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8/10/2019 2014 Rallye Casino
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10th annual new york
value investing congress
September 8, 2014 New York, NY
An Owner-operator to Rally Around
Marcelo P. Lima, Heller House
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An owner-operator to rally around
NY Value Investing Congress September 8, 2014Marcelo P. Lima marcelo@hellerhs.com +1 (305) 520-9855
mailto:marcelo@hellerhs.commailto:marcelo@hellerhs.com8/10/2019 2014 Rallye Casino
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Legal Disclaimer
All information provided hereinis forinformational purposes only and should notbe deemed as a recommendation to bmentioned.
This presentation contains information and analyses relating to some of the Heller House funds positions during 201currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed inany reason. Heller House hereby disclaims any duty to provide any updates or changes to the information contained helimitation, themanner or type of any HellerHouseinvestment.
Past performance is not necessarily indicative of future results. All investments involve risk including the loss of princassumed that any of the securities transactions or holdings discussed herein were or will prove to be profitable, orrecommendations or decisions we make in the future will be profitable or will equal the investment performance of theherein. Specific companies or securities shown in this presentation are meant to demonstrate Heller Houses investmenof industries andinstruments in which we investand arenot selected based on past performance.
The analyses and conclusions of Heller House contained in this presentation are based on publicly available informrecognizes that there may be confidential or otherwise non-public information in the possession of the companpresentationthat could lead these companies to disagree with Heller Houses conclusions.
The analyses provided include certain statements, assumptions, estimates and projections prepared with respect to, amhistorical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projeassumptions by Heller House concerning anticipated results that are inherently subject to significant economic, councertainties and contingencies and have been included solely for illustrative purposes. No representations, express orto theaccuracy or completenessof such statements, assumptions,estimates or projections or with respect to anyotherm
This document is confidential and may not be distributed without the express written consent of Heller House and dooffer to sell or thesolicitation of an offer to purchase anysecurity or investment product.
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Our presentation today:Well be talking about a retailer
1 main security (and lots of related ones) Over $2 billion market cap (controlling assets worth over $10 bi
Growing fast, long runway, excellent management
Hard catalysts for value realization
Bargain price: would be worth 42% more today if liquidated
Potential upside of 200-300% over the next few years as story p
its a bit complicated, so please bear with me
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Lets talk about retail
Physical retail is dead! (Right?) Just read the headlines: WSJ, Shoppers Are
Fleeing Physical Stores (Aug 5) and TheGreat Mall Exodus (Aug 6)
Marc Andreessen: Software eats retail.*
*Source: http://pando.com/2013/01/30/andreessen-predicts-the-death-oftraditional-retail-yes-absolute-death/
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And yet
In Kowowecitret
Photo of the Myeongdong shopping district, taken May 17, 2014
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Another example
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Selfridges
Opened in 1909 Just four locations
Thriving: generated488m in sales and a15% pre-tax margin in
2012*
*Source: FT, Selfridges doubles dividend to owner despite fall in profits
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The reality is
Ecommerce sales are only 6% of all retail sales Half of ecommerce sales are actually going to retailers with phy
stores*
Anecdotal: physical shopping is still a pleasant, entertaining, fuactivity, which lets you discover things you didnt expect or kno
about Conclusion: retailers that adapt and successfully integrate phys
and online will thrive
*Source: http://blogs.hbr.org/2014/08/e-commerce-is-not-eating-retail/
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Back to the future
Online-only retailers are starting to seek outphysical stores
Shoppers suddenly paid more attention toun-flashy pieces often overlookedonline. More women bought multiplenecklaces that could be worn together. Andperhaps most importantly, co-founderDaniella Yacobovsky said shoppers typicallypurchased three times as much merchandiseas an online BaubleBar customer. Havingthe opportunity to touch and feel ourproduct is a big value, Yacobovsky said.*
*Source: http://www.washingtonpost.com/news/business/wp/2014/08/19/online-shopthe-future-so-why-do-so-many-web-retailers-want-to-be-in-stores/
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Now, lets talk about food retail
Food retail is changing, operators must embrace ecommerce Analytics and competitive prices more important than ever
Focus and strategy are critical; low margins means mistakes areamplified
Despite all this, food retail is the least affected by technologicachange, making it much more stable than other types of retail
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Grocery least affected by ecommerce
Source: Tescos Winning in the new era of retail presentation
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but very affected by mismanagement
Tesco is a good case study of a food retailer that lost focus and to react to the changing landscape
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Tescos missteps
Expansion into US (at a cost of over 1 billion) and China broke tsuccessful formula of making money in the UK and reinvesting there to benefit UK customers*
Didnt react quickly enough to lower its fat margins at home,allowing competitors to become stronger - German discountersand Lidl thrived
Failed to appreciate trend towards smaller top-up baskets, morfrequent trips to convenience formats
Very high exposure to large stores (66% by retail space excludinstores smaller than 10,000 sf) results in lower sales densities aninefficient use of capital**
*Source: FT, The inside story of how Clarkes tenure at Tesco came to an **Tescos Winning in the new era of retail presentation
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Tescos missteps - continued
Spent money on Blinkbox, amusic-streaming service,Mobcast, a digital book store,the restaurant chain Giraffe,and launched the Hudl tablet
And of course it has four
corporate jets*
The result:
*Source: FT, Tesco flies into trouble over its corporate jetsImage: FT, Tesco chief Lewis faces heavy to-do list to turn round retailer
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A retailer that gets it
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Our idea today:Groupe Casino, a global retailer
Ke
TicCO(E
Re
9
Ma1
Di
3.4
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What is Casino?
Thats a good question does anybody k
Sell side: We view Casino as a Frenchgroup mainly.
J.P. Morgan Cazenove Europe Equity Research, October 10, 2013
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Casinos sales
Heres what the sell side sees:
True, Casinos sales on aneconomic, look-through basisare predominantly French
Total 2013 sales: 30.12 billion
Given IFRS, Casino fully consolidates the sales of partially owned subsidiaries. This is an ecview of 2013 sales in euro, excluding Mercialys. Source: Company filings, Heller House esti
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Casinos look-through earningsHeres what matters:
On a look-through basis, 65% ofCasinos profits come fromabroad.
And theyre growing muchfaster.
For 2013, in euro. France includes ecommerce and Casinos share of Mercialys. Includes TGPA. Deducts parent company debt service. Source: Company filings, Heller House estim
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France Brazil Colombia
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Market value:Is it really a French group?
10.7 billion outside of France.Snapshot at 8/31/2014, portion owned by Casino only, including TRS.
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Casinos sales
Being paid to own France
Given IFRS, Casino fully consolidates the sales of partially owned subsidiaries. This economic view of 2013 sales in euro. Source: Company filings, Heller House estimate
With a market cabillion and holdin11.42 billion (1which are in Brazand Thailand) thevalue of Casinosbusiness is negatbillion
Being paid to ow
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It wasnt always this way. Back in 20
Source: Company filings, Heller House estimates*Includes holding in Super de Boer, for 244 million, not shown (since dive
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In 2007, market ascribed positive valto French businesses
With a market cap of 8.34 billion and holdings worth 3.89 billthe implied value of Casinos French retail business back in 20074.5 billion
Since then, the value of Casinos holdings grew by 194% whileCasinos market cap is up only 23%
Current environment in France has something to do with thiwell see how the fast-growing subsidiaries will drive returnsregardless of what happens in France
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The man behind it all(and this is important)
I used to talk to Bill [Gates] all the time, Id always use this expression that a ham
sandwich could run Coca-Cola.*
~Warren Buffett
Except food retailers arent Coca-Cola.
You need more than a ham sandwich to run them.
*Source: Snowball: Warren Buffett and the Business of Life, by Alice Schr
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Jean-Charles Naouri biography (cont
Subsequently, studiedeconomics at Harvard for
two years on a scholarship Obtained a perfect score
on the LSAT beforereturning to France andattending the coleNationale dAministration*
Served as chief of staff forPierre Brgovoy,Minister of Economy andFinances from 1982-1986
Architect of Frenchfinancial markets reform(futures, options, andcommercial papermarkets)
*Source: WSJ, Brazil's New Retailing King Has the Enemies to Prove It
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Jean-Charles Naouri biography (cont
At age 38, joinedRothschild & Cie Banque
as Managing Partner Established his
investment fund Euris,with help from DavidRothschild. Euris was aningeniously structuredholding instrument thatallowed it with a
relatively small initialplacement to controlsignificant shares of blue-chip companies such asLOral, Canal Plus, andCarrefour.*
*Source: The French Rothschilds, by Herbert Lottman
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Putting Casino together
Naouri used his fund Euris to take over Rallye, a struggling retain 1991
In 1992, he swapped Rallyes assets for shares of Casino GuichaPerrachon, founded in 1898 by Geoffroy Guichard
In 1997, fended off a hostile offer from Promods, kept control
Also in 1997, bought a stake in Monoprix (France)
1999: bought stakes in Thailands Big C, Colombias Exito andBrazils GPA
2000: bought a stake in Cdiscount (ecommerce)
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Epic battles for control
Over the years, Naouri had epicbattles with the families of thevarious companies he took over(Monoprix, GPA, Franprix andLeader Price)
Known as a tough negotiator
Consolidated full control overall holdings over the years
Naouris most public battle was thAblio Diniz, whose family foundedPo de Acar in Brazil
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Naouris superior long-term strategy
Naouri understood early on that retail was moving away from mand into precision commerce; tailored offering to customers aacquired footholds in proximity, convenience, high and low end
He also realized that growth at home would be difficult, and focCasinos portfolio in the most promising emerging markets
Dual retail/real estate strategy: every time Casino builds a big st
France or abroad, it builds a shopping center around it. This crehigh quality rental income from surrounding tenants and is a heas retail trends move away from big boxes.
Strong in private label, offering innovative (instead of me tooproducts to better compete with brands
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The result
T-1
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Source of growth:
Casinos foreign holdings
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Grupo Po de Acar (GPA) Brazil
Brazils largest private employer, leader in food and non-food re Operates 1,999 stores across 30.1m square feet, plans to grow f
retail portion by 57% over next two years
2013 same store sales growth of 9.0%, net sales up 12.8%
Expanding GLA of shopping centers by 20% per annum
Growing network of convenience banners
Plans 650 new stores by 2016, equivalent to 4 new stores per we
Publicly traded, on a forward P/E of 16-17x based on 2015 estim
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GPAs steady growth over the years
Source: Casinos 2013 full-year presentation
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Via Varejo Brazil
New name for two well known Brazilian non-food retailers CasaBahia and Ponto Frio, both top-of-mind in terms of brand recall
In aggregate they sell more than their next four competitorscombined (26% market share and growing)
Difficult to replicate: dense distribution network with over 9m s
distribution centers and a fleet of 2.6 thousand vehicles makingthousand deliveries every day
Publicly traded and 43.35% owned by GPA (62.3% of voting righ
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Via Varejos exceptional opportunity Brazil
Source: GPAs 2013 investor day
Brazpenegrow
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Grupo Exito Colombia & Uruguay
Leader in food retail in Colombia with 40% market share Operates 470 stores in Colombia, 54 in Uruguay
Recently announced the acquisition of 50 stores from Super Intcompetitor in Colombia
Growing middle class means the opportunity to expand formal
an additional 200 towns across the country
Over past ten years, consolidated sales have grown at 16% CAG
Publicly traded, on a forward P/E of 20x based on 2015 estimate
*Estimate by JPM Chase
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Exitos steady growth over the years
Source: Casinos 2013 full-year presentation
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Casinos strong Latin American brands5 in the top 20
Source: El Pas, De compras por Amrica Latina
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Big C Thailand & Vietnam
Thailand: owns 559 stores and 127 shopping malls; co-leader with Teshypermarkets
Half of EBIT comes from shopping mall rents
11% CAGR in sales since 1997
Low proportion of modern retail in the country (44%) compared withdeveloped Asian countries at 95%
Substantial growth ahead: over next three years will double hyper ansupermarket store count, double the number of shopping malls, and convenience format store count
Publicly traded, on a forward P/E of 20x based on 2016 estimates*
Vietnam: privately held by Casino, licenses Big C name; only operatorhypermarket and shopping center segment
*Source: Bloomberg
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Big Cs steady growth over the years
Source: Casinos 2013 full-year presentation
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Tailwinds in emerging markets
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Megatrend: the advent of a new consumclass in emerging countries
Source: McKinsey Global Institute, Winning the 30 trillion decathlon - 2012
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Large populations
In aggregate, Casino is present in countries with 523 million inh
Low urbanizations of Vietnam and Thailand are a tailwind for mretail
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Favorable demographics: Young countri
Percentage of population ages 24 and under:
Source: CIA World Factbook, 2014 estimates
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GDP per capita has substantial runway
GDP per capita in the foreign countries in whichCasino operates is behind more developed countries
Shown in 2013 dollars:
Source: World Bank for all countries except US (St. Louis Fed) -http://data.worldbank.org/indicator/NY.GDP.PCAP.CD
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Brazil is back in the 1940s
Brazils GDP percapita, adjusted forinflation, is wherethe USs was backin the 1940s
Brazil today:
$11,208 US in 1947: $13,513
(2009 dollars)
Source: http://research.stlouisfed.org/fred2/series/A939RX0Q048SBEA
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The 50-year snooze
Over the past 50 years, BrazilsGDP per capita growth haslagged other emerging peers
The upshot: there is a lot ofpotential upside as wealth percapita increases
Source: The Economist, The 50-year snooze
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Potential catalyst to wake up Brazil
Coming up: October elections Broad discontent with incumbent
president Dilma
Growing support for newcomerMarina Silva
A win for Ms. Silva [] could spur adevelopmental leap for Brazil, whichembraced democracy in 1985 after along dictatorship but has struggled with corruption and inefficiesince.
Source: WSJ, Brazils Silva Taps Voter Discontent
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Naouri betting big on Brazil
R$ 2 billion (US$ 800 million) earmarked for 2014 expansion
Quote from 2013 Q4 conference call:
In Brazil, the investments are planned for 2014 to stability c2013 doesn't mean that we're going to slow down CapExambitions are considerable. We want to expand very rapidly in Brwe believe that the potential of GPA is huge. GPA really, Bracontinent than a country, and we believe that the expansion of Gcash-and-carry Assai format, in particular, and Minimerconvenience stores have a lot of potential for the future. So, weambition for Brazil, and we are going to spend R$2 billion andpursue a very dynamic development strategy in Brazil.
Source: Casinos Q4 2013 conference call transcript, Bloomberg
f i k h i f
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Summary of emerging market thesis forCasino
Large populations, growing wealth per capita, growing middle
Large number of consumers reaching tipping point where increwealth translates into discretionary purchases and higher marg Example: In Brazil, GPA converted an entire neighborhood from their low
banner to more upscale Po de Acarbecause the average income had rtipping point and conversion resulted in high return on capital
Within this growth in population and middle class there is additpenetration of formal retail
Fast growth into underpenetrated urban areas will result in addstores, shopping centers, faster SSS and rising rents
Source: Casinos Q4 2013 conference call transcript, Bloomberg
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Lets take a look at France
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Tepid growth, good strategy
Naouri has long said that the French market has little growth
Instead, whats shifting is buying patterns: hypermarkets are ouconvenience city-center formats are in
In 2005, Casino spun out Mercialys, a REIT containing the shoppcenters surrounding its hypermarkets
It has been a very successful strategy, as the big boxes are convto additional shop space
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Mercialyss Grenoble shopping center
C i i i i t l b l
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Casino was a pioneer in private labelWhy is it so important?
Private label was the original way of selling goods: by the 1930s, retathe largest in the world, and was responsible for the quality of the pro
With the advent of radio broadcasting, advertising was used by brandcustomers into retailers, shifting the power from retailers private bramanufacturers, who were now held responsible as agents of trust w
Competition among retailers turned brands from profitable, to sold aeventually to loss leaders, in order to attract customers
With improvements in technology and logistics, it made sense for retcommission exclusive products which they could price competitively much higher margin, shifting power back to retailers
With retailers controlling the customer interaction, five of the top eigmanufacturers are now retailers (Unilever and Coca-Cola are not even
*
Atlantic and Pacific Tea Company**
Fast-moving consumer goodsSource: Store Wars by Greg Thain and John Bradley
O f th fi t l f b d
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One of the first examples of a brandeproduct: Ivory soap, 1886
Examine before you buy ProctGamble were nudging grocers to ssoap so their customers wouldnt buying soap of a lesser quality
Eventually, P&G cut out the midd(distributors) and dramatically gre
force, becoming a strong influencof sale
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Private label today
In the US and Europe, during 2000-2010, private label was respofor the majority of growth in packaged foods
Private label share of FMCG sales approaches 20% and growth surpassed that of manufacturers brands in 9 of the last 10 year
Example: in 2005, best-selling brand in US grocery market wasWalmarts Great Value brand
Penetration varied by country. Highest is Switzerland (47%), witat 29%; Brazil is a mere 8%, which spells opportunity for GPA
Source: Store Wars by Greg Thain and John Bradley
O i f F h b C i
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Overview of French banners: CasinoSupermarkets
Casino Supermarkets: 410 stores, average sales areaof 17,200 sf, private label penetration is 36% of sales
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Monoprix
584 stores, very attractive formatboth from a shopping experienceperspective, and with the highestoperating margin, at 6.9% in 2013
Offers both food and non-fooditems
40 new stores opened in 2013
Strong private label strategy
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Franprix
885 stores theunavoidableconvenience store
Naouri: It isdifficult to replicateby anyone in Paris.
Source: Franprix website, March 2014
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Franprix very convenient
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Leader Price
619 stores; mission of selling quality products ataffordable prices
Stocks 700 items year-round at less than 1
More affordable thanhard discountcompetitors
Only sells nationalbrands if economicssimilar to privatelabel
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Lots of options within walking distan
Walking around Paris,there are manylocations dominatedby Casinos banners
This is a few blocksfrom the Arc de
Triomphe and Ave desChamps Elyses
Champs Elyses
a couple of blocks away
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Summary of French thesis for Casino
No growth overall, just a shift from
Casinos hypermarket format toconvenience (Casino, Monoprix,Franprix/Leader-Price, Petit Casino,Vival and Spar)
Analysts have been worried aboutCasinos hypermarket banner, Gant,due to high prices; that has now beenremedied and Gant has the lowest
prices among all competitors Shift to convenience could benefit
Casinos margins over time
Any return to GDP / employmentgrowth would be icing on the cake
Source: Casinos Q4 2013 results
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Casinos real estate holdings
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Casino owns substantial real estate
Like many retailers, Casino owns substantial real estate
Unlike many retailers, Casino has been adept at actively managholdings and highlighting value through spinoffs and asset swaMercialys
Casino owns 4.2 billion of real estate in France, primarily in hyand Monoprix stores
In addition, Casino owns 1.25 billion of real estate abroad, primThailand and Colombia
Has indicated a desire to spin off a REIT in Thailand
Growth in Brazilian malls could create a REIT in a few years
Estimates by Heller House, on an economic, not fully consolidated basisSource: Company filings
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A detailed lookat Casinos valuation
Lets properly value the French busin
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Let s properly value the French businComparable multiples
Universe of similar retailers trade at vast multiples from 0.26x evalue to sales (Safeway) to 1.69x EV/S (Big C), with multiples socorrelated to operating margins
B
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v5sr
GAVu
Cb
tt
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Valuing the French business today
Using 0.50x EV/S for the French business, we arrive at EV for the Fren8.16 billion
This counts French sales at 16.3 billion, which excludes the portion oattributable to ecommerce and unlisted foreign subsidiaries
Unlisted foreign subsidiary sales: Argentina 428 million (we value at 0.25x sales due to current econ Vietnam 468 million (we value at 1.5x sales due to growth profile)
Indian Ocean 862 million (we value at 0.5x sales, in line with Frenc Total French + unlisted subs: 9.4 billion EV
Plus current market value of listed subs (11.4 bn): 20.8 billion EV
Less parent company net debt of 6.9 billion, we get 122 per share, values the French business today (Casino has 113.1 million shares)
Source: Company filings, Heller House estimates; Casinos sales andnet debt at 12/31/2013
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Perhaps too much?
The problem with using EV/S of 0.50x for the French business is
we estimate the French EBIT margin is 3.1%, skewed down by tmargin hypermarket business
This results in an EV/EBIT multiple of 16x, higher than comps at
In 2013, Franprix and Leader Prices operating margins were 3.5Monoprixs were 6.9%
Food deflation in France and price cuts at Leader Price may lowmargin in 2014
If Casino can shift more of its sales to the higher margin bannershrink hypermarkets over time, there is an opportunity for the mto award its business a better multiple
Source: Company filings, Heller House estimates; Casinos sales andnet debt at 12/31/2013
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Using EV/EBIT instead
If we apply a 13x EV/EBIT multiple for the French business inste which is at the high end of comps and one turn higher thanCarrefour we get EV for the French business of 6.55 billion
Adding up the value of the listed and unlisted subsidiaries, totaEV is 19.2 billion
Less parent company net debt of 6.9 billion, we get 108 pershare for Casino, fair valuing the French business
But these methods tell us what Casino is worth today, not whatits worth in the future
There is also the additional value from the 4.2 billion in realestate (37 per share or 41% of Casinos market cap) what wouit be worth if monetized?
Source: Company filings, Heller House estimates; Casinos sales andnet debt at 12/31/2013
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Conclusions drawn from this exercise
Casino has assembled an impressive array of assets over the
years, but as a result, it has also accumulated a lot of debt(although on a consolidated basis, net debt to EBITDA is 1.6x,down from 3.8x in 2005)
Control battles are over: in order to highlight the value of CasinFrench business, Casino should focus on deleveraging
With parent company net debt of 6.9 billion, a substantialamount of value would accrue to Casino shareholders as debt ispaid down
However, this analysis is static; its more important to look athe value Casino will create in the next few years
A better way:
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A better way:Look-through earnings methodology
Start with French and unlisted subsidiaries sales, excluding eco
and apply the current estimated EBIT margin of 3.1%. Grow saleyear to be conservative.
Estimate Casinos parent company debt service (current bondsoutstanding of 8.4 billion this includes Casinos deeply suborperpetual bonds, which it treats as equity, and Monoprixs convbonds)
We believe the average cost of debt is 4.1% and debt service is
Apply French statutory tax rate of 34.43% to arrive at net incomfor France
Bonds outstanding estimated at 6/30/2014
Estimates by Heller House, on an economic, not fully consolidated basisSource: Company filings
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Look-through earnings methodology c
Then, we add the look-through net earnings of all public subsid
Exito, Big C and Mercialys, using Casinos economic ownership converted to euros at the current FX rate
On this basis, Casino is trading at 18x 2014s estimated look-thr
However, if we assume growth in sales in the listed subsidiariesrecent trends, and stable margins, Casino would earn 8.2 per sthrough basis in 2017
At 90.8 currently, Casino is trading at only ~11x 2017 estimated
At 18x in 2017, Casino would trade at 148, or 63% upside
Economic ownership includes TRS (total return swaps); FX at 9/1/2014
Sales growth of 10% at GPA, 8% at Exito, 7% at Big C, 3% at MercialysAssumes stable margins, but improvement at GPA based on 2013 investor da
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Still not accounting for full value
Our estimate of value in 2017 implies a market cap for Casino of
Yet the sum of the portion of the public subsidiaries owned by C16.6 billion
Still attributing little value to the French business
Any parent company deleveraging and improvement in France
Bottom line: Casinos ownership of fast-growing emerging mshould drive the stock over the next several years, regardless
Economic ownership includes TRS (total return swaps); FX at 9/1/2014
Sales growth of 8% at GPA,6% at Exito, 7% at Big C, 2% at MercialysAssumes stable margins, but improvement at GPA based on 2013 investor da
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Casino has ahidden asset
Spotted at the Muse du Louvre
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Cdiscounts logistics advantage
In Europe, the Click-and-
Collect model is moreprevalent than in the US
In the first half of 2014, 56% oforders in France weredelivered through Click-and-Collect, accounting for 59% of
revenues Cdiscount has a network of
over 17,500 pick-up locations(see right), larger than anycompetitor
Source: Company filings
Cdiscount: specialty brands &
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Cdiscount: specialty brands &international expansion
In addition to Cdiscounts main sites, it also operates specialty s
Comptoir Sant (health and beauty products) and MonCornerDhome dcor)
In 2014, two new concepts will launch MonCornerBaby premium one-stop site for maternity products with sub MonCornerBrico do-it-yourself home renovation products and tutorials
In first half of 2014, Cdiscount launched operations in ColombiaThailand and Vietnam
Launched operations in Ivory Coast in partnership with Bollor Logistics, and will expand into two additional African markets bthe year
Source: Company filings
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Brazil: Nova Pontocom
Nova Pontocom is the e-commerce
platform of Grupo Po de Acar Number two player in Brazil, GMV CAGR
of 49% over past 5 years
Sales of 1.47 bn last year, and up 48% YoY inthe first half of 2014 compared with 26% for theBrazilian ecommerce sector in general*
Gaining market share at expense of competitors: from 8% in 2008 to
Experienced management team: Germn Quiroga, founder and CEOPontocom, was a founder of americanas.com, part of B2W (#1 player
Pilot Click-and-Collect program with 2,000 store locations
*At constant currency; sales in Brazil are booked in ReaisSource: Company filings
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Cdiscount + Nova Pontocom = Cnova
Casino is planning an
IPO of Cnova on theNYSE in order tohighlight the value ofthis hidden asset
Registration statementhas been filed with theSEC
Total sales of 2.9 billionin 2013 and growth of29% to June 30, 2014
Source: Company filings
Internet and smartphone penetration a
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p ptailwinds for Cnova
Sources: http://data.worldbank.org/indicator/IT.NET.USER.P2http://en.wikipedia.org/wiki/List_of_countries_by_smartphone_penetration
http://www.atelier.net/trends/articles/cote-ivoire-government-hoping-turn-country-regional-ict-hub_424740Company filings
Low penetration of internet users and smartphonestranslates into faster growth
African countries can leapfrog other countries withvery fast smartphone adoption
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Accretion from Cnova IPO
Cnova did 2.9 billion in sales last year and may do 3.4 billion t
ignoring new sales from Colombia, Ecuador, Thailand, Vietnam We estimate Casinos economic ownership of Cnova at 64.17% (
balance owned by GPA, Via Varejo, Exito and some members ofat Via Varejo)
Public comps trade at very diverse multiples; lowest multiple of(Nova Pontocoms direct competitor in Brazil) at 1.5x sales
Next is Amazon at 1.9x sales, Ocado and AO.com at 2.3x sales a2.6x sales
Well use the lowest multiple for Cnova, 1.5x sales
Source: Bloomberg, company filings, Heller House estimates; includes TRby Casino on GPA shares
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Accretion from Cnova IPO cont.
With 3.4 billion of sales, at 1.5x sales, Cnova could be worth 5
Casinos direct and indirect stakes would be worth 3.3 billion, oshare; assuming modest growth, could easily be worth 4.3 bill32 per share, assuming Casino IPOs 10% of its holdings
Source: Bloomberg, company filings, Heller House estimates; includes TRby Casino on GPA shares. Estimates Casinos 2017 ownership of Cnova at 5
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But there is one more thing
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But there is one more thing
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Our idea today (really):
Ke
TicRA(E
Re3
Ma1
Di5%
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Rallye: leveraged exposure to Casino
Rallye has 2.7 billion of net bond and bank debt
It also owns 224 million in financial assets, 165 million of whicprocess of disposing*
Prior to 2008, Rallye received a lot of cash flow from its financiaaddition to Casinos dividends
Only used cheap bank debt; in 2009, was forced to pay a high paccess bond markets due to instability in the banking sector
Rallye has been actively deleveraging by conducting tender offrefinancing its high cost debt (2009 bonds at ~8%) with lower c(2014 7-year bond at 4%)
*Mostly real estate and private equity investmentsSource: Bloomberg, company filings, Heller House estimates
Yield-to-maturity of Rallyes 5-year
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y y ybond is at all-time lows
Source: RALFP 4 03/11/19Bloomberg as of 9/2/2014
Extremely low Eurozone interest rates give Rallye an extraordin
opportunity to refinance higher coupon bonds into lower couposimilar maturity issues, as it did earlier this year
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Rallyes upside based on Casinos gro
As Rallye deleverages and begins building NAV, its discount sho
narrow, and will eventually trade at NAV
On a look-through earnings basis, Rallye trades at 7.1x 2013 earand 3.9x our estimate of 2017 earnings for Casino
Rallyes current NAV math: Casinos market cap: 10.3 billion, 5 billion owned by Rallye
Plus other financial assets of 224 million, less net debt of 2.7 billion Equals NAV of 2.5 billion, or 51.75 per Rallye share
Currently trades at 36.40
Source: Company filings, Heller House estimates
Rallyes NAV per share
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and potential upside
Source: Company filings, Heller House estimates. R
look-through EPS in 2017 is estimated at ~9.3 per
Rallyescurrentstock price
RallyescurrentNAV
NAV fairvaluing theFrenchbusiness in2014
NAV fairvaluing theFrenchbusiness in2014 + Cnova
NAVlook-earnCasinCnov
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Why this opportunity exists
Extremely complex corporate structure, with eight publicly trad
entities in four different currencies, confusing accounting (IFRSconsolidation), no holding company financials, intricate debt iss
Hard to understand the full picture, including the opportunitiesgrowth in emerging markets and the quality of management; mstuck on France, when in reality France matters little
Low profile CEO and foreign company have received very little press
Limited free float: only 800 million of Rallye publicly traded mtoo small for most institutions*
*The balance, or 55.4%, is owned by Foncire Euris, the next holding comp
the chain. Source: Company filings, Heller House estimates.
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Summary
An investor in Casinos equity is getting a set of fast-growing em
market assets and an attractive French business with substantiaestate holdings, plus a global, fast-growing ecommerce busine
Hard catalysts in the form of Cnovas IPO and future real estate
Very cheap, leveraged way to invest in Casino, through Rallye
Substantial value creation opportunity for Casino and Rallye as
emerging market subsidiaries grow, and Casino and Rallye dele All assets, with the exception of Mercialys, are controlled by Jea
Charles Naouri, who is very hands-on, has proven to be a great operator and financial engineer, and should continue to generafor shareholders
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