X5 Group - 2021 CMD Key Takeaways

Yesterday, X5 Group hosted a capital markets day that left a positive impression on us. The company reiterated its strategy, upgraded its guidance and said it would place additional focus on ROIC and cash-flow generation. It highlighted its ambition to remain the leader in offline food retail (with 15% market share) and remain among the top three e-grocery players in 2024. We were pleased to hear the updated top-line CAGR guidance for 2021-24, capex optimization initiatives, as well as the possibility of higher dividend payments for 2021. Moreover, strong LFL sales growth of around 10% in October and new lockdown measures in November should support the company's 4Q21 results, in our view. While we did not get an update on the search for a partner for VPROK.ru, the company added some color on the strategy for express services within X5 and reaffirmed its plans to make its online businesses profitable by 2024 (without the huge investment that other players are having to make). We see all of these as supportive factors for the stock and reiterate our BUY recommendation.> Near-term guidance. X5 plans to open around 2,000 stores (gross) next year, including 300 stores in the hard discounter format Chizhik. Top-line growth should be at least 10% next year (also this year), while the EBITDA margin is expected to be above 7%. The company forecasts that capex will grow more slowly than revenues and believes that the planned pace of store rollout will allow it to maintain a decent level of ROIC.> 2021-24 growth strategy. X5 guides 7,000 store openings over 2022-24 (with 10% in Moscow). It has also increased its 2021-24 EBITDA CAGR guidance from 10% to above 12%. During the period, the main priorities will be: increasing sales densities via an improved CVP; operating efficiency (with the share of private label in revenues rising from 20% in 2021 to 28% in 2024); direct imports and logistics; digital transformation (mainly the automation of internal business processes based on advanced analytics); and capex optimization (capex should decrease from 4.7% of revenues to below 4.5% in 2024, with ROIC rising at least 3 pp). X5 aims to increase its market share to 15% by 2024 (from 13%), which, based on our numbers for food retail turnover, means revenues will grow to R3.3 trln from R2.2 trln this year.> Development of hard discounters in focus. X5 targets 3,000 new stores over the next three years. The format should start to see more intensive development after 2022, when the share of private labels in revenues will be about 75% (versus the 40% in 2021). Importantly, the company sees just limited cannibalization between Pyaterochka and Chizhik of 1-5% (if they are located within 500 meters), but as both formats are growing, X5 is expected to grow as well. The management expects the format to become profitable in 2024 with EBITDA pressure from its active rollout over the period to be about 80 bps. Taking into account the possibility of the need for price investments, this results in consolidated EBITDA margin guidance of above 7% over the period.> Express delivery and 5Post to be developed within X5, while a partnership is being considered for VPROK.ru. On the back of intensified pressure from ecosystem players and marketplaces, the management does not plan to invest in the creation of another marketplace based on VPROK.ru (this option had been considered previously). However, a partnership is being considered. As for Pyaterocka's and Perekrestok's express delivery services, the management says they are a continuation of X5's CVP, which should be developed within the company, thus contributing to its value in the future. > Dividends for 2021 may exceed R50 bln, with 100% of NI to be paid out in 2024. When determining the amount of dividends, X5 takes into account net debt/EBITDA (it should remain below 2.0), full capex coverage with operating cash flow and the amount of retained earnings from previous years. In 2024, X5 plans to increase dividends to the level of net income, and net cash flow should cover at least 70% of dividend payments, according to Vsevolod Starukhin, the company's CFO.