ASDA - Progress - Model Update
All,
Please find our slightly updated analysis here.
ASDA’s Q4 results were expected to be bad and were. Also, whilst the pace of decline has slowed in the first few months of 2026, revenue has not turned around yet. The potential for a surge in inflation due to the Iranian conflict will cap further tightening in the short term, but we forecast that ASDA has the liquidity and access to debt to complete Allan Leighton’s turnaround, even if we are sceptical as to how quickly it will be achieved. Progress is slow, but we do expect some improvements in the latter part of 2026.
Investment Considerations:
- The ASDA FY results were as bad as forecast. Management has seen green shoots in March, but the market share data from Kantar points to ASDA still struggling to convert its price support policy to improved performance.
- Given the likely inflationary pressures in the UK from the Ukraine and Iranian conflicts, the capital structure is going to, at best, trade sideways.
- We see the best potential value in the EUR700m 2031 SSNs, currently trading at 93.75%. We see little short-term upside and 2/3 points of downside, but over the next 9 months, there are 7 points of upside (YTW 7.75%), and 5 points of downside (10.5% YTW) as ASDA starts to deliver some traction on bottoming out its sales. The GBP SSNs trade at 92% (10.6% YTW) and have similar upside-downside characteristics)
- 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 continue to 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 £1.3bn 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.
Trading Update:
Q4 2025:
- ASDA is slowly going in the right direction. We forecast that Alan Leighton’s turnaround plan will take two more years, with improvement in 2027. We think investors will be disappointed at the pace of recovery in Q1 and concerned about inflation from the US war in Iran. Management is guiding for revenues and margins to improve in 2026, but we are sceptical that things will turn around that quickly.
- Q4 sales fell 4.2%, and EBITDA fell 39%, with the drops largely expected after a botched logistics system introduction in Q3. Management claims that sales reductions started to reverse in Q1, but we were here in Q2 2025.
- Working Capital inflows of £458m in 2025 (£506m in Q4) with Payables rising from 58 to 69 days of sales Q4 2024 to Q4 2025, staying at this level will require cooperation from the suppliers.
- Liquidity is significant – GBP1bn in cash, £750m in RCF availability, will fund the ASDA through to the end of the recovery plan.
I look forward to discussing this with you all,
Aengus
T: +44 203 744 7055