Magnit - CPI Mitigates Base Effect and Slow 2020 Rollout; Upgraded to BUY

Elevated food CPI is being absorbed by customers (thanks to a huge drop in spending on services), while big chains are still capturing new customers. This has erased our fear of a major top-line slowdown for Magnit in 1Q21 (due to a high base and slow rollout). We upgrade our forecasts and lift our target price to $19.00 per GDR, which warrants a BUY rating. The stock is trading at a 40% discount to EM peers on EV/EBITDA despite reduced risks and strong cash flow generation.> Food retail grew 6% y-o-y in nominal terms in January. This was driven by 7.0% food inflation, which rose to 7.7% in February. As we noted in our December report, this is mostly being absorbed, as customers have increased grocery spending and cut back on services (down 6.5% y-o-y in nominal terms in January) and dining out (down 9.6%). We raise our 2021 food retail sales growth forecast from 7.5% to 9.0% in ruble terms (driven by our 6.2% food inflation forecast). > Top-line risks reduced. The share of unique customers rose from 19% to 22% over the last 12 months. New customers are staying with Magnit, while trading has been buoyed by low-frequency, high-ticket shopping. This, along with the higher food CPI, should mitigate the base effect and weak space growth in 2020. We now expect above 6% y-o-y revenue growth in 1Q21 (up from 4%) and a pickup in subsequent quarters. > We upgrade our forecasts, target price. We have incorporated the 2020 results and strategic outlook and have raised our long-term revenue and EBITDA estimates by 2% and 3%. We have rolled our model a year forward, which has helped lift the target price from $18.00 to $19.00 per GDR. We upgrade Magnit to BUY, though our forecasts are still below its targets.> GDRs re-rating. The GDRs have re-rated from 5.5 to 6.0 times current-year EBITDA over the past year (based on IAS 17), versus the 7.5 implied by our target. They trade at a 40% discount to EM peers despite a much improved risk profile. The dividend yield of 9% adds downside protection, while the quarterly operating and financial results should be supportive.