Both Russian food retailers, which are traded in London, sank about 30 per cent in 2014 during a broad market sell-off as plunging oil prices and sanctions linked to the Ukraine conflict squelched the economy. X5 has jumped 73 per cent this year as sales rose each month, while Magnit gained 30 per cent amid slowing revenue growth. X5 sells for 15 times projected earnings, compared with a multiple of 22 for Magnit.
X5, Russia’s second biggest retailer, has the potential to continue to outperform its larger competitor as the company benefits from improvements it has made in logistics, product lines and pricing, according to BCS analyst Marat Ibragimov. The stock’s price doesn’t reflect those upgrades and the discount is not justified, he said.
“Magnit has been performing at its peak, while X5 has been making across-the-board improvements in its operational activity, widening product assortment, adjusting prices and renovating its stores, and these factors combined drew more customers in,” Ibragimov said by phone from Moscow on Friday. “If you add the valuation gap to this, you see that X5 is becoming more preferable than Magnit.”
Soaring inflation and shrinking disposable income have prompted 48 per cent of Russians to switch to cheaper food brands, marketing researcher Nielsen said last week.
Gross domestic product contracted 1.9 per cent in the first quarter from a year earlier after a 0.4 per cent gain in the previous three months, data showed Friday. More than 20 million Russians, or about one-seventh of the population, will be living beneath the subsistence level this year, the World Bank said last month.
Annual inflation slowed to 16.4 per cent in April from 16.9 per cent in the prior month, which was the fastest since 2002. X5 said last month that sales growth may slow as consumer prices decelerate.
“X5 was helped by the effect of a lower starting base than Magnit,” Natalya Kolupaeva, an analyst at ZAO Raiffeisenbank in Moscow, said by phone Friday.
X5 increased its sales by 19 per cent last year, compared with Magnit’s 32 per cent increase. Revenue growth at X5 was less than 10 per cent in 2012 and 2013, allowing Magnit, controlled by the billionaire Sergey Galitskiy, to become the country’s largest retailer.
“When you compare the valuations of X5 and Magnit, you see that X5 is cheaper and it has an upside potential,” Maria Kolbina, an analyst at VTB Capital who has a hold rating on Magnit’s London-traded stock, said by phone from Moscow. “It’s a buy call on valuation.”
Bloomberg News, edited by ESM
