Detsky Mir - Opening Trade Idea to Buy Ahead of CMD

INVESTMENT CASEDetsky Mir is one of the largest players in the Russian children's goods market. Although the sector as a whole was hit by the lockdown, the company registered positive revenue growth y-o-y in 2Q20, which we believe will accelerate to double digits in 3Q20. Offline competition is easing, while Detsky Mir's online channel is growing noticeably and its new business projects should soon start feeding into the financials. The 12m forward dividend yield is now 7.8% and the stock trades at a 2021E (IFRS 17) EV/EBITDA of 6.6. We see potential upside for our forecasts. PERFORMANCE AND WHAT'S IN THE PRICEThe share price has fully recovered from the 2020 trough (caused by a revenue decline in April), as has the operating performance. The market has priced out as unrealistic a black-sky scenario, but prices have yet to reflect the ongoing market consolidation. In addition, the contribution from new projects is not reflected in either the valuation or analysts' forecasts. We also believe that the highest ROIC should deserve a premium valuation to the rest of the market. WHERE WE ARE VS CONSENSUSThe Bloomberg consensus seems distorted because there are forecasts under different financial standards. KEY DRIVERS AND CATALYSTSThe 2Q20 financial results (due on August 25) have already been flagged as strong. Comments on current trading should be supportive and we assume double-digit revenue growth in 3Q20 (shopping mall traffic stats show a recovery), despite the strong base. The presentation of the results will be followed by an online capital markets day. This event having been scheduled suggests the strategy for the small format and pet stores has been finalized. We are likely to hear the outlook and financial metrics on those new segments, which may trigger analyst upgrades. With business conditions back to normal, Detsky Mir may consider paying out the unpaid 45% of RAS net income from 4Q19 (versus the 100% policy). This remaining R1.8 bln being paid out would lift the 12m dividend yield from 7.8% to 9.9%.RISKS TO OUR VIEWThe key risk is from online competition, where the largest marketplace, Wildberries, is actively building scale in the category. However, our recent Ivanov survey showed superior prices and delivery times at detmir.ru. Moreover, Detsky Mir's small format is aimed to compete against Wildberries' rapidly growing chain of pickup points. We thus expect these two players to keep capturing share from the rest of the market.