Elo/Auchan (ELOFR; NR, BB+ Stable); Look at Fundamentals

We'd caution that Elo is still far from turning around operating performance; uncertainty remains on how quickly it can integrate Casino stores to EBITDA positive & how French (52% of revenues) hyper/super-market industry does - its main business runs a 1% EBITDA margin. It has been impacted by exposure to Russia/Ukraine - but S&P excludes revenue (& lease debt) from Russia on ratings anyway (marginal positive if included). 80bp NIC on IPT, thoughts on secondary to follow...initial thoughts are cheap noting basis still negative.

Risks;

• On French performance; EBITDA margin has been in free-fall; from 3% in 2021 to now 1% - its hard to justify that on competitive pricing vs. peers - market share has dropped from 10.5% in '18 to 8.5% in '23 - its inorganically boosting that back up on Casino store acquisitions (below). Carrefour runs 2.6% operating margin in France (up from 2.2% in '22) - Moody's affirmed it at Baa1 last month & was willing to look past the competition in the industry.
• On casino store acquisition it is getting 70 supermarkets & 26 hypermarkets all in France and increases its market share from 8.5% to 10% (S&P). Debt increase (including leases) is expected to be sizeable €600-700m (Net debt currently €2.9b, adj. gross €5.6b - most of it from RE arm/NIH). S&P does not see casino stores being positive EBITDA contributing till 2025-26. Net it leaves a spike in S&P leverage (ex. Russia) to 4* this year (from 3.4* now).
• On Russia/Ukraine exposure; says combined 10% of income & had -€82m EBITDA fall last year - was still shy of France's -€175m; together they drove S&P adj. EBITDA margins to 4.4% (vs. 5.1% in '22 and 5.8% in '21). S&P does not include Russia in EBITDA & lease calc's for leverage - including it would be marginal positive dropping S&P leverage from 3.4* to 3.2*.

Positives;

• The RE portfolio, NIH, is 2% of revenue but generates 26% of EBITDA. Adding to its strength its a high-grade asset portfolio - only recoding a -1.5% LFL revaluation last year - S&P points to solid yields on the property protecting it from peers (including vs. those in office/residential). Its used asset disposals in the past to de-lever, FV of investment properties is at €7.3b (LTV 40%).
• Mgmt prioritising leverage - 1.9* vs. target 1.5* & declaring no dividends this year with shareholder contributions of €300m as well.