Detsky Mir - Scoping Out New Territory

Detsky Mir's three growth projects - Zoozavr, Detmir.ru and the marketplace - represent a foray into new segments and a geographical expansion. These projects should help the company retain growth momentum, safeguard it from online competition and maintain strong ROIC. We have added these projects to our model, which has lifted our 2023 EBITDA forecast by 17% and our target price to R150 per share. Detsky Mir remains our top pick in the consumer sector, and we see the upcoming trading results as the next trigger. We are unconcerned by competition from Wildberries, as we consider Detsky Mir's value proposition in core categories to be superior and poised to improve further. > Detsky Mir is poised to deliver robust performance (we project y-o-y growth of 14% in revenues and 19% in EBITDA in 3Q20) and it offers a ROIC of over 35% and a dividend yield of 11% over the next 12 months, on our numbers. Meanwhile, it recently launched three projects with the aim of diversifying away from children's goods (amid negative demographic trends), creating new growth drivers and protecting itself against online competition. > The Zoozavr pet supply store chain is to roll out 500 outlets (average selling space of 170 m2) by 2023 that will be located in shopping malls and on street locations close to chain food retailers. The synergies in logistics should provide cost advantages in a growing but highly fragmented market that has no specialists outside of Moscow. We project a R2.0 bln EBITDA contribution in 2023.> Detmir.ru PUP, an online format offering a pickup service, should expand the company's footprint into small cities and districts lacking large premises available for the core format. The format should more than double the number of cities in which Detsky Mir has a presence and should penetrate areas currently covered by Wildberries, which should lift the targeted market by 25%. We calculate that the channel should contribute R1.8 bln to the EBITDA line in 2023.> The marketplace project is intended to bring the assortment to 2 mln SKUs over the medium term. The contribution to EBITDA is unclear to us at this point, but the project should strengthen Detsky Mir's position in the children's apparel segment.> We have incorporated estimates for Zoozavr and PUP, and also upgraded our forecasts for the core business. Our 2020-22 EBITDA projections are up by 7% on average. We move our target price up to R150 per share and reiterate our BUY recommendation. A sum-of-the-parts valuation suggests 75% compound value growth through 2023, of which 21 pp will come from the new formats. > With the company now taking market share from traditional offline competitors and streamlining its cost structure, short-term triggers are likely to come from the operating and financial results. We reiterate our short-term long trading idea. > The risk from Wildberries is overstated, in our view, as Detsky Mir has lower prices and offers faster delivery. However, it has a smaller footprint and a narrower apparel offering, which is what the projects are aimed at overcoming.