Detsky Mir Trading Idea - Buy Ahead of Lockdown Lifting

Detsky Mir is Russia's largest children's goods retailer. It posted superior LFL sales growth of 6.7% last year (versus growth of just 0.7% for the sector) and has sustainable double-digit margins and high ROIC. However, sales plummeted 33% y-o-y in April due to the deteriorating macro environment and the start of the nationwide lockdown. The entire non-food retail sector is under considerable pressure, but we think the children's goods market will prove more resilient and recover faster than other subsectors. The company can also adjust its opex more quickly to the lower-revenue environment. The stock is trading close to a record-low EV/EBITDA of 5.1 in 2021E (under IAS 17), suggesting discounts of 4% to X5 Retail Group and 10% to Magnit. We therefore consider the current moment a good buying opportunity.> Performance and what's in the price. Between Detsky Mir's SPO in November 2019 and February 20, the stock advanced 33% to reach R122 per share. It then suffered a hefty selloff and is now trading down 16% YTD. This performance contrasts with that of food retailers, which have recovered faster and now are up 5-7% YTD in ruble terms. The market is pricing in a structural deterioration in the business outlook for Detsky Mir. > Where we are versus the consensus. Our 2020 EBITDA estimate (under IFRS 16) of R22.7 bln is 11% above the Bloomberg median estimate (the average estimate seems off to us, likely due to there being a mix of forecasts under IFRS 16 and IAS 17).> Key drivers and catalysts. First, revenues sank 33% y-o-y in the first 27 days of April but were down "only" 19% in the week to April 26, so we assume only a moderately negative performance in May. So any management comments on the current performance or news that the lockdown is being eased could support the stock. Second, Detsky Mir is set to announce its plans for its small format stores, pet stores and online marketplace at the end of this quarter. Positive news and further details on their performance would be favorable for the stock. Third, the company has postponed the dividend payment for 4Q19; the BoD will make a final decision once the lockdown is lifted. Should it decide to pay out the postponed dividends, this would support the stock. > Risks to our view. We believe the main risk stems from a slower than expected recovery in the children's goods market, which would result in slower revenue and LFL growth. Rising competition with online marketplaces represents another risk. During the lockdown, people may be developing more loyalty to pure online players due to improvements in their online experience, and they could start buying children's goods online at marketplaces with a wider assortment rather than at Detsky Mir. However, we assume that retail specialists such as Detsky Mir will remain the preferred option for consumers.