Elo/Auchan (ELOFR; NR, BB+ Stable) 1H Results

Co has ordered its slides so it goes through its property segment in detail first (2% of revenues). It's normally given a few slides right before the appendix. The shift summarises what's happening on the bottom line. The results aren't great but French newspapers and those invited to the earnings call have already started to price this in (€28s -2pts/+70bps). We think investors should be careful even at these levels and price based on RV against retail RE curves. Retailing arm is not profitable and its dragging on cash/BS. The solution to turn that may take time (and includes turning around acquired casino stores). While it works on that it's losing market share in its core (50%) France segment to competitors who are managing to price aggressive while holding onto margins (based on Carrefour colour and YTD market share data).

Debt looks large but it is not wrong in splitting it out as 1.22x LTM in Retail and a LVR of 39.6% on property; it is the approach S&P takes and has allowed it to stay on BB+ ratings. It has €1b due next year, if it decides to refi (instead using its €7b in properties to paydown) then it will face a ~3x in interest costs...or said alternatively on the 25s a jump from €16.5m/yr to ~€49m/yr in interest payments. Interest cost is currently €107m; even ignoring the loss making retail arm, real-estate EBIT is only €76.

Positives; RE metrics look firm on declining vacancy rates and edging in valuation gains and for longs basis remains well negative (4Y -110bps). We have no firm view noting this mornings approach to reporting results. Re. next catalyst; market share data is released monthly but co reports half yearly (FY generally late Feb to Early March). New ITM Enterprises has moved to Z+305 some similar dynamics there (low margin with RE holding etc.) but less clarity on reporting (our view). Casino, for the speculators, has a single 27s PIK as well.

Financials;

• Revenue at €15.7b (constant currency -0.1% and reported -1.2%), gross profit margin at 26.6% (-70bps).
• Within the headline retail was €15.4b (-0.2%) and Property €323m (+5.5%).
• EBITDA was €339m (-38%) at a margin of 2.2% (-130bps). Auchan retail was €166m (-53%) and RE was €178m (-4.2%).
• EBIT was a loss of -€745m worse than the -€83m loss it had last year. Reason for the larger D&A is €495m its classified as "other operating income and expenses" including €350m in impairment of goodwill and assets (NOT in Russia/Ukraine) and €47m related to dispute in the property side.
• Interest cost was €107m up from €86m tied to the net financial debt increase of €437m (+13%yoy).
• Cash flow gets worse (even if we exclude the 1H seasonality in working capital). Cash flow from operations was €272m (-43%) - reminder this is ex. all the hefty non-cash amortisation charges above. Interest cost and taxes is leaving it nearly breakeven. WC swing in line with last year (-€862m). Below that another -€931m in investing activities and offset slightly with +€421m from financing activities (€300m shareholder capital increase). It left cash use at -€1.3b (-30%yoy).
• Net debt totals €1.2b under retail arm and €3.3b under the RE to total €4.5b; increase as expected on the acquisition of Casino store in France and Dia stores in Portugal.

Segment asides;

• LFL France (50% of sales) down -4.7% which it says is " in the face of competition that is currently better positioned in terms of prices and (more compact) formats". It's pricing was not bad at -0.6% but looks like that cost it on volumes that were -3.9%. Hypermarkets were -5.2% vs. Supermarkets -1.6% and is costing it.
• Western Europe (21%) was -1.2%, Central & East Europe (26%) -1.9% and Africa (1%) +0.5%. It said across ex. France regions most of the drag was from volumes (-2.8%) vs. pricing (+1.5%).
• On the Real-Estate; rental income was €323m (+5.5%), mainly helped by indexation. Foot fall was +4.8%, vacancy rates down 50bps to 5.5%. FV of assets at €7.2b (+0.2%). Net debt under it was €3.3b leaving LTV at 39.6% (unch from last qtr).