Russian Retail Results Preview - Mixed 4Q21 Trading, but Low Valuations

Based on our Ivanov survey and recent macro data, we expect positive trends, as inflation is being passed on to the consumer, trading down has not intensified, while Covid-related restrictions are benefitting the large players. This should all bode well for the food sector, less so for non-food. We expect Magnit and X5 Group to see 9% LFLs and outpace the consensus, whereas Fix Price is set to miss the consensus, and Detsky Mir could prompt concern over pressure from marketplaces. We expect a positive reaction to Magnit, a neutral reaction to X5 Group, while others are likely to see weakness.> Positive shopping patterns. The preliminary figures from our SberCIB Ivanov Consumer Confidence Tracker point to limited trading down and promotion hunting, increased food spending, and a preference of large players for new year shopping. All of these bode well for the sector.> Strong trading for food retailers... We think 4Q21 food inflation was absorbed by customers, while November lockdown measures and the introduction of QR codes redirected revenues to big retailers. We expect the companies to post LFL sales growth of around 9% in 4Q21. We expect Magnit to post revenue growth of 16% (organic) and over 30% if including Dixy's contribution. We estimate a 14% y-o-y revenue increase for X5 Group. Our forecasts are above the consensus for both chains. > ... non-food to be mixed. We expect Detsky Mir to see 8% y-o-y revenue growth in 4Q21, with a muted figure for December, as toys sales were likely captured by marketplaces. This trend should reverse in 1Q22, but the market may have concerns. We see Fix Price posting 16% y-o-y revenue growth in 4Q21, with QR code requirements trimming growth by 3-4 pp, and we see a growing overlap with Svetofor. Accordingly, we think the company is set to miss its 10% full year LFL guidance, though this is already priced in to the stock and the 2022 revenue outlook (23.5% growth, according to the Bloomberg consensus).> We upgrade our Magnit TP from $19 to $21 per GDR. We have incorporated Dixy into our model along with stronger organic growth (EBITDA projections up by 13% in 2021 and 22% in 2022E. That was set off by higher WACC. BUY recommendation reiterated. > The sector is cheap. Following a 40% correction since peak, the sector now trades at the same level as in 2019, at an EV/EBITDA of 4.5. The discount to EM peers narrowed in 2020 but has widened again and now stands at 48%. The sector dividend yield of 11% by far exceeds the 1.7-2.8% of peers. We suggest buying Magnit and X5 Group ahead of the results, Detsky Mir after the results and Fix Price on early indications of positive 2022 trading.