Elo/Auchan (ELOFR; NR, BB Neg) S&P Downgrade and put on negative outlook

Cash led by new 28s +50bps/-1.4pts

It's always traded away from ratings but S&P comments are quiet pessimistic and its been quick to come with a downgrade + neg. outlook...even though it expected the rough 1H results. We value what S&P has to say on Auchan - it's coverage on the name has made some interesting points that we would have missed otherwise (private co, lacks reporting clarity etc.).

• Key line its repeated is retail deterioration, especially in France "poses a long-term threat to the group's creditworthiness" and notes execution risk with the 98 acquired Casino stores.
• It's highlighted the one way slide in margins from 2021-24; 4.7%, 4%, 3.5%, 2.1% (1H numbers). As results showed, its noted that Russia and Ukraine are having less of a impact now with weakness broad based. It forecasts FY24 EBTIDA at €1.2b now (-17%yoy). That implies a pick up from 1H's €339 to €861m ( -12% yoy) in 2H still though.
• It's again shadowed our concern on expecting negative FOCF in the retail arm as France continues to run razor thin margins (it sees 0.5% EBITDA for FY as Casino stores weigh on it).
• Again echoing our concerns on falling market share (Kantar at 8.5% in June vs. 10.5% in 2018) - Casino will boost that to 10% now. It says its caused by hypermarket skew (2/3 of France sales it estimates) and uncompetitive prices. Again its echoing the fact competitors are under-pricing it - something even Auchan admitted in earnings last week. Re the pricing alliance with ITM all it says is "the impact on profitability is untested" and even Auchan only sees tangible effects from 2025.
• It's effectively painting asset sales from the property arm to delever as a last resort and not necessarily a credit positive - we agree given the RE arm is contributing significantly to bottom line right now. It's also added that it will "imply higher lease payments" - we have not been able to find owned amount as % of store footprint - S&P says "sizeable portion".
• On interest payments - again its echoed our refi cost concerns but also added it will face a €80m increase in lease payments on casino stores and €40m on interest expense movements. It sees that moving coverage against EBITDAR to 1.8-2 in 2024-25.
• We've noted this before but S&P seems to have higher yields on the property arm and goes as far as saying above sector peer. We assume rental income is being depressed on reported figures from the property Auchan itself is using up. It expects new investments will be rotations (i.e. financed from asset disposals) and hence the RE arm will not be a mover for net debt levels.