ASDA - Execution - Model Update
All,
Please find our updated analysis here
The challenges of separating from Walmart’s IT systems are behind ASDA, but the plan to reposition itself as the cheapest of the Big 4 is a long way from completion and will take at least two more years (and £600m in costs) to complete. We expect ASDA to be able to restore its position as 5%-10% cheaper than Sainsbury’s and possibly Morrisons, but the discounters will be able to influence overall pricing more than in the past. We still see significant equity under the Cap Stack, but Allan Leighton’s transformation plan will not be easy.
Investment Considerations:
- ASDA will produce its FY results at the end of April, and we will review our stance then. We are minded to take a long position in the
- We see two points of upside and 4 of downside going into the FY results, but thereafter we see the SSNs as having 11 of downside and 7 of upside
- Our DCF model shows£2bn equity below the bonds.
- There are no significant maturities between now and October 2028; this gives ASDA time to demonstrate that its lower price strategy has been successful in halting the decline in sales and margins.
- In the meantime, ASDA will sacrifice cash flow and margins in favour of protecting its market position.
- ASDA has significant additional freehold assets and can use S&L transactions to release further cash for price support if necessary.
Key Conclusions
- ASDA had inventory availability issues in Q4, and the impact will delay the recovery by two quarters. However, as our Recent Trading section shows, the company has £1bn in cash and a £750m RCF, so liquidity is not an issue.
- Our DCF calculation shows £2bn of Equity under the cap stack, although our model assumes that EBITDA and OCF improve from 2027.
- The Model section shows that we expect EBITDA to begin to recover in 2027, and that leverage (including S&L) will return to 7x by 2028. We forecast that an additional £300m of debt will be required to bolster liquidity, and this could be from further S&L deals or RCF drawings.
- The need for the price support is covered in the Falling Volumes section. ASDA expects the program to take three years (from Jan 2025) and we expect it to cost £300m a year over that time. The botched Ordering platform introduction in Q3/Q4 2025 has set the recovery plan back by two quarters.
- ASDA is targeting a price gap of 5% -8%, but maintaining this gap against Sainsbury and Morrisons will be tough. Also, the increasing market share of the Discounters means that margins are increasingly capped by their market behaviour.
- Project Future is now largely done. It cost >£1bn in OpEx and £166m vs. an original budget closer to £300m. The £200m cost in the LTM period should now start to fall rapidly as we go into 2026. There will be a limited EBITDA rebound initially due to the £300m in price support.
Recent Trading:
Q3 2025:
With over £1bn of available liquidity (post the November £560m sale and lease back transaction), ASDA has sufficient cash to cope with the volume recovery programme being pushed back by two quarters. Q3 2025 results were significantly impacted by stock availability issues post the Walmart separation in Q2/Q3. Management was noncommittal on the repayment of the Walmart PIK; this debt will be one priority, but we expect flexibility from Walmart as ADSA spends up front to reposition itself in the longer term and, in the shorter term, looks to entice back customers disappointed by the availability issues in Q2/Q3 this year.
Q4 2025 Revenue has been guided as below: Q3 (Q4 is normally 7% - 10% above Q3), EBITDA will be further impacted by higher marketing costs. We are updating our model, but we expect EBITDA to be £800m - £825m in 2025. The £1bn available cash is sufficient to cover negative free cash flow through 2028, but ASDA is likely to do one more S&L deal to boost cash (probably in 2027). Pricing the S&L deal at c7.5% is an attractive cost of finance, albeit it will put 0.65x of a turn of leverage ahead of the SSNs.
Q2 2025:
The pace of decline at ASDA is slowing, but there is a long way to go for ASDA. The response from competitors to price rollbacks has been muted so far, but Q2 performance will need to show that volumes are starting to improve. The potential £400m sale and leaseback deal would provide a cushion if competitors respond more aggressively. Our thesis for the SUNs remains underpinned by the value of the ASDA brand.
Underlying EBITDA levels were down 30% in Q1, with management maintaining its broad guidance of -20% for the FY. Improvement in H2 hangs on the newly established price gap (3%-5%) and availability (96% vs 90%), translating into higher volumes. Management claims this should become more visible in Q2, but this will be partly dependent on the price war not worsening.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055