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17 November 2008
Russian Food Retail Update
Cutting estimates on weaker
ruble and sector de-leveraging
Brady Martin
Research Analyst
(7) 495 933 9221
brady.martin@db.com
Georgy Kartashov
Research Analyst
(7) 495 933 9232
georgy.kartashov@db.com
We slash price targets 56-77% as growth capital diverted to pay back debt
We revise our retail outlook on a weaker ruble and a phase of required deleveraging.
Down by an average of 70% YTD, the sector currently trades at FY09E
EV/EBITDA of 4.4x and P/E of 8.3x. A growth premium is no longer justified but
neither is the current discount to peers. Magnit (especially the discounted local
shares) is our top pick as the company’s clean balance sheet and defensive format
should mean increased momentum and few negative surprises. X5 is attractive in
the longer term, but excessive USD exposure will likely increase earnings volatility.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com or by calling 1-877-
208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Forecast change
RUSSIA FOOD RETAIL VALUATION
Stock Rec. TP, $ Ups.,%
TOP PICKS
MAGNIT locals BUY 23.0 84%
X5 Retail Group BUY 16.0 129%
OTHER STOCKS
MAGNIT GDRs BUY 6.5 51%
DIXY BUY 3.5 67%
SEVENTH CONTINENT HOLD 10.0 -5%
RUSSIA FOOD RETAIL MULTIPLES
Stock EV/EBITDA P/E
08E 09E 08E 09E
X5 RETAIL GROUP 4.5 3.6 14.3 6.8
MAGNIT GDRs 6.1 5.3 10.9 9.3
DIXY 3.6 2.9 65.6 7.6
SEVENTH CONTINENT 5.8 5.7 9.9 10.4
Food retail CAPEX/leverage revisions
2.5x
2.0x 1.9x 2.0x
1.4x
1.6x
2.4x
1.0x
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2007 2008E 2009E 2010E
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
Previous CAPEX, $ mn New CAPEX, $ mn
New Net Debt/EBITDA ratio Previous Net Debt/EBITD
Currency exposure of existing debt
46%
100%
51%
76%
53% 49%
24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
X5 Magnit Dixy Seventh
Continent
RUR USD EUR
Retail debt repayment schedule, $ mn
372
484
241
520
105
51
241
55
449
1,121
0
200
400
600
800
1,000
1,200
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
X5 syndicated
loan maturity
Source: Company data, Bloomberg, Deutsche Bank Research estimates
Global Markets Research Company
No default risk, but capex budgets to be significantly lower than expected
We think that the government's liquidity program is short-term only and will be
focused on funding working capital needs and refinancing debt. The sudden onset
of the credit crisis left little room to adjust FY08 investment plans, but we expect
drastic cuts in capex by 50% on average in FY09-10 as companies de-leverage
their balance sheets from an average of 2.5x net debt/EBITDA to 1.0x by 2010E.
However, this translates into only a 25% reduction in expected new selling space
due to lower development costs and cutbacks in expected landbank expansion.
Operating performance to stay strong; currency to have unpleasant surprises
We expect continued outperformance at the operating level. Financing issues
should weed out smaller players and support survivors’ like-for-like traffic numbers
while double-digit inflation should keep up like-for-like ticket numbers. A cooling
economy should also offer food retailers relief from salary and rent inflation,
preventing a collapse in margins. However, ruble weakness should mean lower
USD-based sales figures; reduced investment means a slower growth profile
beyond FY09. We expect sizeable translation losses for companies that have USDdenominated
debt (X5, Dixy) that will likely be a negative shock to the market.
Magnit top short-term pick; X5 best long-term bet (but expect volatility)
Russian retail no longer deserves a growth premium; we have reduced our target
multiples by 45% to be in line with emerging market peers. With the sector down
70%, we still see tremendous value. Magnit is likely to outperform in the near
term with its strong organic momentum, clean balance sheet, steadily-improving
margins, and a focus on the defensive discount format. We like X5’s leading
operational performance, yet the company’s balance sheet (USD-based debt and
significant goodwill) will likely create earnings volatility. Risks include ruble
weakness, worsening credit markets and a deceleration of consumer spending.
Table of Contents
Investment summary ........................................................................ 3
Government support removes default risk for traded retailers…..............................................3
…but tight liquidity should force de-leveraging of sector .........................................................3
We expect operational performance to remain strong…..........................................................4
…but currency effects will likely lower USD-based reporting…...............................................5
…and USD-denominated debt means sizeable translation losses............................................6
Valuation ............................................................................................ 8
Growth premium no longer justified…......................................................................................8
…but a discount is not justified ................................................................................................9
Changes to our models...........................................................................................................10
Risks ......................................................................................................................................11
Company valuations........................................................................ 13
Magnit: New top pick on momentum and lower earnings risk ...............................................13
X5: Net income forecasts reduced by translation losses ........................................................13
Dixy: Still confused on SPO logic; but stock cheap on EV/EBITDA.........................................13
Seventh Continent: What is the real free float? ......................................................................14
Appendix A: retail debt analysis .................................................... 19
X5 debt details and assumptions ............................................................................................20
Magnit debt details and assumptions .....................................................................................22
Dixy debt details and assumptions .........................................................................................24
Seventh Continent debt details and assumptions...................................................................25
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