Detsky Mir - Challenging 2Q20, But Business Robust

Detsky Mir posted EBITDA growth of 17% y-o-y in 1Q20, but that has been overshadowed by a 33% drop in revenues in April, as it is the most profitable categories that are most exposed to the current economic turbulence. However, profitability should be supported by improved procurement terms, while SGA expenses are variable to a large extent. We believe the children's goods market should be hit most in 2Q20, but that a rebound should follow in 2H20. Detsky Mir could benefit from market consolidation. As for risks, they come mostly from marketplaces, as consumers are becoming accustomed to online shopping. We have cut our revenue forecast for this year by 7% and EBITDA projection by 14%. We have reduced our target price from R135 to R125 per share but reiterate our BUY recommendation.> Revenues expanded 11.2% y-o-y in 1Q20 to R31.0 bln on 4.0% LFL sales growth thanks to higher traffic. The gross margin rose 30 bps y-o-y to 29.3%, which helped to boost the EBITDA margin by 30 bps to 6.2%. EBITDA was up 1.8% y-o-y to R1.9 bln (in line with our forecast). However, a net loss of R0.3 bln was recorded on an FX loss amid ruble depreciation. > The management reported that revenues fell 30% y-o-y in the first 27 days of April due to the lockdown, with sales in large cities hardest hit. However, sales were down only 19% in the week to April 26, possibly indicating a positive trend. A hundred and twenty stores have been temporarily closed, mostly those in malls.> Revenues declined in the most profitable categories, which are fashion and toys, though the company's profitability should be underpinned by improved procurement terms. Operating expenses are variable to a large extent, and we do not project a drastic deterioration in operating leverage in 2Q20. We expect revenues to decline by 17% to R23.1 bln in 2Q20 and EBITDA by 52% y o-y to R1.6 bln for a 7.0% margin (down from 12.0% in 2Q19). > For now, we assume the restrictions will be eased in May, so the children's goods market should be hit the hardest in 2Q20, followed by a rebound in 2H20. The company could benefit from market consolidation, as some offline chains are running out of cash and have already closed stores, although risks stem from marketplaces as consumers' online experience is improved. > We have cut our revenue projection for this year by 7% to R134.7 bln and our EBITDA projection by 14% to R13.3 bln, while our projections for 2021 were trimmed just slightly. We reduce our target price from R135 to R125 per share but reiterate our BUY recommendation.> Despite the dividend payment for 4Q19 being postponed, we expect the company to continue paying out 100% of net income, which implies a 9.1% yield for dividends paid in 2020.