Rallye SA RAL FP
November 10, 2014 - 2:30pm EST by
2014 2015
Price: 32.36 EPS 5.1 5.7
Shares Out. (in M): 49 P/E 6.3 5.6
Market Cap (in $M): 1,577 P/FCF 0 0
Net Debt (in $M): 2,695 EBIT 0 0
TEV ($): 4,272 TEV/EBIT 0 0

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  • Holding Company
  • Retail
  • Discount to NAV
  • Europe
  • Emerging Markets
* Idea not eligible for membership requirements


This write-up does not count towards my yearly requirements, but it’s an idea that I feel is very much off the radar and I wanted to bring it to the attention of the VIC community as I feel it is a great investment. This write-up will be brief and I can answer questions in the Q&A.


The idea is long shares of Rallye SA (RAL FP), which currently trade around €32 and yield 5.7%.


Over the next few years, I believe the intrinsic value of Rallye is ~€140. This price target is the sum of (a) growth over the next few years in its fast-growing emerging market retailers and (b) the short-term catalyst in the form of the IPO of its ecommerce subsidiary.


The story has lots of moving pieces but in simple terms you are buying a set of well managed, growing food and non-food retailers controlled by a brilliant owner-operator who’s virtually unknown in the U.S.


What is Rallye?


Rallye is a French holding company with 48.9m fully diluted shares outstanding and a market cap of €1.57bn. It owns 48.4% of the common stock of Casino Guichard Perrachon (“Casino”, ticker CO FP) and has voting control over it. French holding companies do not pay taxes; Rallye currently trades at a 27% discount to its NAV and if you were to magically liquidate Rallye today, you’d capture 38% upside to NAV without a tax liability.


Rallye’s NAV is essentially its stake in Casino less net debt (there are a few other assets, but this is it in simple terms). This leveraged structure is common in France/Europe but not in the U.S. It has been around for over two decades and is very well managed by a brilliant capital allocator (below) and I can elaborate on its features if anybody wants.


I’ll show below that Casino has a lot of upside. Rallye has even more. Due to its leveraged structure, for every 1% move up in Casino, you get 2.15% move up in Rallye. Given Rallye’s high dividend, the market actually treats it more like a call option. When Casino shares rise a lot, Rallye trades at a wide discount to NAV (peaks around 29-30%). When Casino shares come down, the discount tends to narrow and in the past Rallye has even traded at a premium to NAV when Casino shares were more depressed.


Casino owns 46.5% of GPA (Grupo Pão de Açúcar (PCAR4 BZ or CBD US), the dominant retailer in Brazil, which in turn owns 43.4% of Via Varejo (VVAR11 BZ), another outstanding retailer in Brazil). Casino also owns 54.8% of Almacenes Exito (EXITO CB) in Colombia and 58.6% of Big C in Thailand (BIGC TB).


These are all retailers and Casino has full voting control over all of them, and the ability to define the management team and capital allocation policies.


Casino also owns 40.3% of Mercialys (MERY FP), a French REIT it spun out in 2005 to hold the shopping centers surrounding its stores in France. It does not have voting control, any longer, over Mercialys.


I hate supermarkets. Why is this different?


Casino has a French name and French listing and the sell side sees it as a French group. Indeed, Casino does about €16bn in sales in France across many different banners at different price points (Franprix, Leader Price, Monoprix, Casino, Géant, Vival, Spar, Naturalia, Monop’, etc).


But that’s not where the value is. In fact, I believe the market is currently ascribing a materially negative value to the French operations, because of the deflationary environment in France.


What’s relevant is that the operations in Brazil, Colombia, Thailand and Vietnam (Casino runs Big C stores in Vietnam although that business is not publicly traded like the others) are growing and comprise 65% of the economic, look-through earnings to Casino.


As these foreign earnings continue to grow, they will mechanically push up the value of Casino.


Controlling all of these companies with the exception of Mercialys is a brilliant French PhD in math, Harvard Business School grad, investment banker and fund manager: Jean-Charles Naouri. Long story short, over many years Naouri has taken stakes and eventually full control of all of these foreign retailers, as well as the French banners (most recently Monoprix). He’s extremely hands on, understands real estate very well, is a good financial engineer, and a very good operator. Unfortunately he’s very little known outside of France, which is part of the reason for this write-up.


Casino’s foreign holdings are very profitable, generate substantial free cash flows, and have underleveraged balance sheets. This provides the group with substantial liquidity. Most debt is at the Casino parent company level, which is interesting. Casino gets to borrow in a deflationary environment at a very cheap cost, to invest in a growing environment (foreign companies). Furthermore, Casino has substantial real estate holdings which give the group an asset backing. More below.


OK, I get it. But why is this cheap?


A few reasons. First, France isn’t doing so well, if you haven’t heard. So the premium attributed to the French business has disappeared and it’s now a drag, as we’ll see. The market is basically stagnant. Second, the Real has devalued against the Euro over the past five years (down about 19%), and Brazil isn’t so much in favor these days. Third, this is a reasonably complex set of assets and even the bulge bracket banks who follow Casino seem to get confused and call it primarily a French group, when clearly its fortunes are tied to its foreign holdings. Fourth, there is very little coverage of Rallye. Fifth, few people have bothered to inspect the companies and learn about the manager’s (Naouri’s) track record.


To put some numbers on it, we’ll use current market values and current FX, and year-end 2013 net debt number, since the mid-year 2014 net debt number is very high due to seasonal working capital requirements.


All numbers in millions.


Casino’s market cap: €9,509

Net debt: €6,978

EV: €16,487 [A]


Casino’s share of each foreign holding (their market caps * Casino’s stake, at today’s price and FX):


GPA: €4,093

Exito: €2,742

Big C: €2,712

Mercialys: €643

Total: €10,190 [B]


Stub EV = [A] - [B] = €6,296 = [C]


What else does Casino own?


Well, it has operations in Argentina with €428 in sales, Vietnam with €468 and Indian Ocean (Reunion) with €862. You can use your multiple of sales to value these (I use 0.25x for Argentina, 1.5x to Vietnam due to its dominant position and fast growth, and 0.5x for Indian Ocean) and get €1,240 in value for the unlisted businesses [D].


EV of France-only operations = [C] - [D] = €5,056 [F]


Now, recall that there is €6,798 of net debt so the implied market cap of France is negative €1,922. The sales in France are €16,314 (ex ecommerce) so the implied EV/S in France is 0.31x, which is probably too low.


If you ascribe a 0.5x EV/S multiple to France, you’d end up with a market cap of €12,609 which is about 33% up from where it is now. But this is not where the juice is.


(Before the next section, I want to point out that Casino owns €4,193 of real estate in France. That’s pretty material relative to the French EV of €5,056 [F].)


Foreign growth


On a look-through basis, 65% of Casino’s earnings come from emerging markets. If we model growth in these markets -- I’m modeling 10% growth in GPA, 8% at Exito, 7% at BigC and 3% at Mercialys, all assuming flat margins in the early years and slightly rising margins in the out years, and flat FX -- I get about €8.2 of EPS to Casino by the end of 2017 (meaning, it’s trading at 10.2x 2017E EPS, and Rallye is trading at 6.3x trailing and 3.5x 2017E EPS). In comparison, I get €4.5 of EPS for 2013 for Casino.


On the French side, I am modeling 1% yearly growth and flat margins, the full statutory tax rate, the full debt service at the parent level, to arrive at French-only EPS.


If Casino maintains its multiple of ~18x trailing, we could reasonably see a €148 share price, or upside of 76%, primarily from the growth in the foreign earnings.


Short-term catalyst: Cnova


Casino is the co-leader in French ecommerce with Cdiscount. It is the #2 player in Brazil with Nova Pontocom (part of GPA and Via Varejo). Earlier this year, Casino joined both companies into Cnova, and has filed a prospectus with the SEC. You can watch a 29-minute presentation on Cnova at www.retailroadshow.com (won’t be there for long). Tomorrow (Tuesday) the management team of Cnova will present at the Four Seasons in Manhattan, followed by Boston on Wed, São Paulo and Rio de Janeiro.


Ecommerce businesses tend to be valued on a forward P/S basis. I believe the best comp is B2W, the leader in Brazil (controlled by the 3G guys; however, note that German Quiroga, who helped build B2W, left and is now running Nova Pontocom, and stealing lots of market share from B2W). On that basis analysts expect Cnova to be priced at 1.0x 2014E sales, at a slight premium to B2W and at a discount to Amazon.


I value Cnova at 1.5x trailing sales (sales are growing briskly) and I get Casino’s direct and indirect stake (64.17%) to be equivalent to €20-25 per Casino share or roughly 23-29% of its market cap. You can find some articles that reach a similar conclusion (http://www.reuters.com/article/2014/11/03/casino-stocks-cnova-idUSL6N0ST2SU20141103).


Interestingly, the bulge bracket banks working on the Cnova IPO have stopped covering Casino due to the conflict of interest. This adds to the mispricing.


One final observation here. At 29% of market cap I value Casino’s stake in Cnova at €2,790. That’s also interesting relative to [F], the French-only EV.


Adding it all up


As we saw, we can get to a value of €148 for Casino by estimating growth in the foreign holdings and a stable multiple by the end of 2017. Assuming Cnova grows ~10% per year and garners 1.0x sales in 2017, the additional €23 per Casino share gets us to €171 per share, or 104% upside for Casino.


The NAV of Rallye at that point would be €142, which is up about 339% from where the stock price is today. But Rallye likely won’t trade at NAV. Let’s say it trades at the historical high discount of 30%; you get a Rallye stock price of ~€100 or over 200% upside, not including dividends.




  • A massive devaluation in emerging market currencies relative to the euro would diminish the value of Casino’s foreign holdings
  • Key man risk - if Naouri were no longer able to run Casino, this investment wouldn’t be nearly as attractive as it is, in my view
  • Interest rates - low interest rates in Europe are a positive for Casino and Rallye. I don’t see this going anywhere in the short to medium term, but wanted to note it.


Additional due diligence

If you’re interested in this idea I can share a lot more in the Q&A. I also highly recommend the Casino year-end presentation (http://www.groupe-casino.fr/IMG/pdf/2013-FYResults_presentation.pdf) and the Rallye results/presentations (http://www.rallye.fr/en/investors/results). This is also useful: http://online.wsj.com/articles/SB10001424052702303379204577472653430170694

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Short-term, Cnova IPO. Long-term, growth in foreign holdings.

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