The rally in the Russian food retailer that has rebounded 35 per cent from a record low in September, is poised to lose momentum as sales and profit growth slows amid mounting competition from discounters and rising lease costs, according to BCS Financial Group.
A month after advising clients to buy the London-traded stock, BCS cut it to hold on Monday. The shares have still fallen 52 per cent this year, the worst performance among five Russian peers, according to data compiled by Bloomberg.
O’Key last week reported third-quarter sales that rose 7.9 per cent from the same period last year, while earnings before interest, taxes, depreciation and amortization shrank 17 percent to 2.2 billion rubles ($34.5 million). Lease expenses increased 24 per cent as the company opened 11 stores and the ruble depreciated 16 percent against the dollar. BCS, whose $2.20 target price on the stock implies a 4.8 percent potential return from Friday’s closing level, said the fundamentals aren’t supportive for much more of a gain.
“The rally was too good to pass up,” BCS analyst Marat Ibragimov said by phone from Moscow. “But now as the stock has gained about 30 percent amid almost no positive news, it looks like the buying momentum is gone. There are other names in the sector that look more attractive.”
Ibragimov, whose recommendations on O’Key would have earned investors who followed his advice an 81 per cent return over the past year, the most among all analysts who cover the company, advises clients instead to buy shares of competitor X5 Retail Group.
While US and European sanctions linked to the Ukraine conflict had already been squeezing Russia’s $2 trillion economy, the outlook worsened as oil, the country’s top export, fell to about half of its five-year average price and a recovery in the ruble wavers. Retailers such as O’Key, a chain of hyper- and supermarkets that combine a department store and grocery supermarket under one roof, is taking a bigger hit by Russia’s weakening economy than smaller retailers that sell basic products, according to Ibragimov.
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