Ozon - One Click, Double the Growth

We initiate coverage of Ozon with a HOLD rating and target price of R3,501 ($47.63) per share, which implies 7% upside given the shares have gained 48% since the IPO on November 24. We see Ozon as a true multi-category player with high customer loyalty and a developed on-the-ground infrastructure that make it well positioned to drive growth in the Russian e-commerce market.> A true multi-category player. We think Ozon deserves its reputation as the go-to destination for online shopping in Russia. It already has the widest selection, with around 9 mln SKUs that are well diversified across different categories, as well as a variety of last-mile delivery options, with around 40% of the Russian population able to receive next-day delivery. Ozon has a track record of steadily growing customer loyalty, and it leads Russia's online marketplaces in brand awareness. > Top gateway for sellers. Sellers are attracted by the demand Ozon generates and its fulfilment and logistics infrastructure. The share of 3P in Ozon's GMV increased from 6% in 1Q19 to 51% in 3Q20, and we expect it to be above 75% by 2025, supporting the scalability of Ozon's model.> GMV to expand at 53% CAGR over 2020E-25E. We think that Ozon's logistics infrastructure outside Moscow and St Petersburg will help it capitalize on structural growth opportunities in the Russian e-commerce market beyond the two largest cities. We project a 26% 2020E-25E CAGR for the market and see the penetration of e-commerce expanding from 8.6% this year to 19.3% by 2025. We believe Ozon has a visible path to profitability with the expansion of its 3P sales, its improved customer loyalty and retention, its higher order frequency, and its improved fulfillment and logistics infrastructure. We thus anticipate that Ozon will break even on FCF by 2022 and on EBITDA by 2023.> Things to watch. We think that GMV growth could well surprise to the upside in both 4Q20 and 2021, resulting in better unit economics and improved visibility on the path to profitability. Ozon raised $1.2 bln in its recent stock offering, and we think it might spend some of this on value-accretive acquisitions and the expansion of new verticals. Key risks include potential difficulty executing the organic growth strategy, increased competition, cybersecurity issues, share overhang pressure, the economic slowdown and possible adverse changes in regulation.> Valuation. We initiate coverage of Ozon with a HOLD rating and target price of R3,501 ($47.63) per share, based on a target EV/GMV multiple of 2, where we see Ozon's fair value over a 12-month horizon. It is trading at a 2021E EV/GMV of 1.8, which implies a premium of around 40% to B2W and a 20% discount to Allegro.