Magnit - 1Q20 IFRS Review: Strong Top-Line Acceleration

Magnit's 1Q20 financial results showed a marked top-line acceleration to 18.5% (from 11.0% in 4Q19) with 7.8% LFL. Bulk purchases contributed just 2.4 pp of the growth, whereas the company attributed the rest to an improved CVP. That correlates with the better store perception in the most recent Ivanov survey and sales uptick in February. Diminished promos supported the gross margin, while operating leverage improved thanks to stronger revenues. EBITDA came in at R22.7 bln (5% above consensus) for 6.0% margin. The results for 1Q20 and April mark a meaningful improvement in the company's operations. Though for us to adopt a more constructive stance on the company we would like to be assured that the improved perception seen in our survey is sustainable. We thus reiterate our HOLD recommendation for time being.> The top line rose 18.5% y-o-y to R376.0 bln in 1Q20. Retail revenues climbed 17.6% y-o-y (a massive acceleration from 9.2% in 4Q19) to R364.8 bln. LFL sales growth rose to 7.8% (from 0.1% in 4Q19) on 4.0% traffic inflow (thanks to the cosmetics and convenience formats) and a 3.7% ticket increase. Moreover, SIA and wholesale added R11.3 bln (up from R7.1 bln a year ago) and pharmacies, which were invisible a year ago, generated R2.6 bln in revenues. > January saw the slowest sales growth (12%), while both February (19%) and March (21%) were strong. That contrasts to X5 Retail Group, which saw most of its acceleration in March. The management estimates 2.4 pp (out of 7.8% LFL) came from stockpiling, while the rest is attributable to an improved CVP. This correlates with the findings from the recent Ivanov survey that the store perception is improving and becoming more appealing to wealthier customers. > The gross margin decreased y-o-y by 70 bps to 22.7% in 1Q20. That resulted from the 60 bp negative impact on profitability from the rollout of the loyalty program. The margin improved from 21.7% in 4Q19 on diminishing promos and better procurement terms. > The improved operating leverage has fully offset the R1 bln in extra costs related to the coronavirus (payroll and sanitary protection). SG&A expenses (excluding D&A) went from 17.5% of revenues in 1Q19 to 16.6% in 1Q20. EBITDA came in at R22.7 bln (in line with our forecast, but 5% above the consensus) for a 6.0% margin. The company posted an FX loss of R1.8 bln, so net income amounted R4.2 bln, 7% below consensus. > The retailer closed 28 convenience stores in 1Q20 (versus 482 additions a year ago), but opened 164 cosmetics stores in net terms. This is in line with the company's strategy to scale down expansion. > During the call, the management noted that the previous capex guidance of R60-65 bln, in line with 2019, would be revised as expansion and refurbishment would be slowed down. Capex in 1Q20 was already down 25% y-o-y at R7.2 bln.