GPA - Sarria Daily Comments 04/11/2021

GPA reported their Q3 numbers last night before the release of Q3 Sales numbers from Casino later this evening. Topline sales growth was an increase of 8.4% Q321 versus Q319. However, an increase in promotions and investment in price, lead to a reduction in Gross Profit. Despite a modest reduction in SG&A, this passed through to EBITDA. with EBITDA margins falling from 7.6% in Q319 to 5.8% in Q321. (Note not comparing to FY20 as these figures are distorted by government aid).

- However, the focus will be on the inflow of cash from the GPA/Assai deal. It should be noted, this deal is not included in the above numbers. GPA has signed an agreement with Assai to sell 71 of its Hyper stores for up to R$5.2bn, which includes R$1.2bn for real estate assets. This potential deal is expected to close in late Q4/early Q1 2022 with payment to be made over 5 instalments from 2022 to 2024. Management state the sale of the Hyper stores will reduce Gross leverage and improve profitability. Additionally, it enables the Company to pursue M&A targets regionally and have sufficient cash to fund expansion in its profitable formats.

- From Casino perspective, it further streamlines the GPA business and makes it more marketable for external buyers. We speculate an alternative that Casino could purchase the c.60% of outstanding shares currently not owned and fully consolidate GPA. This would enable Casino to own 100% of Cnova and subsequently divest GPA (without Cnova) more easily. Funding of the outstanding GPA shares could be done by partially selling down their Assai stake.

- Regardless, the divestment of the Hypermarkets can be seen to simplify the GPA business and enable Casino to crystallise its value more easily.