The valuation gap between Magnit and its nearest competitor has surged sevenfold in nine months, as investors bet on its discount model being better positioned to withstand a looming recession.
Magnit rose 20 per cent to a two-month high last week in London, after a ceasefire accord on Ukraine quelled concern that international sanctions against the nation will be tightened. Magnit trades at 27 times estimated earnings, a 200-per-cent premium over X5 Retail Group NV’s multiple of 8.8. The gap was 29 per cent in April.
With consumer spending in Russia forecast to decrease as much as 6.5 per cent amid projections for a 4-per-cent contraction in the economy this year, Magnit’s low prices and large scale will help it win bargain-seeking consumers, according to VTB Capital and ZAO Raiffeisenbank. Sales will jump 40 per cent this year, as evidenced by the mean of 13 analysts' estimates compiled by Bloomberg. That forecast – a 20-per-cent increase from August – compares with a projected advance of 12 per cent for OAO Dixy Group and a decline of 7.2 per cent for X5.
“Magnit is our favourite story in the whole Russian retail sector for this year, as it is the most resilient during these tough times,” Nikolay Kovalev, an analyst at VTB Capital in Moscow, said by phone on 13 February. “Even if their purchasing power is under pressure, food is the last item that people are cutting back, and Magnit is the safest bet in the sector.”
“Magnit wins in every way. It wins customer traffic as people tighten their belts and focus on finding cheaper food, and it wins because of the weakening rouble and rising inflation,” Natalya Kolupaeva, an analyst at Raiffeisenbank in Moscow, said by phone on 13 February. “Even as the economy slows, Magnit expands.”
‘Price-Conscious Consumers’
Russia’s discounters will continue to show above-average sales growth in 2015, Tatiana Bobrovskaya, an analyst at Fitch Ratings in London, wrote in an e-mail. “Price-conscious consumers are likely to change their shopping habits, from large purchases at hypermarkets and supermarkets to smaller but more frequent purchases at discounters/convenience stores.”
The company plans to open 1,200 convenience stores, 800 cosmetics stores and 90 hypermarkets this year, billionaire chief executive officer Sergey Galitskiy said last month. Magnit has about 6 per cent of the Russian food retail market, according to 2013 figures cited by the company in a presentation. X5, controlled by billionaire Mikhail Fridman, has about 5 per cent.
“Magnit can use the crisis as a growth opportunity, as many non-food and smaller food retailers will vanish,” Svetlana Sukhanova, an analyst at UBS AG, said by phone. “It is the strongest company in the consumer segment, with the strongest momentum.”
Bloomberg News, edited by ESM
