Page 15 - RusRPTFeb21

Although we expect 2021 to be a year of normalization with slower growth and lower margins for food retailers, some residual positive effects from COVID-19 will continue to support the likes of X5 and Magnit at least in 1H21.
X5 is our preferred food retail exposure for 2021, with industry-leading growth and margins along with a dividend yield of almost 8% this year. We raise our TP to $45/GDR and reiterate our BUY rating. At the same time, we reckon that Magnit’s turnaround in 2020 was well rewarded and that its GDRs look fairly valued at their current levels. We have a TP of $17.0/GDR with a HOLD, while our TP of RUB5,830/share warrants a BUY. With this note, we also preview X5 and Magnit’s 4Q20 operating results.
Modern food retailers were some of the main beneficiaries of COVID-19 in 2020. Food retail sales grew c. 1.7% y/y in nominal terms and fell c. 2.5% y/y in real terms in 2020, on our estimates (the figures for December will be published later this month). The former is the slowest growth pace in Russian modern history. That said, last year proved to be an extremely benevolent environment for large chains.
Firstly, COVID-19 and the subsequent lockdowns in 2Q20 were a massive blow to non-chain food stores, resulting in their revenue dropping c. 30% y/y in April-May 2020, according to data from Evotor. COVID-19 squeezed many non-chain food stores out of the market, which fostered the accelerated consolidation by industry bellwethers.
Secondly, the massive shift to remote working, as well as closed borders during the summer vacation period and the hit to the HoReCa segment, prompted increased food consumption at home. Overall, this helped Russia’s top 10 food retail chains increase their market share to c. 38% in 2020 vs. c. 34% in 2019, according to INFOLine. Convenience stores were the key beneficiaries of this trend while large boxes underperformed.
A post-COVID-19 normalization should follow in 2021... We expect the food retail market to grow c. 6% y/y in nominal terms and c. 0.7% y/y in real terms. Food inflation is likely to peak at c. 6.7% in 1Q21 before decelerating to c. 4% towards YE21. The monthly performance of food retail sales is set to be very volatile, with a possible y/y decline in March due to stockpiling a year ago; a strong recovery in April-May mirroring last year’s lockdowns; and a normalization at a growth rate of c. 6% y/y in 2H21.
...although some tailwinds will continue to support large chains. High infection rates, remote working, health safety issues and the remaining restrictions on the HoReCa segment mean that COVID-19 is likely to continue to positively affect the performance of food chains, at least in 1H21. At the same time, we believe that the pricing environment will become more aggressive in 2021 after subdued promos in 2Q20 and 3Q20, which should lead to more pressure on retailers’ margins this year, all else being equal.
Overall, 2021 should be a decent year for X5 and Magnit, although not as good as 2020. There is no doubt that the very high comparison base of 2020 (in terms of LfL growth rates and sales density dynamics) will challenge Magnit and X5. As such, we expect both retailers to see their top-line growth
15 ​RUSSIA Country Report​ February 2021 ​ ​www.intellinews.com