STOCK PITCH

CMP (USD)

17TH SEP 2015

MAGNIT (MGNT).: BUY

VALUATION
EQUITY
WEIGHTS
VALUATION
DCF
50%

47

TARGET PRICE (USD)

67

RECOMMENDATION

BUY

Business Summary
Magnit PJSC is a holding company, which engages in the
operation of retail stores. It operates through the following
formats: Convenience Stores, Hypermarkets, Magnit Family and
Cosmetic Stores. It also engages in the food retail market. The
company operates mainly in modern grocery retailing with a
greater focus on convenience stores and hypermarkets. The
company was founded by Sergey Nikolaevich Galitskiy in 1994
and is headquartered in Krasnodar, Russia.

A Magnit for Investors

A retailer doing well in a business unfriendly country.
The company has a combination of strong IT systems and
efficient logistics system that has propelled it to the top of the
Russian food retail industry. The companys strategy is to expand
in the provinces where the sites are plentiful and where modern
retail is often non-existent and a lack of competitors means it is
relatively easy to develop presence and loyalty.
Magnit has a plenty of room to grow. It has just 6% of the Russian
food market far less than Tesco which has almost 30% of the
Britain Market

Investment Rationale

Strong growth of over 30% in sales for past 3 years in RUB

and an EBITDA Margin of 11.3%. The higher growth has
resulted in an increase in number of stores and distribution
centers.
Cost control Measures leading to better margins: The
Company reduced its employee expenses by 30 bps. This
was attributable to the improvement of staff costs.
More advertising more visibility: The Company has
increased its advertising and has increased its visibility
across different districts.
The company will not be impacted by Rouble devaluation
much. Though, it is likely to see Foreign exchange losses
due to Rouble depreciation.

69

EV/EBITDA

25%

59

P/E Multiple

25%

67

Blended Value

67

RTS

INDEX
BLOOMBERG

Sector:
Industry:
Market Cap
1 Year Return:
52 Wk high:
52 Wk low:
Beta:
Yield (%):
Free Float (%)

MGNT:LI

Consumer Staples
Retail
$ 22.236 Bn
-19.6%
$ 68.4
$ 34.42
1.14
2.98%
54

Price
70
60
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40
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20
10
0

TARGET

STOCK PITCH

17TH SEP 2015

MAGNIT (MGNT).: BUY

Competitive Position
The companys target segment are low income consumers unlike other players. The biggest competitive
advantage is its presence in regional areas of Russia. Magnit Retail is successful in Russia mainly due to huge
number of convenience stores. It is very unlikely that any of its competitors would be able to create such a huge
network of stores to rival Magnit especially in Convenience Stores at any point. The company has over 8000
convenience stores and is increasing its strength in hyper markets slowly.
The company has a huge fleet of 5938 Lorries, making it Russias largest shipping company. As of 2014, the
companys centralization was approximately 86% and the company plans to increase it to 90-92% in the coming
years. The company has over 27 distribution centers serving over 8000+ stores.

Name of
Company

Revenue (2014
RUB Bn)

Number of
Stores (2014)

Selling Space
(000 Sqm)

EBITDA Margin

Net Profit
Margin

X5 Retail Group

634

5483

2572

7.2%

2%

Dixy

229

2195

747

7.1%

2%

OKey

152

108

552

7.4%

3.4%

Lenta

194

132

701

11%

4.7%

Magnit

764

9711

3591

11.3%

6.25%

Location of Stores Key to Success

The idea of convenience stores is to target people who live within 500 meters of radius. The stores are located
within walking distance of many residential areas and this is clearly visible from number of consumers (2567 Mn
as of 2014). The companys hypermarkets are also located at places which are well connected. The number of
consumers at hypermarkets reached 237.59 million an increase of 19% compared to last year whereas the LFL
growth was 6%. Drogries, the drug stores saw an LFL of 36% this year and the stores are located to serve people
who live within 500 meters of radius.

Key Items
(USD mn)
Sales
EBITDA
Net Profit
EBITDA Margin

2014A

2015E

2016E

2017E

2018E

2019E

2020E

19,872

14,958

19,830

23,164

26,546

30,535

33,754

2,236
1,241
11.3%

1,572
752
10.5%

2,267
1,175
11.4%

2,534
1,314
10.9%

2,912
1,530
11.0%

3,380
1,818
11.1%

3,663
1,983
10.9%

Valuation
The company has been given a buy rating based on companys strong operating and financial results. We have
used 50-25-25 combination of DCF and multiples valuation. The WACC used for calculation is 12.81%, based on
cost of debt of 10%, a risk free rate of 3.5%, a beta of 1.14 and market risk premium of 8% and Russias risk
premium of 3%. Our DCF yields a value of USD $69.
Our peer multiple valuation is USD 59 & USD 67 using EV/EBITDA and P/E multiple respectively. The combined
3

STOCK PITCH

17TH SEP 2015

MAGNIT (MGNT).: BUY

valuation yields a fair value market price of USD 67, which implies an upside of 43%. Hence, the rating assigned
to the stock is BUY. The downside risk to our estimates is lower margin in coming years and any fall in average
ticket size and traffic per sqm in stores.
Financials
In USD Mn
2013
REVENUE
18,202
Cost of sales
(13,013)
GROSS PROFIT
5,189
Gross profit margin
28.5%
Selling expenses
(107)
General and administrative expenses (3,097)
EBITDA Margin
11.2%
Depreciation
445
Finance costs
(156)
PBT
1,427
Income tax expense
(318)
1,118
PROFIT FOR THE YEAR
Net income margin
4.7%

2014
19,872
(14,133)
5,739
28.9%
(232)
(3,717)
11.3%
458
(173)
1,531
(373)
1,241
-3.1%

2015
14,958
(10,545)
4,413
29.5%
(105)
(2,736)
10.5%
305
(161)
1,105
(354)
752
0.6%

2016
19,830
(13,980)
5,850
29.5%
(139)
(3,444)
11.4%
356
(182)
1,728
(553)
1,175
5.1%

2017
23,164
(16,330)
6,833
29.5%
(162)
(4,137)
10.9%
406
(197)
1,932
(618)
1,314
4.9%

2018
26,546
(18,715)
7,831
29.5%
(186)
(4,733)
11.0%
456
(210)
2,246
(719)
1,527
5.0%

2019
30,535
(21,527)
9,008
29.5%
(214)
(5,414)
11.1%
507
(208)
2,665
(853)
1,812
5.3%

2020
33,754
(23,797)
9,957
29.5%
(236)
(6,058)
10.9%
558
(196)
2,909
(931)
1,978
5.2%

STOCK PITCH

17TH SEP 2015

MAGNIT (MGNT).: BUY

Balance Sheet (In USD Million)

2013

2014

2015

2016

2017

2018

2019

2020

ASSETS
Non-current assets
Property, plant and equipment
Investment property
Land lease rights
Intangible assets
Goodwill
Long-term investments
Total non-current assets

5,963
10
100
23
42
2
6,139

4,141
11
55
16
24
2
4,248

4,141
11
55
16
24
2
4,249

4,543
11
55
16
24
2
4,650

4,945
11
55
16
24
2
5,052

5,306
11
55
16
24
2
5,414

5,631
11
55
16
24
2
5,738

5,936
11
55
16
24
2
6,043

1,300
11
0
183
1,575
5,824

1,724
14
0
759
2,599
7,249

2,013
17
0
1,664
3,810
8,862

2,307
19
0
2,618
5,075
10,489

2,654
22
0
3,731
6,555
12,293

2,934
25
0
5,001
8,121
14,164

Currents assets
Inventories
1,714
1,448
Trade and other receivables (2008 includes19
other receivables)
14
0
0
Other current assets
Cash and cash equivalents
181
314
2,055
1,880
Total current assets
TOTAL ASSETS
8,194
6,128
EQUITY AND LIABILITIES
EQUITY
Share capital
Share premium
Treasury shares
Foreign currency translation reserve
Non-controlling interest
TOTAL EQUITY
LIABILITIES
Non-current liabilities
Long-term borrowings and loans
Long term advances received
Deferred tax liability
Total non-current liabilities

0
1,498
-4
-414
0
3,855

0
1,508
-9
-2,272
0
2,553

0
1,508
-9
-2,936

0
1,508
-9
-3,095

0
1,508
-9
-3,270

0
1,508
-9
-3,460

0
1,508
-9
-3,664

0
1,508
-9
-3,881

2,641

3,657

4,796

6,133

7,741

9,502

1,144
9
250
1,403

789
4
185
978

1,074
4
185
1,262

1,136
4
185
1,325

2,087
4
185
2,276

2,116
4
185
2,305

2,004
4
185
2,192

1,865
4
185
2,053

Current liabilities
Trade and other payables
1,472
Accrued expenses
202
Taxes payable
141
Dividends payable
0
Income tax payable
9
Short-term advances received
3
Short-term obligations under finance leases0
Short-term borrowings and loans
1,110
Total current liabilities
2,937
TOTAL LIABILITIES
4,339

1,187
145
96
255
0
2
0
911
2,596
3,574

1,156
0
0
0
0
0
0
765
1,920
3,183

1,532
0
0
0
0
0
0
735
2,267
3,592

1,790
0
0
0
0
0
0
0
1,790
4,066

2,051
0
0
0
0
0
0
0
2,051
4,356

2,359
0
0
0
0
0
0
0
2,359
4,552

2,608
0
0
0
0
0
0
0
2,608
4,661

TOTAL LIABILITIES AND EQUITY

6,128

5,823

7,249

8,861

10,488

12,292

14,164

8,194