Carrefour ready to revaluate

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Carrefour is a stock pick from our deep value Data Dive last week.

French supermarket group Carrefour (FR:CA) has been running hard for several years now. Since CEO Alexandre Bompard announced his original turnaround plan for the group shortly after his appointment in mid-2017, total shareholder returns, including dividends, have been negative 5%.

The poor performance reflects the fierce competition and challenges facing hypermarkets, of which Carrefour owns a large share. More recent concerns have focused on tough economic conditions in Latin America, which accounts for about a quarter of the group’s sales, and the cost of living crisis in Europe, which accounts for the rest.

However, Bompard, which is currently implementing a second strategic plan until the end of 2026, has arguably had a more positive impact on the underlying business than the stock market performance would suggest.

While the shares may not have gone anywhere during his reign, improving business fundamentals have caused their valuation to drop significantly. By several measures, the shares are the cheapest they have been in decades and some of the world’s most successful professional value investors are buying.

To cheap?

In total, 13 of the best fund managers in the world own shares in Carrefour. All are among the best performing approximately 3% of the 10,000 global equity fund managers tracked by Citywire. Based on this high level of smart money ownership, Carrefour has been awarded a top AAA Elite Companies rating.

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“We think well-managed large food retailers are better than average companies,” said Sean Peche, a top investor who manages the Ranmore Global Equity fund, where Carrefour is a top 10 holding.

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‘They provide an essential service to society and generate attractive returns on capital and consistent cash flow due to their favorable working capital dynamics. Under the current management team, Carrefour has doubled its cash flow from operations over the past five years [and trades on] eight times expected profits.’

Perhaps Carrefour’s most notable valuation is that its free cash flow over the next twelve months is expected to be equal to around 15% of the company’s total market value.

Money Back

The balance sheet also looks solid, boosted by the €1 billion sale of Carrefour’s Taiwan operations last year. Excluding loans related to the company’s credit activities and €4.9 billion in lease liabilities, net debt at the end of 2023 was €2.6 billion. This allows Carrefour to return large amounts of cash to shareholders.

Carrefour’s expected yield is 6.4%, and in addition to the hefty dividend, the company plans €700 million in buybacks this year. It has already reduced its share count by 17% through share purchases since the start of 2021.

Investors can count on large cash returns.

Management has promised a dividend increase of more than 5% through 2026 and further annual buybacks. This is supported by a target to generate over €1.7 billion in annual free cash flow by 2026, compared to forecasts of €1.5 billion over the next 12 months.

On target

Key to achieving the target are planned cost savings of €4 billion between 2023 and 2026. Much will come from leveraging the group’s size for better purchasing, creating a leaner management and improving logistics.

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Scale has recently been increased through the company’s first major French acquisition in two decades: the soon-to-complete purchase of 175 Cora and Match stores for €1.1 billion – equivalent to 4.2 times earnings before interest, taxes and depreciation and amortization (Ebitda) if the expected cost savings are achieved.

Carrefour’s Brazilian operations also received a major boost from the 2022 acquisition, with the purchase of Grupo Big for BRL7 billion.

Efficiency is also promoted by Bompard’s strategy to operate more stores as franchises. Across the company’s eight core areas, 72% of stores now operate under such agreements.

Not all cost savings will flow to shareholders. Competition at home and abroad remains fierce, and Carrefour is lowering prices to retain and win customers. This includes a target of 40% own label sales by 2026; this figure currently stands at 37%, up from 25% in 2018.

Bompard believes there is also opportunity to grow profits by opening more convenience and discount stores, boosting e-commerce, redeveloping properties and through a joint venture with a AAA-rated advertising giant. Publicis (FR:PUB) to create marketing services based on customer data.

After years of Carrefour shares going nowhere while fundamentals have improved, the valuation has fallen so low that not much needs to go right for the stock to return. And should the recent economic headwinds ease, there could be significant upside potential.

Key facts – Carrefour
Market capitalization €10.1 billion Price €14.94
Net debt €13.4 billion Net debt/Ebitda 2.9x
52 weeks high/low €18.72/€14.73 Return on invested capital 7.2%
F’cst price for profit 7.3 F’cst dividend yield 6.4%
F’cst growth in earnings per share 10.1% Share price over 12 months -10.9%
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Source: FactSet, as of June 7. EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts based on the next 12 months.

This article first appeared in De Telegraaf Questor column.


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