ATAAY - Carrefour: Potential For Multiples To Rerate

2023-05-02 11:19:53 ET

Summary

• 1Q23 saw strong earnings thanks to price increases despite falling volumes, particularly in food categories.
• Management is optimistic about cost savings plan and ability to adjust store hours and logistics costs in response to declining volumes, which should have long-term impact on margins.
• The current valuation of CRRFY is not reflective of its potential for earnings growth and multiples re-rating.

Overview

Carrefour ( CRRFY ) mainly operates super and hypermarkets, and is a well-known brand in the regions it operates (Europe and LATAM). I recommend a buy rating as I think the current valuation (10x NTM PE) is not reflecting the value of the business accurately. If CRRFY continues to execute and beats consensus expectations, I believe the risk reward is attractive at the current levels, in which returns will be driven by both earnings growth and multiples re-rating back to historical average. Overall, CRRFY beat expectations for 1Q23 thanks to strong showings in France and the rest of Europe. However, volume remains difficult, with declines in the mid- to high-single-digit percentage range across France and Europe. Price increases and decreased sales volume as a result of consumers trading down is a trend seen across most consumer sectors and not unique to CRRFY. The relative share loss that CRFFY is sustaining in its core markets is crucial to keep in mind. Because of the economic downturn, CRFFY has become relatively more competitive. Management reiteration of all financial targets that were unveiled in February 2023 makes me feel more positive about near-term growth and also its ability to at least meet consensus estimates.

1Q23 earnings

The increased cost of food in most of the company's most important markets contributed significantly to the 15.4% constant currency growth in sales that drove the company's total revenue to €22.04 billion. Across the board, price increases are being responsible for the uptick in growth despite falling volumes. While declines occurred in non-food categories, food contributed to the 7.1% increase in French, with HMs also recovering. Total sales in Brazil increased by around 30% in constant currency, with new store openings and Grupo Big being the primary drivers of this growth. Although Atacadão ( ATAAY )'s performance in Brazil was impressive, the stock price has fallen significantly since the beginning of 2022. This is likely because the true competitive landscape is more intense than expected. The fact is that Brazil's performance is slowing, and consensus anticipate that it will continue to do so. Consequently, this may be contributing to the downtrend in CRRFY share price. Next, in Europe, countries like Spain, Italy, Belgium, Poland, and Romania all saw comparables that were above consensus. And lastly, 1Q23 saw 23 more conversions as part of Grupo BIG's integration. 2Q23 will see the conclusion of all conversion plans.

Outlook / Guidance

In 2023, management is still planning on EBITDA, EBIT, and FCF growth. Notably, management is optimistic about this year's €1 billion cost save plan, and it has highlighted the extent to which the company's ability to adjust store hours and logistics costs in response to declining volumes contributed to robust profitability in the 2H22. These are structurally changes that should have long-term impact on margins, which I expect to reflect positively in FY23 figures.

Valuation

I hold a variant perception from most investors that CRRFY has the potential to return to its historical valuation as it continues to grow in line with consensus expectations. When compared to other food retailers in Europe, CRRFY's valuation appears to be lower than its peers, such as Sainsbury and Tesco, despite having a similar growth and margin profile. Currently, consensus estimates indicate that CRRFY will generate EUR2.37 EPS in FY25, and applying a 10x PE to this figure results in a share price of EUR23.7, which represents a 26% upside.

However, I believe that the reason for CRRFY's underperformance in terms of valuation is due to the pressure from Brazil. By conducting a SOTP valuation, I arrive at a value of EUR21, which represents a 12% upside. It is also noteworthy that ATTAY was previously valued at a high multiple, and the decline in its share price can be attributed to a contraction of multiples to a more reasonable level (10x earnings today vs 16+x previously).

Moving forward, the expectations for ATTAY are much lower, and I believe that if management can surprise consensus with a few quarters of positive results, the narrative for the stock will become very positive. Overall, I would summarize by stating that the current valuation of CRRFY is not overly demanding, with expectations being reasonable (i.e., CRRFY is expected to grow at around 3-4% with minor margin expansion).

Conclusion

I recommend a buy rating for CRRFY, based on its strong brand recognition and the potential for earnings growth and multiples re-rating. Although CRRFY's 1Q23 earnings showed volume declines in some markets, the management's reiteration of financial targets and cost-saving plan give me confidence in the company's ability to meet consensus estimates. While the pressure from Brazil may be contributing to CRRFY's underperformance in terms of valuation, I believe that its potential return to historical valuation and reasonable expectations make it an attractive investment opportunity.

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