Asda Group Credit Analysis: Highly Levered UK Grocer at Critical Juncture

Background

• • Asda Group ("Asda") is a UK food & general merchandise retailer headquartered in Leeds. LTM (FY-24) Adjusted EBITDA is equal to £1.1 bn and Total Net Leverage is equal to 5.5x
• • Third-largest UK grocer (c. 15% value share, Kantar) operating 633 superstores, 170 supermarkets, 145 Asda Express c-stores and >640 fuel forecourts, plus George clothing and George.com.
• – FY-24 Adj. EBITDA ≈ £1.1 bn, +2 % YoY; margin ~4 % (FY-23: £1.08 bn). IFRS operating loss £-44 m after £714 m non-underlying items linked mainly to IT separation, M&A and impairments.
• – Executive Chair Allan Leighton (ex-Co-op) appointed Jan-24 to accelerate turnaround. Ken Towle (Retail), Matt Kelleher (CIO) hired; Michael Gleeson remains CFO. High C-suite turnover in last 18 months underlines execution risk.
• • Segment mix (revenue, management disclosure & estimates):
• – Grocery 72 % (core food, fresh, online) – c. 80 % of EBITDA.
• – Fuel 15 % – volatile, low-margin but cash-generative.
• – George clothing 6 % – mid-teens margin, meaningful contributor to cash.
• – General merchandise & other 7 % (home, toys, financial services, wholesale).
• – Convenience (Asda Express) still <2 % of sales but strategic for growth.
• • Geography: >95 % of revenue generated in the UK; small sourcing/wholesale ops in ROI and CE. UK cash flows therefore exposed to sterling, UK consumer cycle and regulation.
• • Revenue model: predominantly spot sales to consumers; price×volume. No long-term contracts, near-zero recurring revenue outside click-&-collect subscription (limited adoption). Churn concept not relevant – store footfall and online traffic are key KPIs (FY-24 in-store transactions +4 %, online orders ‑5 %).
• – Inflation pass-through partially achievable but constrained by discounter competition; FY-24 like-for-like ex-fuel +5.4 % vs grocery inflation ~7 %, implying negative volume mix.
• – No contractual CPI pass-through mechanisms; margins pressured when commodities spike.
• • Cost structure (FY-24, mgmt. disclosure & estimates):
• – COGS 78 % of sales (highly variable, tied to procurement prices).
• – Store labour 9 %, largely variable but unionised and inflating >8 %.
• – Logistics & fuel 4 %.
• – Central SG&A 5 % (IT, marketing, head office) – mainly fixed.
• – Roughly 80 % variable, giving flexibility but limited operational gearing upside.
• • Shareholders / valuation: Issa brothers & TDR Capital hold c. 67 %, Walmart retains 33 % preferred equity, small stake by former PE bridge vehicle. Asda taken private Oct-20 for c. £6.8 bn EV (11x FY-19 EBITDA). UK listed peers (Tesco, Sainsbury's) trade 6-7x FY-25 EV/EBITDA; discount warranted for leverage and execution risk.
• • Strategy: "Formula for Growth" – restore price perception (Rollback, private-label), exploit convenience (c. 500 Express sites by '28), expand online capacity, separate legacy Walmart IT, realise £150 m cost synergies from 2023 EG-owned UK convenience forecourt acquisition, pursue net-zero 2040.
• • Corporate actions:
• – 2023 acquisition of 356 EG UK petrol/retail sites (£2.07 bn EV, financed with new £3 bn TLBs).
• – 2024 refinancing: issued £3.2 bn equivalent senior secured TLA (£1.5 bn SONIA) & TLB (€1.9 bn Euribor) to refinance 2021 TLB, extend maturity to 2031; raised £500 m SSN due 2031.
• – No dividends since 2020; shareholders took c. £500 m advisory fees & property sale-leasebacks – creditor negative.
• • Current trading (Q1-25 trading statement): total revenue +3 % YoY, food volume finally positive; fuel sales ‑4 % on lower pump prices; Adj. EBITDA +5 % aided by integration synergies though wage inflation continues to offset gross-margin recovery.

Risks and mitigants

• • Customer concentration: none – diversified mass-market consumer base.
• • EBITDA adjustments material – FY-24 non-underlying items £714 m (c. 40 % of Adj. EBITDA add-back) driven by IT separation, M&A costs and store impairment – undermines quality of earnings.
• • Cyclicality: grocery historically resilient but UK cost-of-living squeeze hurt discretionary GM/George; high exposure to low-income shoppers raises demand elasticity.
• • Litigation/provisions: ongoing equal-pay lawsuit from predominantly female store staff vs higher-paid depots (industry-wide). Potential settlement could exceed £500 m – partially provided but outcome uncertain.
• • Free cash flow and leverage: FY-24 FCF neutral after £366 m capex and £370 m interest; post-M&A leverage >5x EBITDA, thin covenant cushion (maintenance test if RCF drawn >40 %).
• • Regulatory: CMA scrutiny on fuel pricing, grocery supplier practices (GSCOP), HFSS location bans and potential windfall taxes on forecourts. Margin dilution risk.
• • Geopolitical: Sterling volatility affects USD-denom imports (fruit, textiles) though 6–9-month hedging policy mitigates. Tariff risk low post-Brexit deal but customs friction raises working capital.
• • Accounting or fraud: No known irregularities; KPMG unqualified opinion. High level of non-underlying costs invites scrutiny.
• • Financial distress history: none since Walmart acquisition in 1999; leverage step-up post-2021 LBO raises refinancing risk but no prior restructuring.
• • Technology: IT carve-out from Walmart SAP platform is complex; delays or outages could disrupt supply chain – £1 bn Project Future capex over 3 yrs.
• • Other: high energy prices, living-wage hikes, and climate transition (refrigerant, fleet electrification) demand capex; balance sheet capacity limited.

Capital structure (Dec-24)

• • Total gross debt c. £10.2 bn: £4.8 bn senior secured TLBs (GBP & EUR); £3.4 bn senior secured notes (2026/31); £0.7 bn revolver (undrawn); £1.3 bn lease liabilities; £0.1 bn other. Net debt ≈ £9.0 bn after £1.2 bn cash; TNL 5–5.5x Adj. EBITDA.
• • WACD roughly 6.5 % (SONIA +275 bp on TLA, Euribor +300 bp on TLB, 6.875 % fixed on SSNs). Interest expense FY-24 £611 m, EBIT/interest cover <1x on statutory numbers.
• • Maturity wall: RCF 2028, SSN 2026, material term debt 2031 – limited near-term bullet but £500 m notes due 2026 need refinancing in a higher-rate backdrop.
• • Contingent liabilities: equal-pay litigation, supplier disputes, £170 m pension deficit (IAS 19) but manageable relative to EBITDA.
• • Supply-chain finance: c. £900 m payables on SCF facilities (~20 days of COGS) – potential working-capital squeeze if withdrawn.
• • Liquidity: £1.2 bn cash + £1.2 bn undrawn RCF = £2.4 bn headroom; however, separation capex and litigation could consume cash.

Financial modelling (based on saved model)

• • Assumptions: revenue CAGR 5 % 2025-29 reflecting convenience rollout, online penetration and 2 % inflation; gross-margin flat as price investment offsets mix; SG&A efficiencies 50 bp pa; capex maintained at 1.4 % of sales then taper; working-capital neutral post-separation; interest costs fall 50 bp from deleveraging.
• • Projections (USD model converted to GBP at 1.25): revenue grows from £22.5 bn (2025) to £27.4 bn (2029); FCF improves from £3.8 bn to £4.7 bn (model appears aggressive vs historic c. £0.4 bn FCF and merits haircut); leverage path assumes 70 % of FCF to debt pay-down, reaching 3.5x by 2029 – contingent on no shareholder distributions.
• • Key sensitivities: 100 bp margin miss cuts cumulative FCF by £1.2 bn; sustained 5 ppl fall in fuel margin wipes c. £120 m EBITDA; 50 bp higher rates cost £50 m pa.

Conclusion

• • FCF outlook: modest near term as high interest and separation capex absorb cash; meaningful ramp-up only post-2026 once IT project complete and synergies flow. Dividend unlikely before 2027.
• • Valuation: Assuming 6.5x FY-24 Adj. EBITDA, EV ≈ £7.1 bn; debt is >125 % of EV, leaving covenant tail-risk if margins slip.
• • Capital structure: stretched but term-out buys time; high fixed-rate debt shields against further hikes yet limits deleveraging; supply-chain finance and leases inflate off-balance funding. Equity cushion thin; any litigation or margin shock could drive rating pressure.
• • Indicative ratings:
• – Moody's grid: Debt/EBITDA 5-5.5x → Ba2/Ba3 territory; EBIT/interest ~1x → B range; RCF/Net Debt low-teens % → B. Business profile mid-BB due to scale, but high leverage dominates.
• – S&P: Similar metrics place Asda in 'BB-' with negative outlook until deleveraging evidenced.
• • Overall, Asda remains a highly levered, execution-dependent grocer whose investment case hinges on synergy capture, IT carve-out completion and disciplined capital allocation.