Russian Food Retail - Expecting a Decent 2Q21; Sector Is Cheap

X5 Retail Group will kick off 2Q21 reporting season this week with the release of its operating results, while Magnit will report near the end of the month. We expect top-line growth to accelerate by an average of 3 pp Q-o-Q for both chains. Margins should find support from seasonal factors. July's trading numbers should be in line with those of 2Q21, though we could see an improvement in subsequent months thanks to accelerating food retail turnover growth and social spending. The sector still trades at an 8% 2021E dividend yield and a 40% discount to global peers on 2021E EV/EBITDA.> Top-line growth set to accelerate thanks to base effect. The first quarter was muted due to a weak March, but we anticipate a recovery in 2Q21. We forecast X5's revenue growth climbing to 10.7% y-o-y (from 8.1% in 1Q21) for revenues of R546.5 bln; for Magnit, we pencil in revenues rising 9% y-o-y to R422.1 bln (versus 5.8% growth in 1Q21). We expect July to progress in line with 2Q21, with further improvements possibly coming in subsequent months. > Margins supported by seasonality. We expect gross margin improvements in Q-o-Q on seasonality, while opex should stay flat in absolute terms but decline as a share of revenues. We plug in a 7.8% EBITDA margin for X5 Retail Group and 7.1% for Magnit. This suggests y-o-y declines, as 2Q20 was boosted by Covid-related purchases via limited promotions. > Positive shopping patterns. We will publish our latest SberCIB Ivanov Consumer Confidence Tracker later in July, but the preliminary figures point to limited trading down and promotion hunting and an intention to spend social payments on food. All these bode well for the sector. > We expect food retail sales growth to climb to 9% y-o-y in 2H21. This contrasts with 4% in 1Q21 (2Q21 is not representative). Some of this will feed through into the retailers' top lines. Moreover, we estimate that the Covid-related social payments should boost food retail sales by 200 bps in August-September. > The sector remains cheap. The two companies are trading at an average 2021E EV/EBITDA of 6.0, a discount of more than 40% to both EM and DM peers. We believe X5 and Magnit offer better growth outlooks than these peers and we forecast respective 2021E dividend yields of 7.4% and 9.2% (versus 1.7-2.4% of DM and EM peers).