Staple Retail

Etablissementen Franz Colruyt

Despite a strong H1 performance, the valuation remains rich

Colruyt reported strong H1 FY18/19 results with a better than expected expansion in the gross margin, supported by softer competition/promotional activity in Belgium. However, we maintain our cautious view on the company due to its expensive multiples/valuations and an expected intensification of the competition in the Belgian retail sector in the forecast years. The stock recommendation remains ‘Sell’.

View

13 Dec 18
-
-

Carrefour

France: yellow vests movement and impact on retailers

Disruption in France A social media campaign in France, which originated against the proposed rise in duty on diesel, has rapidly morphed into “the worst riots in Europe’s third largest economy since 1968”. Thousands of protesters have taken to the streets for the four consecutive Saturdays, demanding an improvement living conditions and blaming President Macron for favouring the elite classes of society. Succumbing to the pressure, government had already suspended the proposed diesel duty hike, and has now announced few more appeasing actions, which include: 1) a 7% rise in the minimum wage, 2) removal of tax and social charges on overtime, 3) encouraging employers to give workers a tax-free bonus, and 4) an end to the surcharge on most pensions. However, it remains to be seen how Macron’s promises will be received by the protesters and whether more demonstrations will follow in the future. Impact on the French economy and retailers According to the French government, the total cost of promised actions is likely to be in the range of €8-10bn, besides the absence of tax benefits from the proposed tax hikes. Moreover, the protests would cost the French GDP growth 0.1% qoq in Q4 FY18. The Banque de France has also cut the country’s Q4 FY18 GDP growth estimate by half to 0.2% qoq. There is no doubt the ongoing unrest will adversely impact some sectors, e.g. the retail sector might lose over €1bn during the period (according to the French Retailers Association). The government also believes that large-scale retailers have experienced a 15-25% revenue loss, due to these protests. Note that Q4 (October – December) is the most important period of the year for retailers. In the run-up to Christmas, such high-octane protests will take a toll on the grocers’ top-line, especially in the store formats (e-com players might still benefit from store closures to some extent; we are assuming home delivery remains a possibility amidst a disruptive environment). If the current chaos spills beyond Q4 2018, the country’s economy is likely to be adversely impacted in the near term. We believe the combination of slower GDP growth, lesser tax receipts and higher social spending might shatter Macron’s budget deficit target of 2.8% in 2019. And this might force the government to halt its plan of progressively reducing corporate tax rate to 25% by 2022 (vs 33% at present). In a nutshell, the protests might inflict a double-whammy on French retailers (lower revenue growth in the coming quarters and a higher than expected tax rate in the forecast years). Two retailers from our coverage (Carrefour and Casino) are based / operate in France. Although both have witnessed a slump in their stock prices over the past few weeks, Carrefour seems to have lost slightly more value compared to its arch-rival Casino. However, this slide has also opened an opportunity to patient investors (investment horizon of more than a year) as the ongoing disruptions are non-structural in nature. We will be tweaking our estimates but reiterate our positive recommendation on both stocks.

View

12 Dec 18
-
-

Casino Guichard Perrachon

France: yellow vests movement and impact on retailers

Disruption in France A social media campaign in France, which originated against the proposed rise in duty on diesel, has rapidly morphed into “the worst riots in Europe’s third largest economy since 1968”. Thousands of protesters have taken to the streets for the four consecutive Saturdays, demanding an improvement living conditions and blaming President Macron for favouring the elite classes of society. Succumbing to the pressure, government had already suspended the proposed diesel duty hike, and has now announced few more appeasing actions, which include: 1) a 7% rise in the minimum wage, 2) removal of tax and social charges on overtime, 3) encouraging employers to give workers a tax-free bonus, and 4) an end to the surcharge on most pensions. However, it remains to be seen how Macron’s promises will be received by the protesters and whether more demonstrations will follow in the future. Impact on the French economy and retailers According to the French government, the total cost of promised actions is likely to be in the range of €8-10bn, besides the absence of tax benefits from the proposed tax hikes. Moreover, the protests would cost the French GDP growth 0.1% qoq in Q4 FY18. The Banque de France has also cut the country’s Q4 FY18 GDP growth estimate by half to 0.2% qoq. There is no doubt the ongoing unrest will adversely impact some sectors, e.g. the retail sector might lose over €1bn during the period (according to the French Retailers Association). The government also believes that large-scale retailers have experienced a 15-25% revenue loss, due to these protests. Note that Q4 (October – December) is the most important period of the year for retailers. In the run-up to Christmas, such high-octane protests will take a toll on the grocers’ top-line, especially in the store formats (e-com players might still benefit from store closures to some extent; we are assuming home delivery remains a possibility amidst a disruptive environment). If the current chaos spills beyond Q4 2018, the country’s economy is likely to be adversely impacted in the near term. We believe the combination of slower GDP growth, lesser tax receipts and higher social spending might shatter Macron’s budget deficit target of 2.8% in 2019. And this might force the government to halt its plan of progressively reducing corporate tax rate to 25% by 2022 (vs 33% at present). In a nutshell, the protests might inflict a double-whammy on French retailers (lower revenue growth in the coming quarters and a higher than expected tax rate in the forecast years). Two retailers from our coverage (Carrefour and Casino) are based / operate in France. Although both have witnessed a slump in their stock prices over the past few weeks, Carrefour seems to have lost slightly more value compared to its arch-rival Casino. However, this slide has also opened an opportunity to patient investors (investment horizon of more than a year) as the ongoing disruptions are non-structural in nature. We will be tweaking our estimates but reiterate our positive recommendation on both stocks.

View

12 Dec 18
-
-

MCLS RTHM UEX WRES MERC PGM FAR ULS BVC

Small Cap Feast

Crossword Cybersecurity PLC* (NEX:CCS)—the technology commercialisation company focusing exclusively on the cyber security sector is investigating the possibility of AIM admission. The Company is proposing to raise up to £2.25 million before the end of December, conditional on Admission. Manolete Partners—leading UK insolvency litigation financing business looking to join AIM raising £16.3m as a placing and £13.1 realised by the selling shareholder at 175p. Market cap £76.3m, expected 14 December Titon holdings—international manufacturer and supplier of ventilation systems and window and door hardware. No capital raise. Due 10 Dec. Mkt cap c.£22m. Greenfields Petroleum (TSX-V:GNF) production focused company with operated assets in Azerbaijan seeking AIM dual listing including $60m private placement. Mkt cap $12.6m CAD. Expected early December. Finncap—proposed acquisition of M&A adviser Cavendish Corporate Finance and AIM admission. Offer raising £3.75m of new money and £1.25m for selling shareholders, market cap of £47.1m. Due 5 December The Panoply parent company of a digitally native technology services group founded in 2016 with the aim of identifying and acquiring best-of-breed specialist information technology and innovation consulting businesses across Europe, is looking to join AIM. Offer £5m new capital, £400k sell-down, market cap of £30m, expected late 4 Dec 2018.

View

03 Dec 18
-
-

Carrefour

Moving in the right direction

The strong Q3 performance was led by the improved value proposition and strong market trends in France and Brazil. Key highlights were a flattish lfl performance of French hypermarkets (after a few quarters in the red), over 30% growth in food e-commerce and a continued progress in the ‘Carrefour 2022’ turnaround plan. We maintain the current recommendation on the stock.

View

30 Nov 18
-
-

Greggs

Greggs - Raising earnings expectations

An unscheduled trading upgrade confirms impressive stronger than anticipated sales growth in October and November, on the back of a robust Q3 and tough prior year comparatives. Cautiously factoring in slightly weaker Christmas trading as shoppers increasingly favour buying online, we raise our FY18e PBT by 6.4%. Our valuation increases to 1,516p.

View

28 Nov 18
-
-

J Sainsbury

Good Q2 performance; momentum difficult to sustain in H2

Good H1 performance was a factor of the hot weather conditions nudging the top-line and better margins due to the early delivery of Argos merger synergies. However, it will be tough for management to sustain the momentum in forecast years, especially due to macro-economic uncertainty and intensifying competition (in both food and non-food space). Sainsbury’s proposed merger with Asda is yet to receive any pleasant indications from the anti-trust regulators. No change in our stock recommendation.

View

21 Nov 18
-
-

Casino Guichard Perrachon

Strong Q3 results; deleveraging plan on-track

The strong Q3 performance was led by a sustained top-line growth in France and Brazil. Besides benefiting from moderate inflation in both the countries, a strong volume uptick in Brazilian food retail business was also noticeable. We believe the strong momentum will persist in the near term. Moreover, Casino’s progress on the cost-cutting and deleveraging front is also encouraging. No change to our stock recommendation.

View

20 Nov 18
-
-

WM Morrison Supermarkets

Q3 below consensus; apprehensions over retail growth slowdown

The Q3 results were in line with our estimates but below consensus (due to retail business). The biggest investor worry is softer growth in transaction volume and apprehensions about Morrison’s Christmas performance. Although we continue to believe in management’s capability, it looks as if there will be a tough fight ahead in the forthcoming holiday season, as the competitors are also well-equipped and will not leave any stone unturned to grab the biggest pie. We have tweaked our estimates but no change in stock recommendation.

View

06 Nov 18
-
-

Jeronimo Martins SGPS

Weak Q3 results – Polish lfl and negative FCF are the culprits

The Q3 performance was healthy in Portugal but weak lfl growth in Poland is concerning (c.65% of group revenue). Another issue is negative FCF in 9MFY18. Of the two explanations, while accelerated capex is acceptable the slump in working capital is concerning (management attributes it to the base effect). We have trimmed our estimates for three valuation methods (DCF, NAV and Relative valuation). However, the stock is still attractive for patient investors. No change in stock recommendation.

View