Detsky Mir - Market Consolidation and Strong Dividend Flow; Upgrade to BUY

We now consider Detsky Mir's investment case to be positive following its strong 1Q21 financials, healthy QTD operating numbers, progress with new projects and the completion of the Altus deal. We believe the company's lower operating expenses are sustainable. We have upgraded our financial forecasts and have rolled forward our model. Our new target price is R180 per share, and we upgrade our recommendation to BUY. The company is expanding its market share despite mounting competition from marketplaces. We see the 1H21 financials as the next trigger.> Decent financials in a sluggish market. Although the children's goods market shrank 1% in 2020 and we project a 1% CAGR in 2021E-23E, the company managed to post revenue growth of 11% y-o-y in 2020 and 15% y-o-y in 1Q21. It has also improved its operating efficiency, resulting in an EBITDA margin (IAS 17) of 11.4% in 2020 (up 0.6 pp y-o-y) and a record first-quarter margin of 7.9% in 1Q21 (up 1.7 pp y-o-y), above our expectations. The online channel is becoming the main growth driver, and we expect an even stronger contribution in 2Q21, with overall top-line growth exceeding 25% y-o-y. > The deal with Altus Capital was closed this month. Altus Capital (via Gulf Investment Ltd) has raised its stake in Detsky Mir to 29.99% and pledged to continue holding the stock for the medium term. We now expect the shares to be governed more by financial and operating performance than by tender offer procedures.> We have upgraded our forecasts and upgrade the stock to BUY. We have incorporated the 1Q21 numbers and lower operating expenses in our model. This has allowed us to raise our EBITDA forecasts by 14% for 2021 and by 12% for 2022. We have raised our target price to R180 per share, and we upgrade our recommendation to BUY. The stock is trading at a 2021E EV/EBITDA of 6.1, below EM and DM peers, despite Detsky Mir's outstanding ROIC profile (we forecast about 40% for 2021E-24E versus the global peer average of 15%). We model a 100% payout, in line with the company's guidance, which implies a 2021E dividend yield of 9%.> Attractive factors remain intact. The company's core children's goods revenues are seeing low double-digit growth thanks to the online expansion. This is being assisted by new projects (Zoozavr and Detmir.ru PUP), which we expect to drive a consolidated revenue CAGR of 17% through 2023. This should translate into similar FCF and dividend growth. The company's own targets are more ambitious: to double revenues by 2024 (a 2020-24E CAGR of 20%), with 45% to come from online sales.> Competition from marketplaces will be an important development to track. Our key concern over the company's growth prospects is related to competition from Wildberries and Ozon. These competitors have a combined 13% share of the domestic goods market and mainly utilize the 3P model. However, we believe Detsky Mir's business model (1P and 3P) has proven itself to be resilient to the current challenges facing the economy, and we expect the company to continue growing fast, including its pet stores, small format and marketplace.