Summary

The Sarria Analysis team, comprising of Wolfgang Felix, Tomás Mannion and Aengus McMahon, focused their conference call on European High Yield Retailers, looking closely at Iceland, Casino, Matalan, Takko and Steinhoff as potential high yield opportunities.

Starting with Iceland, a UK food retailer with an emphasis on selling frozen food.  2022 is a year of transaction for food retailers as top-line sales reduce to pre-covid norms.  This reduction in revenue will reduce profitability with an additional impact on working capital.  However, balanced against these negatives are the facts that Iceland is a well-run, 100% family/management-owned business with no upcoming maturities in the short term.  Tomas highlighted the cost inflation that Iceland (all retailers) is experiencing currently, but with UK consumers under significant inflation pressures, Iceland can pick up new customers as consumers trade down the UK retailer price curve. 

Tomas moved on to Casino, explaining that Casino had similar pressures to Iceland, but additionally, Casino had a more complicated corporate structure.  Tomas outlined the issues of the overleveraged parent, Rallye, who has benefited from Sauveguarde procedure in France.  In addition to its French food retail business, Casino credit benefits from its equity holding in two Latam food retail businesses and other divisions including an e-Commerce business and solar panel energy business.  The credit story is complicated by the lack of cash generation at the “core” French business and Casino’s necessity to invest in its non-core business.  However, these non-core segments have significant equity value which underpins the creditworthiness of Casino. 

Wolfgang then proceeded to discuss Takko and Matalan, two discount retailers in Germany and the UK respectively. Both companies are in similar in nature apart from Matalan stores being 10 times bigger, but 1/10th in number. Matalan is due to refinance in the near future, having gone through a cash call in mid 2020. More recently however, the sturdy business has recovered to 2019 levels and could be posting above £100m EBITDA. Takko, a private equity owned apparel retailer based in Germany, is on its tertiary buyout and has also had to take up additional cash in early 2021. Since then, Takko has performed strongly and cash balances have swollen to over €200m. However, Takko also has to refinance in the near future and facilities up for renewal are more substantial than the company had initially presented. In order to refinance the balance sheet Takko might need refinance its entire balance sheet. As both companies have had to approach investors during the pandemic and both have staged an admirable comeback in H2 2021, Sarria proceeded to highlighting refinancing opportunities from an investor’s perspective.

Finally Wolfgang moved on to Steinhoff amidst the company’s settlements with its various litigants. Post refinancing the structure will remain complicated, but less so than before. CPU valuations in the recent Q4 report from Steinhoff are in line with Sarria’s prediction on where management is headed over the next 18-24 months. Wolfgang explains the company’s refinancing options based on their various holdings in different retailers globally that have no real synergy between themselves. With a new structure implemented going forward Steinhoff could be put on a more sustainable footing, allowing management to concentrate on maximising value.

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