Casino - Waiting for Naouri

All,
CPlease find our unchanged model here. We will update the model post the release of Q4 numbers due on 25th February.

Late on Friday evening, Casino released a statement that caught the markets off guard. Casino is starting 2022 with another profit warning. We had expected the Ile de France region to outperform the overall market given the easier comps of 2020 resulting in a modest overall decline.

Sales:

- The size of the overall market decline needs to be verified by other market participants. The food retail market has declined by 3.7% in Q4 2021 with the decline in the Ile de France region, an important region for Casino, was 5.6%. We had expected Casino Sales figures to be down only 1.5% year on year, based on the Ile de France region outperforming as that region regained previously lost sales.

- In early November, as part of the bond refinancing, Casino had shared top-line sales numbers for 4 weeks of October, which was down 2.6%. We accept that the Omnicron variant would impact French consumer demand for November and December but the decline is larger than expected.

EBITDA:

- Given the operational leverage, a reduction in the top line is going to have a significant impact on EBITDA performance.

- However, again the Company guided in early November that “the Group is targeting an EBITDA growth on France retail banner scope for 2021”. When this statement was issued, Casino had the benefit of October trading to base their EBITDA estimate on. We accept that Q4 EBITDA margins are generally higher than other quarters, but we are again surprised that they have missed their guidance.

- Casino now expects an EBITDA of €1,280m versus €1,304m for FY20. H121 results were ahead of H120, showing all of this decline occurred in Q4.

Next Steps:

- The equity market has already spoken - equity is below €20/share, down nearly 15% this morning. In November, we were considering taking a long equity position in Casino shares at just below €21/share but stalled on the Omnicron variant concerns.

- We should note that the free float of Casino shares is low. Rallye owns 51% of the shares, with Vesa Equity (Daniel Kretinsky) owning above 5%. Volumes this morning are exceptionally high and will be interesting to see if Vesa increases their stake.

- Casino has no immediate triggers but the inability to turn around the “core” French retail business highlights the need to deleverage from asset sales. The extension of the Rallye Sauvegarde has removed the near-term triggers, but the reality is with an underperforming “core” business, Casino needs to accelerate its deleveraging plan.

Rallye Tender?

- Before asset sales or deleveraging, Naouri may attempt to tender for the Rallye unsecured bonds while equity and outlook are poor. This is a high-risk strategy, but to maximise his shareholder value a successful tender at distressed values is required.

- The question remains, how would Rallye finance a tender? Is it able to convince Fimalac to extend further finances?

- We note that the last tender was almost one year ago. Is it that time of the year?

Investment Considerations:

- Even though equity has now traded into a territory where we previously wished to buy, we are holding off once again due to our overall disappointment with the development of the French business which had previously shown some signs of improvement and upon which we had looked at as a reopening trade.

- Suppose Naouri does not tender for the Rallye bonds soon. Wouldn’t that mean this underperformance is even true?

Happy to discuss.

Tomás

Tomás MannionCASINO