EG Group confident ahead of Asda aquisition deal, despite earnings dip

Zuber Issa

Blackburn-based EG Group published it first quarter trading update today, ahead of its proposed sale to Leeds-headquartered supermarkets group Asda, announced last week.

Figures for the forecourts and fast food group showed EBITDA for the period fell, compared with the previous year. Its $228m figure for the period to March 31, 2023, compared with $270m a year ago. However, the group said figures were line with expectations.

Revenues were $7.2bn, up from $6.9bn.

Excluding the impact of inventory revaluations, which were the result of oil price volatility in the current and previous comparable quarter, the group’s underlying trading performance for Q1 was $12m or five per cent down versus the prior year period.

During Q1, US EBITDA decreased by $12m or 13% on Q1 2022, reflecting competitive market pressures following oil price decreases in the quarter. This impact was, however, short lived and margins have recovered in Q2 to date.

Grocery and Merchandise continued to perform well across the group. Gross profit of $313m for Q1, on a constant currency basis, was up seven per cent, with margins coming in slightly ahead of last year despite the continued underlying product cost pressures.

This business stream saw an increase in sales across all regions, reflecting the group’s focus on product mix optimisation, continued investment in new sites, as well as ongoing Asda On the Move convenience store conversions in the UK. To date, 167 Asda On the Move sites have been developed and opened.

In Foodservice, sales increased by almost 15% year on year, driven largely by the group’s continued Foodservice investment strategy, with 88 new outlets opening since March 2022. As a result, total Foodservice gross profit for Q1 of $192m on a constant currency basis was $17m or 10% above the prior year.

Fuel volumes of 4.1bn litres were up three per cent on Q1 2022. Fuel volumes grew in the UK, supported by Asda Fuel conversions and a more stable wholesale market relative to the comparable period. Performance in Germany bounced back to normal levels following the challenges reported in the previous quarter. EG Fuel, the supply and distribution business, which supports the Benelux and France businesses, was impacted year on year by adverse stock revaluations as a result of fluctuating external wholesale prices, by $31m of inventory revaluations in total.

EG Group said the key pillars of the group’s growth strategy remain the same. There are multiple opportunities to grow the business organically in all of its operating regions and its strategic priorities will continue to be supported by an average annual growth capex investment of c.$200m-$250m.

EG will remain the third-largest global independent fuel convenience retailer; the second-biggest independent operator in Europe; fourth-largest independent in the US – with around 1,700 stores across 30 states; and will maintain a c.10% market share in Australia.

In the US, there is a clear opportunity to continue the expansion of the Cumberland Farms brand, including store rebranding opportunities and the continued roll out of Cumberland’s leading coffee, private label proposition and Smart Pay solution across EG’s broader US network to create a strong U.S. identity.

The group will further optimise its real estate by identifying new markets – evaluating store locations for expansion through improved Foodservice offerings; investment in new sites; entry into alternative fuels; and continuing to review non-core assets for divestment.

In the UK and Europe, the group will continue to invest in Foodservice outlets and expand its best-in-class Foodservice proposition, including leveraging its ownership of the Cooplands bakery business; as well as continuing to integrate the forecourt business in Germany. In Australia, EG will continue the Ampol rebranding initiatives, with completion of the full rebranding expected by first half of 2023.

Across all markets, the evolution to alternative fuels presents a major opportunity for the group, with EG’s large site network offering a unique base from which to build a leading rapid charging network. The group has identified almost 4,000 high quality potential sites for ultra-rapid charging that have high footfall, enough car parking spaces and complementary Foodservice and/or grocery offerings.

With the whole of the EV business – including in the UK – remaining in the group, EG sees a huge opportunity in the near term to accelerate the rollout of a leading EV charging proposition, under our proprietary brand, evpoint.

The sale of EG UK&I to Asda for an enterprise value of £2.27bn ($2.8bn) represents an important milestone for the group, it said.

The combination of this – alongside other announced and completed transactions, as well as the ability to reduce discretionary growth capex – has delivered significant funding for the group to address upcoming maturities through material debt repayment. This activity is expected to reduce total net debt from $9.801bn in March 2023 to $5.375bn post completion of the announced transactions, with net leverage to fall from 6.3x to 4.9x.

Concurrent with this significant deleveraging activity, the group has launched a three-year Amend & Extend of its term loans. The group has already initiated a process with key relationship banks seeking both an extension of its RCF and banking facilities, and has received good support in this process.

Following the completion of the Amend & Extend, EG plans to refinance the remaining near-term maturities 12-15 months before their maturity date, resulting in a sustainable long-term capital structure.

Zuber Issa, CBE co-founder and co-CEO of EG Group, said: “The sale of EG UK&I to Asda is an important step for the group and provides a platform to further invest across our diverse international portfolio, where we continue to see compelling opportunities to accelerate our proven and successful strategy to roll-out Foodservice, and Grocery and Merchandise to create multi-purpose convenience retail sites across our estate.

“We also have a significant near term opportunity to deploy emerging fuels and EV chargers, across the existing site network and third-party locations.

“The group has now delivered a combination of strategic actions, including the US sale & leaseback transaction – which delivered net proceeds of $1.4bn – that will enable us to significantly reduce our overall leverage to below five times, in line with our financial policy and deleveraging strategy.

“We will now be addressing our upcoming maturities, including a three-year Amend & Extend of our Term Loans, which will help us to put in place a sustainable long term capital structure. We remain committed to achieving a net leverage multiple of mid four times in the near term.”

He added: “Over the last 22 years, we have built a hugely successful global multi-purpose convenience, fuel retail and Foodservice business and this will continue from our global headquarters and shared service centre in Blackburn under the existing leadership team. In Q1 we delivered another robust set of results, with strong performances in most regions and significant growth in Foodservice gross profit, which was up 10% on the prior year.

“Our future ambitions are unchanged and, following the Asda transaction, we will continue to operate across three continents and nine countries, benefiting from a strengthened balance sheet, strong cash generation and $6bn of freehold property. This provides continued geographic diversification, scale and an unrivalled platform from which to grow.”

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