M.Video - Upgrading on Inspiring Growth Outlook, Improving Liquidity

We introduce a target price of R800 per share for M.Video and a BUY rating. We forecast a 13% top-line CAGR in 2020-24E and a 10.2% dividend yield in 2021, while the stock trades at a 2021E EV/EBITDA of below 5. We expect the recent placement (the main reason we had the stock UNDER REVIEW) to boost liquidity and think the active online expansion will ease market concerns surrounding the segment and contribute to the stock's re-rate. The plans to double GMV by 2025 are not yet reflected in our forecasts. We expect around 20% revenue growth in 1H21, which could act as a positive trigger.> We keep our forecasts unchanged. We expect revenues to grow at a 13% CAGR in 2020-24E, reaching R673 bln in 2024, with EBITDA growing at a similar rate to R44.7 bln (a 6.6% margin, IAS 17). We see capex staying flat (the online segment does not require major investment), which should boost FCF from R9.6 bln in 2020 to R21 bln in 2024. We see dividends growing from R12.2 bln for 2020 to R21.7 bln for 2024. > Five-year targets more ambitious. These include raising GMV from R0.5 trln in 2020 to R1.0 trln (including VAT) in 2025 (up to 5% from 3P), implying a 15% CAGR. This would mean opening 500 stores and entering 100 cities. As half of the stores are to be small (250 m2 Eldorados), this would only entail 5% space growth per year. The EBITDA margin would stay at 5-7%, with capex not exceeding 2% of GMV (mostly for IT). This should allow M.Video to distribute 100% of net income as dividends. > Discount to global peers. The 2021E EV/EBITDA of 4.7 implies a discount of 17% to DM peers (which are not expected to grow, according to the Bloomberg consensus) and more than 70% to EM peers. The stock offers a 10.2% dividend yield versus 1-3% for globals. The shares typically trade at an EV/EBITA of around 5 but have recently been depressed by concerns about online competition. We believe that as those fears are refuted, the multiple is likely to re-rate.> We see a strong 1H21. Despite the high base from March 2020, M.Video posted consolidated GMV growth of 13.8% y-o-y to R115 bln (excluding VAT) in 1Q21 amid a surge in online sales. As the base eases in 2Q21, we anticipate decent 1H21 results, with 20% y-o-y revenue growth and 15-20% EBITDA growth (IAS 17). The share of online should be about 60%.> Competition from DNS. DNS grew its store count by 378 (versus 36 for M.Video) to 2,224 in 2020, continuing its rapid rollout. It posted revenues of R504 bln (including VAT) and passed M.Video in unique customers. Our Ivanov survey indicates DNS has a lower NPS than M.Video but a higher one than Eldorado, and that 58% of M.Video customers also shop at DNS.