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bne October 2018 Special focus I 35
Retail’s battle of the Titans: Magnit vs X5
Ben Aris in Berlin
Organised retail is one of the most sophisticated parts of the Russian economy. The Soviet-era open
air markets and “Produkti” corner stores are largely things of the past and after
a decade of growth, Russia’s leading supermarket chains have maxed out their store opening potential and are starting to run up against structural limits to their growth. Two giants of the business have emerged, Magnit and X5 Retail Group, and they are battling it out for the top slot.
Retail has long been the dedicated Rus- sian investors’ favourite sector as it is largely apolitical, home to few oligarchs and has prospered on the relentless rise of Russians’ average income. At one point about three years ago Magnit’s stock accounted for a third of the entire MSCI Russia overweight in investors’ portfolios by itself.
Having eschewed the glitzy life in Moscow, its owner and founder
Sergei Galitsky was the epitome of
the serious businessman who built up
a multibillion dollar retail chain by focusing on Russia’s far flung regions rather than the capital, allowing him
to tap into the 143mn strong population. The company’s stock grew inexorably as not only was Magnit the biggest, it was also the best managed with the highest profit margins and juggernaut- like growth.
But the story fell to pieces last year when internal disputes over direc-
tion tore the team apart. The fall in incomes following the deep devalua- tion of the ruble in 2014 hurt incomes in the regions more than the cities that rival X5 had traditionally concentrated on. Galitsky sold 29% of his stake for RUB139bn ($2.4bn) to state-owned bank VTB on February 16, after X5
overtook Magnit to become Russia’s largest retail chain in terms of turnover. In 2017 X5’s stock doubled in value while that of Magnit stayed flat.
Now investors’ interest in Magnit has perked up again. Both firms have recent- ly reshuffled management and Magnit has brought in some seasoned profes- sionals from X5 to restart its strategy.
X5 reported strong results in the second quarter, whereas Magnit is yet to see a pick up in its second quarter results, but analysts are increasingly keen on the company as a turnaround story and its appeal to portfolio investors is on the
up again.
The game will get harder now as
the competition is fierce. X5 has just launched its first “dark store” – a retail outlet that is dedicated to serving online orders and has no physical customers. The company is also in talks with Chi-
The other name in the sector to watch is Lenta, the third placed supermarket chain. While it is much smaller than the two titans, it is very profitable.
Lenta reported strong IFRS results for the second quarter of 2018, broadly
in line with previous guidance, and
has also maxed out on store openings. Gross margin expanded 20bp y/y on better purchasing terms and improved promotional activity, and its net margin remained flat due to lower interest expenses.
The stock of all these leading companies has fallen this summer on the back of the geopolitical brouhaha, presenting an entry point, argue Moscow-based analysts.
X5’s stock is down 27% YTD after the company reported disappointing first quarter results and the departure of top
“The game will get harder now as the competition is fierce”
nese online store JD.com to set up a joint venture in Russia. For Magnit’s part, it is eyeing a takeover of SIA Group, one of the largest pharmaceutical distributors in the country, from Marathon Group,
as a way of diversifying its revenues.
But recently appointed Magnit CEO Olga Naumova says she will boost Magnit’s market cap “several-fold” and she has built up a formidable reputation at X5 that, “suggests she has all the chances to succeed,” says Vyacheslav Smolyaninov, chief strate- gist and deputy head of research at BCS Global Markets.
managers, which came on top of the worsening sentiment towards the Russian food retail sector.
Lenta’s stock fell 16% in August alone
– more than the index – and is start-
ing to look very cheap. Sberbank CIB has marked the name up to Buy as a result, with a 12-month target price of RUB6.00 and an estimated total return (ETR) of 41%, which is still less than the ETR of 60% for X5 but a lot more than the 10% return expected for Magnit’s local shares.
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