Russian Consumer - Share Gain in a Weaker Market
We think two factors - market consolidation by large players, and customers trading down- are set to impact the food retailers in 2H20. Both factors are an outcome of the lockdown and are difficult to quantify at this point. We believe the leading players will continue to benefit from market consolidation, mitigating the impact of trading down. We anticipate a strong 2Q20, but 2H20 is likely to see slower revenues and lower margins. We have increased our 2020 revenue forecasts by 2% on average (mainly on a stronger 1H20) despite slower expansion and reduced capex. X5 Retail Group is our top pick (BUY), while we have upgraded Magnit and Lenta to BUY and keep O'Key at a SELL.> The ongoing trend entailing fewer stores visited but higher tickets is shifting revenues to the largest chains, bringing them 6% in incremental revenues. The three public players' combined market share has increased by 3.5 pp in just two months. Meanwhile, promo hunting and trading down have been easing. All these bode well for the 2Q20 results. Convenience stores are better positioned, in our view. > Food expenditures were elevated at the start of the lockdown, but incomes have declined by 10% since then, according to our Ivanov survey. Hence spending is set to adjust. Nominal food retail sales declined 5.8% y-o-y in April, according to the State Statistics Service. We have yet to see signs of this in either our Ivanov survey or the SberIndex. However, we expect just 2% nominal growth this year and the retail chains' top-line growth to slow.> The key risk for sector revenues and margins is that unemployment and incomes deteriorate while resumed shopping mobility results in trading down and heavy promo hunting. This would be reminiscent of 2015-16, when the chains enjoyed decent traffic but ticket dilution and a higher share of promos. > The 2015-16 downturn came at the peak of chain expansion, while only X5 is adding stores at this point. The large players are not competing for footprint, though mid-sized retailers are likely to face margin compression, and specialists, including hard discounter Svetofor, are set to lose share. This should ease the margin pressure for the large chains. > We have increased our 2020 EBITDA projections by 15% for Magnit and by 2-4% for X5 Retail Group and Lenta, while we have cut our forecast for O'Key by 9%. We have raised both Magnit (TP upgraded from $10.00 to $14.00) and Lenta (from $3.00 to $3.20) to BUY, while we reiterate our BUY for X5 Retail Group (from $35.00 to $38.00) and SELL for O'Key (from $1.50 to $0.80).> At a 2020E EV/EBITDA of 5.8, the food retail sector offers a substantial discount to global peers. Russian food retailers are still exhibiting higher growth and offer solid dividend yields of 5.7% in 2020 and 6.2% in 2021. Improving ROIC should support multiples expansion, higher FCF and potentially higher dividends.Lenta is a hypermarket group based in Russia. Co. operates 87 hypermarkets in 50 cities across Russia and 16 supermarkets in the Moscow region with a total of approximately 571,328 sq.m. of selling space. Co. also operates four distribution centers for hypermarkets and one for supermarkets. operates three hypermarket formats: Standard, typically with approximately 7,000 sq. m. of selling space (smaller than many Western European hypermarkets) and 24,000 stock keeping unit (SKUs); Compact, typically with approximately 5,000 sq. m. of selling space and 20,300 SKUs; and Supercompact, typically with approximately 3,000 sq. m. of selling space and 15,000 SKUs.
Magnit is a holding company. Through its subsidiaries, Co. operates in the retail and distribution of consumer goods under the Magnit name. Co.'s retail operations are operated through convenience stores, cosmetic stores, hypermarkets and other. Most of its stores are located in the Southern, Central and Volga regions. Co. also operates stores in the North-Western, North-Caucasian, Urals and Siberian regions. As of Dec. 31 2014, Co.'s stores chain consisted of 9,711 stores: 8,344 convenience stores, 190 hypermarkets, 97 Magnit Family stores and 1,080 drogerie stores in 2,108 cities and towns throughout the Russian Federation.
O'key Group is a Russian retailer. Co.'s principal business activity is operation of retail chain in Russia under brand name O'KEY. Co. provides customers with fresh produce (fresh foods and delicatessen products) and non-food goods (cosmetics, clothing, shoes, household cleaning products, domestic appliances, toys, sports and fitness products, etc.). Co.'s stores follow two formats: hypermarkets and supermarkets. Co. manages approximately 71 stores (42 hypermarkets and 29 supermarkets) across North Western, Southern, Central, Urals and Siberian regions.
X5 Retail Group is a holding company. The main activity of Co. is the development and operation of grocery retail stores. Co. operates a retail chain of soft-discount, supermarket and hypermarket stores under the brand names "Pyaterochka", "Perekrestok" and "Karusel" in major population centres in Russia, including but not limited to Moscow, St. Petersburg, Nizhniy Novgorod, Rostov-on-Don, Kazan, Samara, Lipetsk, Chelyabinsk, Perm, Ekaterinburg and Kiev, Ukraine.
Sberbank CIB Investment Research is a research firm offering equity, fixed income, economics, and strategy research. It covers analysis on all aspects of Russia’s capital markets, issues and industries. The firm analyzes trends in Russia and combines local knowledge with a global perspective. It processes macroeconomic data, market and company-specific news, stock quotes and other information for providing research reports. The firm provides details and latest prices on the most traded names and most traded paper on all segments Russian market. In strategy research, it provides thematic research, tips and descriptions of the methodology used to evaluate companies.
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