X5 Retail Group - Trade Idea: Buy Ahead of Results and Capital Markets Day

Our latest Ivanov survey revealed positive food spending trends that we expect to be reflected in X5 Retail Group's upcoming 3Q20 IFRS results. We project 15% revenue growth in 3Q20 and an EBITDA margin of 7.9%, suggesting upside to the full-year Bloomberg consensus of 7.2%. This should refute market concerns that the chain's performance may deteriorate after the lifting of the lockdown. We think the 4Q20 results should also be supported by base effects (as heavy promotions distorted the 4Q19 numbers) and further market share gains (since Magnit has been slowing its store rollout). At a 2020E EV/EBITDA of 6.7, the stock is trading at a somewhat higher multiple than we would usually recommend as a good entry point. But we believe the risks are skewed to the upside, leading us to open a trade idea to go long the stock. We suggest investing in the name ahead of the 3Q20 results and the release of the new strategy. We see earnings revisions, not multiple expansion, as the main short-term valuation driver. We have also raised our EBITDA forecast for 2020 by 10%, which has boosted our target price to $40.0 per share. The stock's 2021E dividend yield of 5.6% offers downside protection. > Sentiment improving among Ivanovs... Our Ivanov consumer confidence index rebounded from -31% in 2Q20 to -21% in 3Q20. Wage growth climbed back into positive territory as employment returned to normal. Thanks to social support payments, household incomes rose by 20-30% in the low-income group and 10-20% in the middle class, per Sber Big Data.> ...generating positive food retail trends. Price sensitivity has fallen, and the Ivanov trading-down index reached a six-year low in September. Some 25% of the Ivanovs aim to sustainably increase their food spending. Shoppers' increased mobility should support X5's traffic, in our view, while its low share of promotions should keep margins elevated. > X5 increasing market share faster than Magnit. The share of loyal customers remained unchanged Q-o-Q at 25% for Pyaterochka (and flat at 21% for Magnit). At the same time, the share of respondents who at least occasionally visit Pyaterochka grew 4 pp (from 54% in 2Q20 to 58% in 3Q20), while the share for Magnit only grew 1 pp.> Strong 3Q20 results in sight. We expect revenue growth of 14.9% to R485 bln in 3Q20 (Pyaterochka the main driver, with above 17% growth). We see the gross margin at 25% (24.5% a year ago), which should translate into an EBITDA margin of 7.9% and a 31% y-o-y increase in EBITDA to R37.6 bln. We expect net income to more than triple y-o-y to R10 bln.> Capital markets day (October 27) should buoy sentiment. We expect to hear more numbers on the company's projects (online, store refurbishments, data analysis) that could prompt some fine-tuning of valuation models. Based on recent comments from the company, we may also hear more on the strategic plan to build a food supply ecosystem. All this should bode positively for the stock.> Soft lockdown measures could bring echoes of 2Q20 in 4Q20. The infection rate in Russia has hit a record high, prompting the authorities to introduce a two-week school holiday in Moscow and encourage people over 65 to stay at home. We do not expect a full-scale lockdown, but we would not rule out further selective restrictions. Consumers may be willing to curtail store visits and order online, as they did in 2Q20. Back then, this trend boosted X5's revenue growth by 2 pp, but this time the company is better prepared and the online contribution could be even more potent.