Morgan Stanley On Cnova Downgrade: 'Insufficient Visibility On '16 Catalysts'

• Cnova NV CNV shares have climbed 11 percent since September 29, even after hitting a low of $2.97 on October 28.
• Morgan Stanley’s Edward Hill-Wood downgraded the rating on the company from Overweight to Equal-weight, while reducing the price target from $4.70 to $4.00.
• There are no signs of an improvement in trading in Brazil, and there is limited visibility into the 2016 catalysts, Hill-Wood said.

Cnova reported its 3Q operating results broadly in-line with the recently-reduced estimates. The company’s gross margin contracted by 100bps to 12.5 percent, due to a 352bps decline in Brazil. SG&A rose from 13.4 percent of sales to 15.2 percent, mostly on account of additional international losses, investment in mobile IT and marketing.

While Cnova’s EBIT for the quarter came in at -€22 million, short of Morgan Stanley’s estimate of -€20 million, the company’s net income was much more disappointing, having been adversely impacted by additional financial expenses in Brazil.

The estimates for 2015-2017 have been reduced to €31-35 million to reflect “worsening of trading in Brazil,” analyst Edward Hill-Wood mentioned, while adding that the “probability of likely catalysts in Brazil appears low within our investment timeframe.”

Heading into the important Black Friday and Christmas periods, Cnova’s management indicated that it would be prioritizing margins over pricing. While gross margins have been under pressure, financial expenses have risen, and cash control and working capital are seeing weakening, Hill-Wood pointed out.

“There is evidence that key competitors are increasingly turning to lower pricing to target share gains and shift inventory,” the analyst added.

Although trading in France continues to be healthy, with y/y margin expansion. Cnova’s performance may be boosted in December by a partnership with JD.com Inc (ADR) JD.

“There is also progress on strategic initiatives such as a higher weighting to mobile (40% vs 27% in 3q14) and marketplace revenues (22% of GMV vs 12.4% in 3q14),” Hill-Wood wrote. He added, however, that apart from macro and FX headwinds, stiffening competition on pricing, distribution or marketplace fees could exert pressure on forecasts and valuation.