Food retailing. Is Rallye proof that Casino is undervalued? INDEPENDENT RESEARCH. Food retailing

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1 INDEPENDENT RESEARCH 23rd March 2017 Food retailing Food retailing Is Rallye proof that Casino is undervalued? CASINO GUICHARD BUY FV EUR62 vs. 57 Bloomberg CO FP Reuters CASP.PA Price EUR49.79 High/Low 54.91/41.44 Market cap. EUR5,527m Enterprise Val EUR12,121m PE (2017e) 17.8x EV/EBIT (2017e) 10.1x RALLYE NEUTRAL vs. BUY FV EUR17 vs Bloomberg RAL FP Reuters GENC.PA Price EUR18.86 High/Low 22.34/14.2 Market Cap. EUR921m The Rallye s share price shows a premium of 427% to its NAV, which prompts us to downgrade our recommendation to Neutral vs Buy (FV@EUR17 / target NAV - FV@EUR62 on Casino), since we cannot duly justify any upside potential. Beyond this anomaly, detractors say that Rallye purely and simply overvalues Casino. We believe this persistent mismatch could otherwise prove that Casino is undervalued. On the one hand, for a Rallye share price at EUR19, Casino is implicitly valued at EUR64 (reverse NAV), implying an upside of 26%. This statement reinforces our conviction on Casino (BUY, FV@EUR62 vs EUR57 / average between a DCF and a SOTP). On the other, if we can explain the share price, we cannot duly justify any upside potential, whatever the valuation methodology we use (target NAV, pricing of a call option, liquidating market value of Casino shares ). This is the reason why we downgrade our rating (Neutral vs Buy, FV@EUR17 vs EUR18.5) /03/17 A second cash push-up with Exito being unlikely at this stage, the salvation for Rallye involves an increase in Casino s share price which would bring together the necessary conditions for a drastic reduction in (disposal of Casino shares?) or a dilution of the effects of its debt (mergerabsorption in order to activate the tax-loss carry forward of ~EUR2.4bn?). With this in mind, Casino has started a deep simplification of its structure (carve-out of Cnova, prospective disposal of Via Varejo), which was a sine qua non condition for its return to grace with unhappy investors. 86 Source Thomson Reuters STOXX EUROPE TM FD & DRUG RTL E STOXX EUROPE 600 Yet, the valuation of Casino depends on the spot SOTP (EUR55), which is based on the depressed valuation of the LatAm subsidiaries, and a conservative 2017 trading profit guidance for France (i.e. EUR545m). Indeed, management does not factor in either a Brazilian macro recovery or a come-back of inflation in France. Hence, a progressive rerating of the LatAm assets (i.e. ~0.65x EV/sales ratio vs ~0.4x, on the back of the disposal of Via Varejo and the upcoming IPO of Carrefour Brazil) along with a 2017 trading profit above the guidance (i.e. EUR580m at most) would add EUR18.5 per share to our SOTP. Analyst: Sector Analyst Team: Antoine Parison Nikolaas Faes 33(0) Loïc Morvan aparison@bryangarnier.com Virginie Roumage Cédric Rossi r r

2 Table of contents The source of the plague: a real Catch The valuation mismatch between Casino and Rallye... 4 Following detractors attacks, the valuation anomaly is persisting... 4 Rallye could be considered as a long-term call option for Casino... 5 We can value Casino at EUR64 through a reverse NAV... 5 Rallye's salvation involves a rerating of Casino... 6 The financial equation of Rallye remains fragile... 6 In fine, Rallye s salvation depends on Casino s spot SOTP... 8 Our spot SOTP on Casino works out at EUR Inertia in average Casino share price targets In the end, target prices did not rerate that much since the attacks Worth noting the ongoing rerating of GPA Worth noting the conservative 2017 guidance So how much is Casino worth intrinsically? Calculating the FV based on the market value of listed stakes is a questionable stance A rerating of LatAm subsidiaries could add EUR16 to the MtM SOTP A 2017 trading profit of EUR580m at most (vs EUR545m e) would add EUR Price Chart and Rating History Casino Guichard Bryan Garnier stock rating system... 20

3 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 v-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 v-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 5Y CDS Share price Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 5Y CDS Share price 5Y CDS Share price Food retailing Detractors have fed a vicious circle whereby short positions started to build-up on Casino, a natural proxy on Brazil, together with long positions on CDSs. The source of the plague: a real Catch-22 As a reminder, in light of the crisis in Brazil, detractors, scaring the cat out of the bag which had already been open for some time, fed a vicious circle whereby short positions started to build-up on Casino (a natural proxy on Brazil) together with long positions on the CDSs. As a result, the perversity of the process resided in the fact that CDS spreads kept widening as the stock was weakening... In order to break this, Casino announced disposals to deleverage the holding company. Ultimately, detractors found it easy to criticise management for selling the jewels in the crown. A real Catch-22 (see our report on the subject: CASINO - With hindsight: a real Catch-22!). Fig. 1: Rallye s share price vs its 5Y CDS and that of Casino s Casino CDS 5Y Rallye share price Rallye CDS 5Y Rallye share price Source: Bloomberg; Bryan, Garnier & Co ests. To understand even better what has been at stake over the last two years, one can make the Casino 5Y CDS vs equity graph more visual. One simply needs to reverse the CDS y-axis and adjust the scale to fully realise how Casino s equity story (and hence that of Rallye) is intimately linked to that of its CDS (while the situation at Rallye, like a ricochet, has always taken a toll on Casino). From that moment, the reversal of the momentum depended on CDS tightening and, hence, on asset disposals. The issue has been well addressed by management through the forecasted EUR4bn deleveraging programme, the success of which has been decisive for Casino s share price. Fig. 2: Let s try to make the CDS vs equity graph even more visual EUR2bn for completion by end EUR1bn for completion by en-2010 EUR1,5bn to be completed over one year EUR700m extended to EUR1bn in august 2011 EUR4bn to be completed over one year (and done as of 04/16) Asset disposals Casino CDS 5Y (reversed y-axis) Share price Source: Company Data; Bryan, Garnier & Co ests. 3

4 Spot Food retailing The valuation mismatch between Casino and Rallye The valuation mismatch between Casino and Rallye is persisting and prompts us to downgrade our recommendation on the controlling holding company. Following detractors attacks, the valuation anomaly is persisting Rallye is Casino's parent company. The economic interest it has in Casino (namely 51.1% along with 63.7% in voting rights), represents 94% of its gross assets. Ordinarily, Rallye was a means of gaining exposure to Casino with a leverage effect associated with debt. But over the last two years, changes in the Casino share price (market capitalisation of EUR5.6bn) and that of Rallye s (market capitalisation of EUR939m) have been massive (-34% and -35% respectively since the beginning of 2015). These changes have gone hand in hand with a disconnection in valuations (the NAV was negative all along 2015 as evidenced in Fig.4) warranting an explanation that we attempted to provide for the first time in September 2015 (Valuation differences between Casino and parent company Rallye warrant an explanation). Fig. 3: Rallye s current spot NAV and target NAV (EURm) as of 21/03/17 Valuation - Casino shares Groupe Go Sport Financial investments portfolio (net book value) 71 - Others 23 (A) RESTATED ASSETS Used credit line Other bonds Net bank loans Commercial papers Others (46) (B) HOLDING NET DEBT (A) (B) = RESTATED NET ASSET VALUE 179 NAV per share 3.6 Rallye share price vs NAV +427% Target NAV per share 17 Rallye share price vs target NAV +16% Source: Company Data; Bryan, Garnier & Co ests. Fig. 4: Premium / discount of Rallye s Market Value vs spot NAV (at year-end) Anomaly NAV Market Value Source: Company Data; Bryan, Garnier & Co ests. 4

5 Rallye could be considered as a long-term call option for Casino Concretely, the price of the retailer's controlling holding company (EUR19) still shows a premium of +427% to its NAV of EUR3.6 (vs. an historical discount of ~20%)! The most pessimistic players would say that Rallye's NAV overvalues Casino and that the share should simply be shorted, while continuing to bash Casino. However, the unmovable holding company is often considered as a longterm call option for Casino. This first approach would explain why, during particularly depressed market episodes, the discount naturally transforms into a premium, reflecting the time value offered by Rallye. This methodology is clearly seductive, but in recent months, has not enabled a precise justification of the holding company's valuation, with the pricing of this call option working out well below the share's spot price (see Fig. 5). Fig. 5: Pricing of Rallye as a call option on Casino Parameters (EUR) Comments Underlying price 51 Casino s current share price corresponds to the spot price of the underlying asset of the call option Exercise price 47.7 Rallye s NFD (~acquisition debt for Casino) less others assets (Go Sport, financial investments portfolio and others) divided by the number of Casino shares owned by Rallye Days until expiration 1460 Four years corresponding to the average maturity of a credit line (credit lines being the longest pending debt). Parity 1.15 Number of Casino share owned by Rallye (i.e. 57M) vs the number of outstanding Rallye shares (i.e. 49M) Interest rate 1.6 Risk free rate as estimated by Bryan Garnier Dividend yield (dividend paid by Casino) divided by 2 (50% of the dividend being captured by minority shareholders of Casino) Volatility 33 Bloomberg estimate Valuation 11 Vs a share price of EUR19 Source: Bloomberg function (OV); Company Data; Bryan, Garnier & Co ests. We can value Casino at EUR64 through a reverse NAV In order to assess this valuation anomaly better, we can also undertake a reverse NAV calculation to establish how, based on Rallye's current share price (i.e. EUR19), the market implicitly values Casino's share price. The exercise is purely factual and is not biased by any subjective factor. In conclusion, for a Rallye share price of EUR19, Casino is implicitly valued at EUR64. We believe that this implicit valuation (i.e. EUR64) could be a fair estimate of the liquidating equity value of the Casino shares owned by Rallye. It would thus correspond to the current share price of Casino (i.e. EUR51) with a 21% control premium (vs a 15 months average of 30%) applied to the equity value of the assets that the retailer controls (namely the French business, Cdiscount, Exito and GPA). This approach helps understanding the current share price of Rallye but, in our view, does not constitute a consistent valuation methodology on which to rely to justify an upside potential. 5

6 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 v-16 Dec-16 Jan-17 Feb-17 Mar-17 Food retailing Fig. 1: Implicit control premium to reach the liquidating equity value of the Casino shares owned by Rallye which would justify the share price of the holding company 70% 60% 50% 40% 30% 20% 10% 0% Average ssource: Company Data; Datastream; Bryan, Garnier & Co ests. In the end, until Rallye cut its dividend (-23% on 17th March), this persistent valuation mismatch between Casino and Rallye (that we have been unable to justify precisely so far) as well as the strong share performance of the holding company (+35% since 27/06/2016) turned out to be kind of proof that the share s valuation depended more on its yield (~7% post dividend cut and ~10% previously) than on its inherent value at a given moment, whatever the methodology used (NAV, target NAV, call option ). Following the cut in the dividend, we have decided to rule on the matter since our Fair Value was obviously disconnected from that of Casino s. We downgrade our recommendation on Rallye from Buy to Neutral since we do not know how to duly justify any upside potential on the holding company. Our Fair Value (EUR17 vs EUR18.5) is based on a target NAV which factors in our new Fair Value on Casino (i.e. EUR62 vs EUR57 / valuation which is an average between an SOTP and a DCF). Rallye's salvation involves a rerating of Casino Rallye's salvation involves a rerating for Casino, which is notably dependent on an ideological quarrel over the use of multiples. The financial equation of Rallye remains fragile In historical terms, Rallye's cash flow (essentially made up of Casino's dividend) does not cover outgoing flows (dividends paid by Rallye and financial expenses primarily). The holding company's priority is therefore to rebalance its financial equation on a lasting basis. In order to do this it has several levers: 1/ selling off the portfolio of financial assets (EUR71m in 2016 vs EUR257m in 2012), 2/ a steady increase in the dividend received by Casino and stability in that paid by Rallye to the top holding structure (Foncière Euris which owns a 55.3% equity stake in Rallye along with 70.2% of voting rights), and 3/ a substantial decline in financial expenses. 6

7 Fig. 2: Rallye s current financial equation (EURm) e (A) Net financial costs (B) Overheads (C) Dividend paid by Rallye (1) (D) Dividend received by Rallye (2) (A)+(B)+(C)+(D) = Financial equation (1) Script dividend option: 1/ Foncière Euris, holding company of Rallye (economic interest of 55.3% / 70.2% of voting rights), intends to fully opt for it; 2/ we estimate that 50% of minority shareholders could choose this option. (2) We estimate that Casino will again pay an interim dividend in 2017 (EUR177m = final interim 2017). Source: Company Data; Bryan, Garnier & Co ests. Even when it manifests itself in certain years, Rallye's deleveraging capacity looks very low (see Fig. 3) in view of the amount of debt (EUR2.9bn at end-2016). However, except for Monoprix (valued at EUR2.85bn in our SOTP), which we do not think Casino is considering selling off, we see no asset that Casino could easily sell which could generate a very substantial exceptional dividend for its parent company. As such, apart from a second cash push-up with Exito (a scenario described in our latest report: The fat Lady has not sung yet*), it seems that the only salvation for Rallye involves an increase in the Casino share price that would bring together the necessary conditions for a drastic reduction in (disposal of Casino shares?) or a dilution of the effects of its debt (merger-absorption in order to activate the tax-loss carry forward of EUR2.4bn?**). With this in mind, Casino has started a radical simplification of its structure (carve-out of Cnova and prospective disposal of Via Varejo), which was a sine qua non condition for its return to grace with unhappy investors. * At this stage, we believe that the right conditions for such an operation to be feasible are not yet achieved. And we understand from management that neither major M&A nor simplifications involving financial engineering are on the cards for 2017 Going forward, we keep believing that buying back some minorities goes in the direction of history. ** At this stage, ceteris paribus, we estimate that an hypothetical merger absorption of Casino by Rallye would result in a ~14% economic interest of Foncière Euris in Newco assorted with ~22% of voting rights vs ~18% and ~28% respectively, should Casino share price reach EUR85 (see last paragraph of this report regarding this valuation). 7

8 Fig. 3: Rallye s financial equation over the last decade (EURm) e Dividends received from Casino* Net Financial Costs Net financial equation Dividends paid Overheads Source: Company Data; Bryan, Garnier & Co ests. * 2009: including the dividend paid in Mercialys shares In fine, Rallye s salvation depends on Casino s spot SOTP This rerating is dependent on the sacrosanct spot SOTP of Casino, which, in a context of sluggish growth in France, is notably suffering from debates surrounding the valuation of the domestic activities. Indeed, either analysts use sales multiples to underpin this, or they use distinct EBITDA multiples depending on the profitability of each of Casino's French banners. In the case of sales multiples, the 2017 SOTP works out at around EUR55, based on an average multiple of 0.41x. In the second case, in view of a multiple of 8x, which reflects disparate levels of margin, the valuation works out at around EUR49 (EUR45 excl. real estate promotion). To go right to the end of this reasoning, analysts could be tempted to value Casino's residual economic interest in the FP/LP stores that it switched to franchises based on their losses, the share of the said losses being booked under the "equity associates" line. In this case, one could be tempted to lop a further EUR400m off the SOTP (EUR40m estimated share of the deficit valued on the basis of a multiple of 10x and a residual stake presumed to be 49%) to obtain EUR45 per share (EUR41 excl. real estate). However, rigour prompts us to note that the said EUR40m probably houses exceptional items to which multiples can clearly not be applied. Moreover, we believe that a third of this is made up of historical losses stemming from some franchises whose motivation to generate earnings may be weak (tax purpose?) and which, in no way, reflect momentum in the entire network of franchises*. * 1/ It is also worse noting that some FP/LP stores which were franchised in 2016 are former units sold to Casino by historical franchises which have exercised put options they owned. Yet, we suspect that the strike prices were based on profitability, which may have driven them to insidiously nurture the margin rate at the expense of the top line. The new franchises are probably far more incentivised and top-line oriented. 2/ On top of this, the FP/LP, which were closed in 2016, will also have a structural impact on profitability. These two elements allow the portfolio to be sanitised and will have a carry-over impact on

9 Our spot SOTP on Casino works out at EUR55 For our part, in addition, to the work on prices accomplished by the group over the past three years (price index of 94.2 at Géant in march 2017 vs in January 2013 ), we would simply point out that in June 2013 Carrefour bought a heavily loss-making banner (DIA France) based on a sales multiple of 0.35x (for an EBITDA loss of EUR75m...). In the end, we believe it is inappropriate to value the French assets solely on the basis of the EBITDA they generate and which, for circumstantial reasons, is depressed (price repositioning). We are in a fixed cost industry and the challenge is to dilute invariable expenses. Valuation is therefore based on sales potential, which primarily increases depending on the quality of the location! If this was not the case, Carrefour would never have paid 0.35x sales for the loss-making Dia banner! The sales-based approach can therefore be defended to the same extent as that based on EBITDA. Here we are in an ideological quarrel that each person can decide on depending on their conviction on the model that Casino is currently rolling out in France (discount hyper) and the strength of the recovery of Géant. Fig. 4: Casino SOTP based on spot price for listed subsidiaries as of 21/03/17 EV of french activities 2017 Sales EV/Sales Stake EV Per share - Geant Casino ,22X 100% SM Casino ,40X 100% Monoprix ,66X 100% FP/LP ,40X 100% Others ,40X 100% EV FOR FRANCE RETAIL & CASINO CAFETERIA ,41X 100% Net debt holdco at year-end Seasonnality of net debt EQUITY FOR FRANCE RETAIL & CASINO CAFETERIA Equity value of Casino's direct equity stake in its subsidiaries Stake Equity Per share France Retail & Casino Cafeteria 100% Casino Bank 50% REIT (Mercialys) 40,2% Brazil (GPA) 22,8% Colombia (Exito) 55,3% E-commerce (Cdiscount) 64,8% (A) TOTAL EQUITY Perpetual bonds (590) (5) Hybride bond issue (750) (7) Put included in NFD Pensions and other provisions (704) (6) (B) OTHER RESTATEMENT (1 662) (15) (A)+(B) = NET EQUITY VALUE Source: Company Data; Datastream; Bryan, Garnier & Co ests. 9

10 Feb-15 Mar-15 Mar-15 Apr-15 May-15 May-15 Jun-15 Jul-15 Aug-15 Aug-15 Sep-15 Oct-15 Oct-15 v-15 Dec-15 Dec-15 Jan-16 Feb-16 Feb-16 Mar-16 Apr-16 May-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 v-16 v-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Food retailing Fig. 5: Premium / discount of Casino vs the MtM SOTP 90% Muddy Waters's Report Diposal Diposal of Thaïland of Vietnam Update of the corporate ises presentation about VV 70% 50% 30% 10% -10% -30% Source: Company Data; Datastream; Bryan, Garnier & Co ests. Inertia in average Casino share price targets We do not understand the current inertia in average Casino share price targets, since the group's profile today has nothing to do with the one it had just a few months ago. In the end, target prices did not rerate that much since the attacks We are lucid and recognise that our vision based on sales multiples has little chance of convincing the fiercest detractors. As such, for once, we have chosen to back their arguments and value Casino on the basis of EBTIDA multiples. To get to the end of the exercise, we have removed revenues from property development, like the denigrators did at the height of the attacks (it is worth pointing out that income from real estate is just as high at many retailers as at Casino, and nobody cares about this). At that time, the market valued Casino at EUR35 per share. Given the change in Casino's operating performances, which take into account the proven recovery in margins in France (+90bp in reported terms in 2016 and +132bp concerning the retail activities excluding real-estate), we conclude that detractors should logically have increased their estimates by EUR21 per share at least, ceteris paribus, since the attacks took place Fig. 6: Theoretical valuation of French activities based on EBITDA multiples Current EBITDA Real Estate promotion Retail EBITDA Valuation multiple Enterprise value Delta per share LTM as of December 2015, according to detractors x Detractor's methodology applied to 2015 published figures x Detractor's methodology applied to 2016 published figures x Detractor's methodology applied to 2017 guidance x Detractor's methodology applied to a 2017 profit above the guidance x Source: Company Data; Bryan, Garnier & Co ests. 10

11 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 v-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 v-16 Dec-16 Jan-17 Feb-17 Mar-17 Food retailing At this stage, 2017 underlying operating profit guidance (+10% at least at cc) implies: +7% in France (+15% excl. real estate) +12% at least for LatAm (ow +12% forex effect) Worth noting the ongoing rerating of GPA However, we cannot reason in terms of all other factors remaining equal elsewhere since, precisely, changes in the share prices of Casino's listed subsidiaries have been positive (+73% and +13% respectively for GPA and Exito since 21/01/2016 when Casino share reached its low point), while the group's structure and credit situation has been massively cleaned up! In short, everyone can justify their valuation as they like. However, we do not objectively see how certain critics can maintain a valuation today that is similar to their valuations of a few months ago, when they did not believe at all that 2016 guidance could be delivered and when the structure was far more haphazard than it is today. Fig. 7: Median target price of the consensus Pre-Muddy Waters median TP Post-Muddy Waters median TP Source: Datastream; Bryan, Garnier & Co ests. Worth noting the conservative 2017 guidance Without masking the debt issues at Rallye, which, like a ricochet, have always taken a toll on Casino, we believe that the retailer's nervous share price could be only circumstantial in the short term. Indeed, the market sanctioned the timid 2017 targets (trading profit of EUR545m in France and EUR1,140m at least at the group level), which apparently do not take account of an eventual return to inflation in France (despite early signs) and a rebound in the Brazilian market (that the indices nevertheless seem to be anticipating, the IBOVESPA outperforming the Stoxx 600 by 450bp YtD). 11

12 Mar-06 Jul-06 v-06 Mar-07 Jul-07 v-07 Mar-08 Jul-08 v-08 Mar-09 Jul-09 v-09 Mar-10 Jul-10 v-10 Mar-11 Jul-11 v-11 Mar-12 Jul-12 v-12 Mar-13 Jul-13 v-13 Mar-14 Jul-14 v-14 Mar-15 Jul-15 v-15 Mar-16 Jul-16 v-16 Mar-17 EPS Share price Mar-08 Jul-08 v-08 Mar-09 Jul-09 v-09 Mar-10 Jul-10 v-10 Mar-11 Jul-11 v-11 Mar-12 Jul-12 v-12 Mar-13 Jul-13 v-13 Mar-14 Jul-14 v-14 Mar-15 Jul-15 v-15 Mar-16 Jul-16 v-16 Mar-17 Food retailing Fig. 8: Raw materials index evolution CBR Index 14/03/ /03/2017 D CRB BLS Spot Index (1967=100) - PRICE INDEX CRBSPOT U$ Foodstuffs CRB BLS Spot Index Foodstuffs - PRICE INDEX CRBSPFD U$ Raw Industrials CRB BLS Spot Index Raw Industrials - PRICE INDEX CRBSPRI U$ Source: Datastream; Bryan, Garnier & Co ests. Management also recognised that the targets are cautious and below the budget (we believe that it might have EUR580m in mind for France). By cold-showering the game of consensus estimates right from the start, we guess that Casino is sparing in the EPS growth potential, a positive trend from which the group has not benefited in recent years (a fact that investors have often reproached it for). Fig. 9: EPS expectations on Casino (DataStream consensus) 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0 100,0 90,0 80,0 70,0 60,0 50,0 40,0 30,0 Share price 2007 e 2008 e 2009 e 2010 e 2011 e 2012 e 2013 e 2014 e 2015 e 2016 e 2017 e Source: Datastream; Bryan, Garnier & Co ests. 12

13 In the end, at constant valuation methodology, we show in the graph below what could be an update of the detractors valuation Fig. 10: An update of detractors valuation at constant valuation methodology +4,7 +2, ,0 + 2,5 + 3, Detractors valuation (1) Disposal of Big C Thaïland (ratio of 1,7x vs 1,3x e) (2) Exito (+11%) and GPA (+26%) share price performances (3) Forex appreciation (BRL +30% / pesos +15%) (4) French recovery (multiple of 8x on LTM figures) Ceteris paribus, a theoretical updated valuation (5) Valuation based on 2017 guidance (6) 2017 guidance beaten (i.e. EUR580 vs EUR545) Blue sky scenario excl. macrorecovery in Brazil Source: Company Data; Datastream; Bryan, Garnier & Co ests. So how much is Casino worth intrinsically? Calculating the FV based on the market value of listed stakes is a questionable stance We can only be stunned at the change in Casino's spot SOTP (i.e. EUR55) as calculated by the majority of analysts (down ~40% since January 2015), and which has historically massively influenced the share price. This decline can naturally be partly justified by the downturn in share performances by listed subsidiaries outside France (-41% for GPA, -42% pour Via Varejo, -48% for Exito since 01/01/2015). However, this approach seems somewhat lacking, since Casino also sold its business in Asia for a record multiple (1.7x EV/Sales multiple). Indeed, the SOTP corresponds to the theoretical value of a company s assets in the event of a disposal. Calculating this intrinsic value based on the market value of listed stakes is a questionable stance. It is tantamount to believing that an investor aiming to get his hands on GPA or Exito would offer and obtain a multiple of around 0.4x A rerating of LatAm subsidiaries could add EUR16 to the MtM SOTP Of course, we are not saying that we should value GPA or Exito using record transaction multiples from a different era, as was the case for example during Carrefour's disposal of its Colombian activities to Cencosud (EV/sales of ~1.3x in 2012). In contrast, a return to pre-crisis multiples does not seem unrealistic. In this case, if we set multiples at 0.65x sales for the South American subsidiaries, we would add EUR16 per share to our SOTP, or a valuation of EUR71 per unit (a price which would bring Rallye s NAV to EUR27). A rerating of this extent is now all the more conceivable going forward in that the forthcoming disposal of Via Varejo's household electricals businesses should be a first catalyst (a pure food Brick & Mortar player is much more valuable than a patchwork of food, electro domestic and e-commerce activities!). On top of this, the success of an IPO of Carrefour Brazil could be a major catalyst since it would be a concrete early indicator of the recovery in the food retail market and provide investors with a peer and a transaction multiple. 13

14 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Food retailing Fig. 11: EV/Sales multiples for LatAm peers 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 0,00 Soriana Walmex Cencosud GPA Source: Datastream; Company Data; Bryan, Garnier & Co ests. A 2017 trading profit of EUR580m at most (vs EUR545m e) would add EUR2.5 Moreover, we do believe that the 2017 trading profit guidance for France (i.e. EUR545m) is conservative, since it does not take into account a comeback of inflation in France (despite early signs). Hence, should Casino be able to deliver above this guidance (i.e. EUR580m at most), at constant multiples, one could add EUR280m (i.e. EUR2.5 per units) to the current SOTP. On top of this, in case of a dismantling, a 15% control premium would probably be justifiable. In the end, a theoretical liquidating intrinsic value of Casino could work out at around EUR85 per Casino share (vs the current share price of EUR51). Admittedly, this approach requires a willingness to project ourselves but may be of interest. Fig. 12: Theoretical liquidating equity value that Casino could reach (first take) Our current spot SOP (1) 2017 trading profit EUR580m in France (vs guidance of EUR545m) (2) Rerating of both GPA and Exito (0,65x EV to sales vs 0,4x) (3) 15% premium on assets controlled by Casino Liquidative equity value of Casino Source: Company Data; Datastream; Bryan, Garnier & Co ests. 14

15 In all, when it comes to Casino (we have increased our 2017/19 EPS by 4% on average, given various adjustments of which forex, financial costs, minorities, deconsolidation of Via Varejo), 1/ we have a rather attractive valuation (i.e. EUR62 on the basis of depressed valuations in Latin America), backed by what seems to be 2/ beneficial momentum (recovery is taking shape in Brazil, while a positive EPS trend is conceivable), and 3/ catalysts on the cards (disposal of Via Varejo and upcoming IPO of Carrefour). On top of that 4/ the dividend yield (6%) is very attractive. We thus reiterate our Buy rating on Casino (see our latest report: The fat Lady has not sung yet). 15

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17 Price Chart and Rating History Casino Guichard /09/15 16/12/15 16/03/16 16/06/16 16/09/16 16/12/16 16/03/1 CASINO GUICHARD-P Fair Value Achat Neutre Vente Ratings Date Ratings Price 20/07/15 BUY EUR /07/15 Under review EUR /01/15 BUY EUR81.37 Target Price Date Target price 19/02/16 EUR57 12/01/16 EUR54 25/09/15 EUR69 20/07/15 EUR80 16/07/15 Under review 22/06/15 EUR82 30/01/15 EUR95 Rallye /09/15 16/12/15 16/03/16 16/06/16 16/09/16 16/12/16 16/03/1 RALLYE Fair Value Achat Neutre Vente Ratings Date Ratings Price 30/01/15 BUY EUR33.3 Target Price Date Target price 25/09/15 EUR /01/15 EUR43 17

18 Casino Guichard Simplified Profit & Loss Account ( m) e 2018e 2019e Revenues 46,145 36,029 39,357 41,010 42,656 Change (%) -4.8% -21.9% 9.2% 4.2% 4.0% EBITDA 2,343 1,697 1,976 2,225 2,469 Current operating income 1,446 1,035 1,196 1,352 1,499 Exceptionals (478) (625) EBIT ,196 1,352 1,499 Change (%) -44.3% -57.6% 192% 13.0% 10.9% Financial results (818) (359) (463) (463) (463) PBT ,036 Tax (61.0) (34.0) (220) (267) (311) Profits from associates Income from discontinued activities 4.0 2, Minority interests (201) (2.0) (177) (194) (214) Net profit / group share (42.0) 2, Restated net profit Change (%) -25.9% -17.2% 3.9% 25.6% 18.8% Cash Flow Statement ( m) Operating cash flows 1,076 1,234 1,334 1,538 1,740 Capex, net (1,488) (1,160) (984) (1,087) (1,280) Change in working capital 269 (920) FCF (143) (846) Financial investments (64.0) (118) Dividends (570) (646) (513) (523) (534) Capital increase (81.0) (30.0) Assets disposal Other 437 3, Decrease / (Increase) in net debt (253) 2, Net debt 6,073 3,630 3,504 3,431 3,360 Balance Sheet ( m) Tangible fixed assets 8,769 8,123 8,327 8,541 8,851 Intangibles assets 13,973 12,704 12,704 12,704 12,704 Cash & equivalents 5,126 11,870 11,996 12,069 12,140 Other assets 11,965 9,345 9,959 10,264 10,571 Total assets 39,833 42,042 42,986 43,578 44,265 Shareholders' funds 12,419 14,440 14,480 14,623 14,863 L & ST Debt 11,836 10,556 10,556 10,556 10,556 Provisions 1,041 1,102 1,102 1,102 1,102 Others liabilities 14,537 15,944 16,848 17,297 17,744 Total Liabilities 39,833 42,042 42,986 43,578 44,265 WCR (4,075) (3,155) (3,444) (3,589) (3,733) Capital employed 18,667 17,672 17,586 17,656 17,822 Ratios Current operating margin Tax rate rmative tax rate Net margin ROCE (after tax) WACC Gearing Net debt / EBITDA Pay out ratio (840) Number of shares, diluted Data per Share ( ) EPS (0.37) Restated EPS % change -36.9% -8.4% 9.0% 29.5% 21.0% Operating cash flows FCF (1.27) (7.48) Net dividend Source: Company Data; Bryan, Garnier & Co ests. 18

19 BUY NEUTRAL SELL Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings BUY ratings 49.4% NEUTRAL ratings 35.4% SELL ratings 15.2% 1 Bryan Garnier shareholding in Issuer 2 Issuer shareholding in Bryan Garnier Research Disclosure Legend Bryan Garnier & Co Limited or another company in its group (together, the Bryan Garnier Group ) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the Issuer ). The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group. 3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report 4 Market maker or liquidity provider A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives. 5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives. 6 Investment banking agreement A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services. 7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report. 8 Analyst receipt or purchase of shares in Issuer The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares. 9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group. 10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months. 11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer. 12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer. 13 Bryan Garnier executive is an officer A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above. 14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. 15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed). Yes A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at

20 London Paris Beaufort House 26 Avenue des Champs Elysées 15 St. Botolph Street Paris London EC3A 7BB Tel: +33 (0) Tel: +44 (0) Fax: +33 (0) Fax: +44 (0) Regulated by the Authorised and regulated by the Financial Financial Conduct Authority (FCA) and Conduct Authority (FCA) the Autorité de Contrôle prudential et de resolution (ACPR) New York 750 Lexington Avenue New York, NY Tel: +1 (0) Fax: +1 (0) FINRA and SIPC member Munich Widenmayerstrasse Munich Germany Important information This document is classified under the FCA Handbook as being investment research (independent research). Bryan Garnier & Co Limited has in place the measures and arrangements required for investment research as set out in the FCA s Conduct of Business Sourcebook. This report is prepared by Bryan Garnier & Co Limited, registered in England Number and its MIFID branch registered in France Number Bryan Garnier & Co Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference Number ) and is a member of the London Stock Exchange. Registered address: Beaufort House 15 St. Botolph Street, London EC3A 7BB, United Kingdom This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firm s prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given ( Forward Looking Information ) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information. Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever. tice to US investors This research report (the Report ) was prepared by Bryan Garnier & Co Limited for information purposes only. The Report is intended for distribution in the United States to Major US Institutional Investors as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY Telephone: This Report is based on information obtained from sources that Bryan Garnier & Co Limited believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co Limited and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co Limited may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies). 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