X5 Retail Group - Closing Our Trade Idea

Back in January, we opened a trading idea to buy X5 Retail Group. Although the stock did not escape the Covid-19 selloff in March, the share price subsequently recovered thanks to management comments on a possible increase in dividends and strong operating results against the backdrop of an overall market rally. Since the trade idea was launched, it returned 14.3% accounting for dividends in absolute terms. We have decided to close the trade idea, as we think the short-term company-specific catalysts have already played out. That said, our view on the company's long-term fundamentals remains positive and we maintain our BUY recommendation on the stock. INVESTMENT CASEWe opened our trading idea to buy X5 Retail Group in January due to weakness in the share price at the time and expectations of strong 1Q20 results. Then, of course, the stock joined the rest of the market in selling off sharply in March due to the spread of Covid-19, but this proved temporary. We had expected the retailer to benefit from the lockdown and market consolidation and reiterated our positive view in subsequent reports. Comments by the management in May and June about online development and a possible 50% increase in dividends for 2020 supported the stock. In addition, the company reported a solid trading performance (16% revenue growth amid 6% LFL sales growth) and stated that it expects the EBITDA margin to expand y-o-y in 2Q20 - even as the 2Q19 margin was already8.3%, the highest since 2Q17. While the trends were in line with our expectations, the magnitude of the improvement was impressive. X5 remains our top pick, and we do not see any notable company-specific risks at the moment. The stock is trading at low multiples compared with global peers and offers a 4.4% dividend yield for 2020E (with potential upside to 6.3%). We remain upbeat on the company's long-term fundamentals.PERFORMANCE AND WHAT'S IN THE PRICESince the trade idea was launched, it returned 14.3% accounting for dividends in absolute terms and outperformed the RTS by over 40%. We are closing it because we think the strong short-term company-specific catalysts have already played out. The near-term performance should depend more on overall stock market movements, in our view. We like the company's long-term fundamentals and maintain our BUY recommendation on the stock.