Metro AG (MEOGR 29s; NR/BBB- S) {B4B GY Equity} 1H/Q2 Results

The wholesale foods retailer reported 1H results that were flat on headline & a tad weaker on margins. FCF negative on 1H WC seasonality. Metro has little positives as a co; margins are thin (industry dynamic), its poorly diversified (sales only in Europe & 8% in Russia) and medium term guidance is weak on FCF (despite headline growth). S&P seems happy on IG ratings mainly on leverage holding below its adj. 3.5x threshold - it sees it testing that this year on increasing Capex (signs of that in 1H already) with FOCF expected to be negative €100-150m over next 2 years.

The new 29s have been bid in 60bps from pricing in Feb, now at Z+130 & though cheap on ratings screens rich on fundamentals trading inside HY Airport Retailer Dufry. We are also tad concerned about potential supply with a €600m '25 line (only other outstanding debt) coming up - this years issuance was nearly double its 5Y pricing in last visit (priced at +72 in '18 on same rating) - both rough year ahead & potential refi (wide) indic. of waiting out on 29s here. 1H numbers below.

• 1H sales came in at €15b flat yoy though it says excluding currency & portfolio effects growth was 8.2%. Adj. EBITDA was €478m (margin of 3.2%) in 1H - margins weakened in 2Q (EBITDA at €73m/1% margin) - its attributing that to discontinuation of license earnings from WM Holding & other one-offs.
• Cash flow from operations was -€104m which is up from -€440m on improving WC. Net of €266m in capex & €293m in lease payments it left -€643m in FCF. Note cash flows seasonally weaker in 1H on WC for Metro - it was -€350m this half (down from -€600m last year).
• Net debt stands at €3.6b and includes €2.5b in lease liabilities & €1.2b in bonds. That's against €1.8b in equity.
• FY outlook is unch; sales growth of +3-7% & adj. EBITDA to move (-€100m to +€50m) from last years €1.2b. By 2030 its targeting >€40b in sales (€30b now), >€2b EBITDA (€1.2b currently) & FCF>€600m (already there in previous years).