year.
- Casino, in line with retail industry in general, has a large seasonal cash outflow in Q1. Casino reduced the outflow in Q1 22 versus Q1 21 by €570m, but €250m of this was due to disposal proceeds and the Company stated the balance is from improvement in operating cashflow of €320m. This is not due to the €339m of reclassified restricted cash, as the historic debt figures already offset the segregated cash from net debt.
- In the absence of quarterly EBITDA numbers, it is difficult to comprehend why cashflow improved by €320m in Q1 22. The Company were asked and highlighted a €170m positive impact from Working Capital but we are still unsure where the balance came from.
Other issues:
- Worth repeating again, but the €4.5bn disposal plan, of which €3.3bn has already been realised, relates only to Casino France. It does not include any LATAM assets. The Company remains confident that the balance, €1.2bn will be achieved by the end of FY23.
- As at March 31st, Casino had issued €289m in commercial paper and drawn €170m unsecured credit lines at Monoprix (note both are not included in the Gross Senior Secured covenant). The commercial paper is significantly lower than the €530m drawn in Q1 21, and it is something we will continue to monitor. However, with the cash proceeds from various disposal in Q1, the Company may have taken the view additional CP debt was not required.
Positioning:
- We maintain our 1% long position in Rallye Unsecured.
- We also maintain our belief that the timeframe for Casino to deleverage has accelerated. We previously viewed the extension of the Sauvegarde at Rallye to be setting the pace. However, the underlying weakness in Casino France Retail means that Casino needs to deleverage in short to medium term in order to comply with its covenants.
- Casino have a further €1.2bn of asset disposals earmarked under the €4.5bn disposal plan and the Company remain confident that they will achieve these by end of FY23. All of these assets are part of Casino France.
- However, we also suspect the Company will attempt to extract value from its GPA stake, which is currently undervalued based on conservative EBITDA or sales multiples for its Brazilian and non-Brazilian (Exito) businesses plus the 35% stake in Cnova.
- As ever, we think Naouri will want to time any substantial fundamental improvements and asset sales with another debt reduction effort at Rallye - however, financed.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk