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Retail
Putting food on the shelves
Despite slower economic growth and difficult credit markets, we forecast
sustained EMEA retailer growth in the near term. Bim and Magnit are our top
picks in the sector, with defensive positioning, low leverage and strong FCF.
Table 1 : Key valuation metrics and ratings
Bloomberg Rating Price target Price Upside/
downside (%)
PE 09F
Bim BIMAS TI Buy TL41.54 TL33.00 26% 13.2
Magnit MGNT LI Buy US$6.95 US$5.25 32% 12.6
X5 FIVE LI Buy US$14.02 US$8.44 66% 11.6
Dixy DIXY RU Buy US$2.86 US$1.79 60% 5.9
Seventh Continent SCON RU Sell US$3.98 US$6.13 -35% 7.3
Source: Bloomberg, ABN AMRO forecasts. Priced at 13 January.
Bim: Hard discounting is often the best defence in tough times
Bim is the only retailer in our coverage universe in a net cash position with positive FCF
generation, which we forecast to rise from 2% in 2008 to 15% by 2012, despite expansion
investment. The company operates the only hard discounter in Turkey. It has the largest
store network and generates ROACE in excess of 53%. Its efficient operations and
commitment to reinvesting SG&A savings into lower prices competitively positions the
company to benefit from the difficult operating environment and expected consumer shift to
lower priced goods. Buy, target price TL41.54, 26% upside potential.
Magnit: Strategically positioned for sustainable growth
We believe Magnit will sustain strong growth (27% 2008-10F revenue CAGR), despite the
economic slowdown in Russia and potential decline in consumption. The company operates
a strong franchise of discount stores across the Russian regions, providing the opportunity to
benefit from potential customer tradedown and weakness at smaller regional competitors.
Magnit is the least leveraged of the Russian retailers under our coverage, with 1.4x 2008F
net debt/EBITDA. In our view, the company’s low leverage will allow it to weather the current
tight credit market without sacrificing its investment plans. Buy, target price US$6.95, 32%
upside potential.
Refinancing is a risk for the other retailers
We initiate coverage on Dixy (US$2.86, 60% potential upside) and X5 (US$14.02, 66%
potential upside) with Buy ratings, and on Seventh Continent with a Sell rating (US$3.98,
35% potential downside). While we see upside potential for Dixy and X5 given their
respective soft discount franchises, there is uncertainty about each company’s ability to
repay the large portion of their debt that needs refinancing by 2010. We see Seventh
Continent as the worst positioned of the Russian retailers under our coverage, operating
primarily a premium supermarket chain in the highly competitive Moscow and St Petersburg
markets. In our worst-case scenario, Dixy, X5 and Seventh Continent all face potential loan
defaults as operating cash flow will not cover their respective repayments, even when capex
is reduced to zero.
Contents
Growth potential despite slowdown 3
While slowing economic growth and difficult credit markets have raised investor
concerns for the sector outlook, we believe EMEA retail growth is sustainable in the
near term.
Our investment ideas 5
Our estimates are broadly in line with or below consensus for 2008 and 2009 because of our
leverage limitation
6
EMEA Food Retail sector 8
The EMEA Food Retail sector has experienced significant growth over the last five
years. Many markets have been consolidated by international/multinational
competitors, particularly those in CE3. Russia and Turkey offer an opportunity to
invest in strong local operators.
Food Retail sector offers headroom for growth 8
The landscape is becoming more competitive 9
Who are the winners? 10
Modern segment expected to continue growing and increasing share 11
Discount and Hypermarket formats should win out 12
There is no uniform approach to development 13
Short-term debt maturity is a concern 16
Leverage is an important issue in the near term for the EMEA retailers given the
short duration of their respective debt structures. Ninety percent of the Russian
retailers’ debt is due by the end of 2010.
Bim and Magnit should deliver returns in excess of capital costs, others may not 17
We believe Bim and Magnit offer the best investment options given their sustainable
growth profiles and estimated leading returns in excess of the cost of capital.
Valuations not demanding versus peers 18
While we initiate with Buys on four companies in the sector, we believe Bim and
Magnit offer investors the best exposure to the EMEA food retail sector given their
ability to sustain profitable growth in the current difficult operating environment.
Credit is a key issue for retailer growth 20
X5, Dixy, and Seventh Continent could all potentially default if credit markets remain
tight through 2010. Bim and Magnit appear better positioned to weather the current
environment as a result of their low leverage.
Company profiles 21
Bim 21
Dixy 30
Magnit 40
Seventh Continent 50
X5 Retail Group 60
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