9 11 2018 Consumer Update Smart Expansion

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	EQUITY RESEARCH		CONSUMER AND RETAIL
	Multiples Valuation			EV/EBITDA	P/E
	GEM peers, x			12,9	22,9
	X5 target multiples, x			7,1	12,6
	X5	18-19E EBITDA, RUBmn		114 767
	X5	18-19E net income, RUBmn			36 825
	X5 implied EV, RUBmn			814 270
	X5	2018E net debt, RUBmn		196 030
	X5 implied equity value, RUBmn			618 240	463 808
	Price per GDR, $			35,0	26,3
	TP (average EV/EBITDA and P/E), $			30,7
	Potential Upside			25%

Source: Bloomberg, Company data, ATON Research

11

WACC calculation

	Tax rate		24,0%
	Asset Beta		1,0
	Debt/Equity		0,5
	Geared Beta		1,4
	Risk free rate		8.5%
	Debt premium		5,0%
	Equity risk premium		5,0%
	Cost of equity		15,6%
	Cost of debt (after tax)		10,3%
	WACC		13,7%

Source: Bloomberg, Company data, ATON Research

DCF valuation	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
EBIT	61,102	71,938	82,856	88,625	89,028	92,954	99,868	110,027	114,723
Less taxation	-11,144	-13,406	-16,107	-17,019	-17,457	-18,609	-20,549	-23,337	-24,859
Tax adjusted EBIT	49,958	58,532	66,749	71,606	71,572	74,345	79,319	86,690	89,865
Depreciation and amortisation	46,491	50,003	53,553	56,630	59,448	62,055	63,206	61,602	60,068
Less CAPEX	-77,004	-68,564	-64,275	-62,402	-61,996	-60,736	-54,733	-52,119	-49,315
Change in working capital	6,205	-2,706	-4,043	-5,634	-6,914	-2,146	-2,943	10,038	-2,842
Unlevered free cash flow	25,650	37,265	51,984	60,200	62,110	73,519	84,850	106,211	97,777
WACC	13.7%
Discounted free cash flow	25,168	32,148	39,429	40,145	36,415	37,897	38,455	42,321	34,254
Future cash flow growth rate	5.0%
Terminal value	1,272,500
Discounted terminal value	445,794
PV of 2026E enterprise value	772,026
Net debt	196,030
Fair equity value	575,996
Number of GDRs, mn	271.5
Price target, $ per GDR	32.6
Potential Upside	33%

Figure 33: X5 new vs old forecasts comparison

		2018E			2019E
	New	Old	%	New	Old	%
Revenue	1,529,876	1,569,960	-2.6%	1,762,035	1,808,087	-2.5%
EBITDA	107,593	111,360	-3.4%	121,940	123,919	-1.6%
Net Income	33,432	36,363	-8.1%	40,218	41,599	-3,3%
	ATON	Cons	%	ATON	Cons	%
Revenue	1,529,876	1,534,140	-0.3%	1,762,035	1,772,959	-0.6%
EBITDA	107,593	107,182	0.4%	121,940	122,532	-0.5%
Net Income	33,432	33,501	-0.2%	40,218	40,332	-0.3%

© 2018 ATON LLC. All rights reserved

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EQUITY RESEARCH CONSUMER AND RETAIL

Magnit

First Steps Towards Transformation

MGNT RX						BUY
Target price share					RUB4 970
Potential upside					34%
MGNT LI
Target price GDR					$18
Potential upside					27%
SHARE DATA
No. of ordinary shares (mn)					101,9
No. of ordinary GDRs (mn)						509.6
3M average daily t/o shares					1 527
(RUBmn)
Free float (%)					65%
Market capitalisation (RUBmn)					381 301
Enterprise value (RUBmn)						485 958
Major shareholder
VTB						18%
Marathon Group					13%*
FINANCIALS		2017		2018E		2019E
(RUBmn)
Revenue		1 143 314	1 235 455			1 355 742
EBITDA		91 778	91 644		106 199
EBIT		58 062	57 716			63 633
Net income		35 539	36 649		42 468
EPS, RUB		348,8	359,7			416,8
DPS, RUB		135.5	161.8		166.7
Valuation
P/E (x)		10.7	10.4		9.0
EV/EBITDA (x)		5.3	5.3			4.6
EV/Sales (x)		0.4	0.4		0.4
RoA (%)		7,2%	6,8%			7,6%
RoE (%)		15,6%	14,0%		15,4%
RoIC (%)		14,3%	12,7%			13,8%
Performance
1 month (%)						-1%
3 month (%)					-12%
YTD (%)						-41%
52-week high (RUB)					7 493
52-week low (RUB)						3 291

Source: Bloomberg, ATON Research

*After SIA Group Deal

Figure 34: Magnit’s stock performance

8000

7000

6000

5000

4000

3000 Nov-17 Feb-18 May-18 Aug-18 Nov-18

MGNT RX

Source: Bloomberg, ATON Research

© 2018 ATON LLC. All rights reserved

In October we released “Magnit: Transformation Strategy 2018-2023: Ambitious, Risky, but Achievable”, in which we resumed our coverage of Magnit with a BUY rating and TP of RUB 4,970/$18 per share/GDR. The report was devoted to Magnit’s new strategy, and outlined the company’s ambitious turnaround plans, which if implemented, may lead to visible improvements in its financial performance over the course of 12-24 months. Yet the street will remain cautious, as the recovery could be very bumpy, given the sheer scale of the challenge, and the tough competitive and consumer environments. Magnit has performed nicely since we issued our rating (+12% GDR) and currently our target price assumes 34%/ 27% potential upside for stock and GDR, respectively.

After the announcement of the SIA deal terms minority shareholders’ caution eased, while the declared 9M18 dividends of RUB137.38 per share, implying a 3.7% dividend yield, provided a positive catalyst for the stock.

Key Takeaways from the Strategy Presentation

Aggressive openings to continue as low market share in key regions justifies expansion... Magnit aims to grow its space by 50% over 2018 – 2023 to capture 15% market share (9% for 2017). Key growth areas will be less-penetrated regions of Moscow (current market share 4%), Volga (12%), and Siberia (3%). Magnit expects to raise the number of proximity stores to 22.8k (+70%), Magnit family stores to 0.9k (+80%) from 0.5k, Magnit cosmetics stores to 9.3k (+111%) stores, and other formats by 9k. The company targets an IRR of at least 19%, and plans to add 18 distribution centres (DCs) (+49%).

Higher competition is the flipside of more aggressive growth. Magnit’s overlap with its competition will only broaden from the current levels (of over 60%). As a result, we expect just modest 8% growth in average sales densities in 2018-2023 despite the 3060% gap vs competition. However, better cost efficiency and higher sales density should help Magnit to offset growing margin pressure which it estimates at 150 bpts.

Improved customer value proposition = turnaround base case to drive sales densities and ultimately better shareholder returns if the process is successful. Store refurbishments (6k stores in 2.5 years), new formats (pharmacies, and ultra-small groceries, 9k by 2023), an extended product range (a wider offering of children’s goods and pet products), and a higher share of items unique to Magnit including more private label products (from 9% to 20%) combined with smart promo campaigns and better communication should help the company to recover after over three years of falling sales densities. Greater product and service differentiation and stronger customer loyalty will be key signs of success. The latter should boost Magnit’s financials over 12-24 months. We expect ROIC to gradually rise from around 13% to 18% in 2023.

Efficiency important weapon in battle with competitors. Apart from driving higher sales densities Magnit has a few other opportunities to improve efficiency and drive ROICs higher. Initiatives include in-house production (predominantly of food products), and improved working capital efficiency, which alone could help to release approximately RUB44bn of capital in the next 24 months (around 12% of the group’s market cap or approximately RUB430 per share). We think that the SIA Group deal may help to address WC efficiency in the cosmetics segment.

Trading well below historical average; good value but no near-term catalysts. We see merit in the valuation argument – Magnit is trading 31% off its 2Y historical average on BF P/E and 37% on BF EV/EBITDA – but the market lacks the confidence required for the stock to re-rate. We believe several quarters of improvement are needed.

vk.com/id446425943								13
	EQUITY RESEARCH	CONSUMER AND RETAIL
			.
	Figure 38: Magnit at a glance
			2015	2016	2017	2018E	2019E			2020E
	Revenue		950 613	1 074 812	1 143 314	1 235 455	1 355 742		1 489 220
	Gross profit		270 821	295 759	304 643	308 864	338 936	366 348
	Operating profit (EBIT)		82 856	81 967	58 062	57 716	63 633		73 059
	EBITDA		103 973	107 793	91 778	91 644	106 199	118 944
	EBITDA margin		10,9%	10,0%	8,0%	7,4%	7,8%		8,0%
	EBITDAR		134 150	146 264	137 101	145 666	166 758	185 238
	EBITDAR margin		14,1%	13,6%	12,0%	11,8%	12,3%		12,4%
	Profit for the period		59 061	54 409	35 539	36 649	42 468	50 942
	BALANCE SHEET, RUBmn		2015	2016	2017	2018E	2019E			2020E
	Property, plant and equipment		265 996	289 945	329 827	344 837	361 316		378 458
	Intangible assets		1 397	1 424	2 268	2 731	2 850	2 568
	Total non-current assets		272 377	296 026	336 786	357 008	373 606		390 466
	Inventories		116 472	134 915	162 205	174 132	163 228	155 643
	Total current assets		131 816	158 890	189 539	199 122	192 864		221 038
	Total assets		404 193	454 915	526 325	556 129	566 470	611 504
	Total equity		165 141	196 077	259 307	262 964	288 445		313 916
	Long-term borrowings and loans		59 411	77 500	86 338	93 165	72 684	72 684
	Total non-current liabilities		72 410	93 126	108 960	119 034	96 385		96 385
	Total current liabilities		166 643	165 713	158 057	174 130	181 639	201 202
	Total equity and liabilities		404 193	454 915	526 325	556 129	566 469		611 503
	Key data		2015	2016	2017	2018E	2019E			2020E
	ROE		38.3%	30.1%	15.6%	14.0%	15.4%	16.9%
	ROA		15.8%	12.7%	7.2%	6.8%	7.6%		8.6%
	ROIC		29.3%	23.8%	14.3%	12.7%	13.8%		16.2%
							Source: Company data, ATON Research
	Figure 39: Magnit new vs old forecasts comparison
			2018E				2019E
		New	Old		%	New	Old			%
	Revenue	1 235 455	1 320 937		-6,5%	1 355 742	1 478 329			-8,3%
	EBITDA	91 644	109 541		-16,3%	106 199	125 801	-15,6%
	Net Income	36 649	40 296		-9,1%	42 468	47 245			-10,1%
		ATON	Cons		%	ATON	Cons			%
	Revenue	1 235 455	1 258 040		-1,8%	1 355 742	1 378 718	-1,7%
	EBITDA	91 644	91 670		0,0%	106 199	102 291			3,8%
	Net Income	36 649	35 987		1,8%	42 468	40 356	5,2%
								Source: ATON Research

© 2018 ATON LLC. All rights reserved

vk.com/id446425943CONSUMER AND

EQUITY RESEARCH

Target Price
Target price per GDR (DCF),$	18,1
Target price per GDR (multiples),$	17,9
Average Target Price per GDR,$	18,0
Potential upside	27%
Target price per share, (DCF), RUB	4 992
Target price per share (multiples)	4 949
Average target price per share RUB	4 970
Potential upside	34%

Source: Company data, ATON Research

RETAIL	14

Valuation

12M target price. To evaluate Magnit we used a combination of DCF and multiples methods. Our combined valuation yields a 12-month target price of $18 price per GDR, which implies 27% upside potential to the CMP. Although we do not see strong catalyst for the stock performance short term we put a BUY rating on the GDR. To calculate the target price for the shares we also applied an average market discount to the GDR price of 15%. The 12M target share price of RUB4,970 anticipates 34% upside potential to the CMP. For the same reason as for GDR we assume BUY rating for the local stock.

Figure 40: Fwd P/E MGNT LI

18

16

14

12

10

8 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18

MGNT RM Equity Multiple (BF P/E) Multiple Average (2 Years)

Source: Bloomberg, ATON Research

Figure 41: Fwd P/E MGNT RX

Multiples valuation. When considering our multiples valuation, we used the 12M forward P/E and EV/ EBITDA ratios of Magnit’s global peers operating in emerging markets (12.9x and 22.9x, correspondingly). The market-based valuation resulted in a target price of $17.9 per GDR, implying 26% upside potential to the CMP and a target price of RUB4,949 per share, indicating 33% upside potential to the CMP.

Magnit’s cost of capital was calculated using: 1) Russian corporate tax rate for retailers of 24%, 2) RFR offered on the 10-year OFZ, 3) we assume a debt premium of 5% and an EMRP of 5%. Using the debt–to–equity ratio estimated in 2018 we derive the weighted average cost of the company’s capital as 13.6%.

DCF. In order to calculate the terminal value, we assume that after 2026 future cash flows will grow at a constant rate of 5%. With our DCF model we derive a target price of $18.1 per GDR which implies 28% upside potential, and RUB4,992 per share, suggesting 34% upside potential to the CMP.

10

					Risks
	8
					Downside risks
	6				Lower than expected economic growth in Russia and legislation restrictions.
					While currently Magnit’s exposure to the VAT increase is likely to be limited,
	4				further legislation changes and a more hostile macro environment may put
	Oct-16 Mar-17		Aug-17 Jan-18 Jun-18		pressure on Magnit’s financial performance.
	MGNT RM Equity Multiple (BF EV/EBITDA)
	Multiple Average (2 Years)				Growing share of promotions: increasing popularity of promotions among
		Source: Bloomberg, ATON Research
					shoppers and the necessity to keep up with the trend in order to maintain market
	Figure 42: MGNT EPS 2019 estimates
					share may put strain on the margins of the major Russian retailers, including
	decreased 35% over 1 year
					Magnit.
	7500			600
				550	Execution and corporate governance risk. Implications in the implementation of
	6000			500	the new strategy may slow Magnit’s operational turnaround.
	4500			450	Upside risks
				400	New management team efficacy. Currently a lot depends on the execution of the
	3000			350	new strategy and the effectiveness of the steps that the management team will
	Nov-17	Feb-18 May-18		Aug-18 Nov-18	undertake to reconquer its leadership position on the market.
		Price	BEst Standard EPS adj 2019
		Source: Company reports, ATON Research			Faster refurbishment programme. The pilot results of the store replanning shows
					that customers welcome the redesign (+30% revenue uplift for proximity stores, +13% in
	Figure 43: MGNT EBITDA 2019 est were
					Magnit family). By the end of 2018 Magnit plans to increase the number of refurbished
	down 24%
	7500			140000	stores to 1,200. In the case of a faster pace in future we see potential upside to the base
					case.
	6000			130000
					Increased market share. Notwithstanding the vast portfolio of Magnit stores (16,
				120000	960 stores of all formats at present), as of 2017 the retailer’s market share was only 9%.
	4500			110000	Higher penetration in the wealthier markets of Moscow and Siberia (current market
					share is 4% and 3% correspondingly; the 2023 targets are 10% and 14%) as well as further
	3000			100000 expansion in other regions will help Magnit to boost market share to 15% and more and
	Nov-17	Feb-18	May-18	Aug-18 Nov-18	this remains the key upside risk for the Group.
	Price		BEst Standard EBITDA 2019 A

Source: Bloomberg, Company, ATON Research

© 2018 ATON LLC. All rights reserved

vk.com/id446425943
	EQUITY RESEARCH	CONSUMER AND RETAIL
	Multiples Valuation		EV/EBITDA	P/E
	GEM peers, x		12,9	22,9
	Magnit's target multiples, x		7,7	13,7
	Average 2018-19E EBITDA, RUBmn		98 921
	Average 2018-19E net income, RUBmn			39 558
	Magnit's implied EV, RUBmn		765 652
	Magnit's 2018E net debt, RUBmn		122 588
	Magnit's implied equity value, RUBmn		643 064	543 530
	Price per GDR, $		19,4	16,4
	TP (average EV/EBITDA and P/E), $		17,9
	TP (average EV/EBITDA and P/E), RUB		4 949

Source: Bloomberg, Company data, ATON Research

	15
WACC calculation
Tax rate	24,0%
Asset Beta	1,0
Debt/Equity	0,3
Geared Beta	1,2
Risk free rate	8,5%
Debt premium	5,0%
Equity risk premium	5,0%
Cost of equity	14,6%
Cost of debt (after tax)	10,3%
WACC	13,6%

Source: Bloomberg, Company data, ATON Research

DCF valuation	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
EBIT	57,716	63,633	73,059	78,239	80,781	85,048	91,577	94,003	94,440
Less taxation	-9,742	-11,289	-13,542	-14,691	-15,228	-16,311	-17,595	-18,049	-18,081
Tax adjusted EBIT	47,974	52,344	59,517	63,549	65,553	68,738	73,982	75,955	76,359
Depreciation and amortisation	33,928	42,566	45,886	51,100	56,540	61,873	67,244	73,020	79,374
Less CAPEX	-54,232	-57,603	-61,185	-65,380	-65,687	-59,117	-63,278	-66,490	-71,844
Change in working capital	-1,725	28,895	26,175	1,967	2,566	3,030	-484	-508	-514
Unlevered free cash flow	25,945	66,202	70,393	51,236	58,972	74,523	77,464	81,976	83,375
WACC	13,6%
Discounted free cash flow	25,183	56,550	52,917	33,896	34,334	38,184	34,929	32,530	29,117
Future cash flow growth rate	5.0%
Terminal value	1,097,771
Discounted terminal value	383,366
PV of 2026E enterprise value	721,005
Net debt	122,588
Fair equity value	598,417
Number of GDRs, mn	509.5
Price target, $ per GDR	18.1
Price target, RUB per share	4,992

© 2018 ATON LLC. All rights reserved

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EQUITY RESEARCH CONSUMER AND RETAIL

Lenta

Share Buyback to Support Stock, but Outlook Grimmer

LNTA LI							HOLD
Target price						$4.0
Potential upside						9%
LNTA RX
Target price share							RUB266
Potential upside						9%
SHARE DATA
No. of ordinary shares (mn)						487.1
3M average daily t/o shares ($mn)						1.6
Free float (%)						58%
Market capitalisation ($mn)						1 810
Enterprise value (RUBmn)							222 986
Major shareholder
TPG Group							34%
EBRD						7%
FINANCIALS		2017			2018E		2019E
(RUBmn)
Revenue		365,178		416,342			453,360
EBITDA	35,490			38,071		40,638
EBIT		25,577		26,835			28,038
Net income		13,264		13,702			15,608
EPGDR, RUB		27.2		28.1			32.0
Valuation
P/E (x)	9.0			8.7		7.7
EV/EBITDA (x)		6.3		5.9			5.5
EV/Sales (x)	0.6			0.5		0.5
RoA (%)		5.6%		5.3%			5.6%
RoE (%)	20.4%			17.4%		16.8%
RoIC (%)		13.9%		12.4%			12.0%
Performance
1 month (%)							6%
3 month (%)						-26%
YTD (%)							-36%
52-week high ($)						7.3
52-week low ($)							3.2

Source: Bloomberg, ATON Research

Figure 44: Lenta’s stock performance

8

7

6

5

4

3 Nov-17 Feb-18 May-18 Aug-18 Nov-18

LNTA LI

Source: Bloomberg, ATON Research

After its 3Q18 trading update, Lenta announced that it will no longer pursue its earlier guidance to double its selling space between 2017 and 2020. Facing a hostile macro environment and intensifying competition, Lenta has decided to constrain its opening pace in order to increase shareholder returns and drive positive FCF in 2019. Incorporating this data into our updated model we derived a target price of $4.0 per share that implies 9% of potential return. We see a short-term positive catalyst for Lenta’s stock in the form of the announced RUB11.6bn share buyback programme that is effective for 12 months. However, slower growth and deteriorating LfL sales decrease visibility. We therefore maintain our HOLD rating on Lenta.

Format risk remains the key concern for Lenta’s long-term investment case.

Weakening 3Q18 LfL sales (-0.6% vs 3.5% in 2Q) confirm investor concerns about the bigger formats’ risks. Hypermarkets remain the key format for Lenta’s business and while the supermarket segment is growing fast, hypermarkets still account for 93% of

Lenta’s sales. Hypermarkets are facing more intense competition and are expected to grow at a 3.6x lower CAGR than the smaller formats (2017-21 CAGR expected at 2.9%). The combination of slower store openings and deteriorating LfL sales will significantly retard the company’s growth.

Organic growth slowing but FCF positive. Lenta changed its earlier guidance of doubling its selling space between 2017 and 2020, and while the company reiterated the opening plan for FY18 (18 hypermarkets, 40 supermarkets), the number of openings in 2019 will be half that number or even less (with more precise guidance to be announced at the beginning of 2019). At the same time, Lenta will continue to consider possible M&A targets with an IRR threshold of 20%. However, on ATON’s estimates, the slower openings will result in RUB13bn positive FCF in FY19 (FCF yield of 13%).

Pressure on sales to persist through 4Q18 and 2019, while margins to be less affected. Lenta reported a significant QoQ slowdown of the top line expansion pace in 3Q18 (-400 bpts) due to the weak LfL sales performance (which turned to negative 0.6%). While initiatives including targeted promo and an improved assortment mix with a higher share of private label, will in our view help to attract additional traffic, the reduction in new openings will result in a significant slowdown in top line growth in 2019 (8.9% YoY vs 14% in 2018 and 19.2% in 2017). However, good cost discipline and a high space ownership rate will mitigate the respective impact on the EBITDA margin level (FY19E at 9.0% - vs 9.1% in 2018E).

Lenta’s share buyback programme to support stock performance short-term. Lenta announced a share buyback programme for up to RUB11.6bn and approximately 10% of its GDRs and 17% of free float. The programme will be effective for 12 months starting from 29 Oct 2018. Lenta will fund the programme via own funds, and will also refinance its debt due 2019.

Lenta’s current valuation is well below its average historic though the new openings guidance will lead to further consensus downgrades. We are 3.4% and 2.9% below Bloomberg consensus on 2019 revenue and EBITDA. Lenta trades at a 49% and 31% discount to its historical average of BF P/E and BF EV/EBITDA multiples, however falling estimates and lower longer-term visibility with respect to the company’s performance will likely keep the stock from re-rating in the short term.

© 2018 ATON LLC. All rights reserved

vk.com/id446425943		17
EQUITY RESEARCH	CONSUMER AND RETAIL
Figure 48: Hypermarkets segment will continue to underperform		Figure 49: Lower selling space growth will result in constrained top
		line expansion

Market volume, RUB trn				CAGR 10.4%		40%					40%
					6,7
				CAGR 11%		30%					30%
				4,5
				4,0		20%					20%
CAGR 5.1%	CAGR 2.9%
2,0	2,1	2,3				10%					10%
						0%					0%
						2015	2016	2017	2018E	2019E	2020E
Hypermarkets				Proximity segment			Selling space expansion			Top line expansion
		2016	2017	2021
		Source: Company presentation, ATON Research						Source: Company data, ATON Research

	Figure 50:… though will lead to RUB13bn of positive FCF in FY19		Figure 51: We expect the impact on margins to mitigated as a
			result of Lenta’s focus on internal efficiency

25
15
5
-5
-15
-25
2013	2014	2015	2016	2017	2018E	2019E	2020E
		OCF	Capex		FCF
		Source: Company data, ATON Research

30%

21,4% 21,5%

20%

10%								9,7% 9,1%
													7,0% 6,4%
0%
	Gross Profit Margin							EBITDA margin						EBITMargin
			2015		2016		2017E			2018E		2019E		2020E
							Source: Company data, ATON Research

Figure 52: Lenta at a glance

		2015			2016		2017			2018E		2019E			2020E
Revenue		252 763			306 352		365 178			416 342		453 360			476 103
Gross profit	56 305			67 768		78 236			89 514		96 778			101 061
Operating profit (EBIT)		22 332			23 695		25 577			26 835		28 038			28 805
EBITDA	28 003			31 390		35 490			38 071		40 638			42 112
EBITDA margin		11,1%			10,2%		9,7%			9.1%		9.0%			8.8%
EBITDAR	30 675			34 825		39 702			44 027		47 392			49 444
Profit before income tax		12 872			14 553		15 172			17 566		20 010			21 381
Profit for the period	10 288			11 202		13 264			13 702		15 608			16 677
BALANCE SHEET, RUBmn		2015			2016		2017			2018E		2019E			2020E
Property, plant and equipment		104 016			147 812		170 308			181 798		183 642			182 529
Intangible assets	1 092			1 890		1 817			1 820		1 795			1 729
Total non-current assets		115 040			161 573		178 245			191 832		193 651			192 473
Inventories	22 782			27 491		36 933			42 533		46 404			48 807
Total current assets		63 352			64 597		68 485			77 967		91 623			115 973
Total assets	178 392			226 170		246 731			269 800		285 275			308 446
Total equity		47 130			58 369		71 787			85 353		100 961			117 638
Long-term borrowings and loans	65 149			66 956		62 194			62 194		59 000			60 975
Total non-current liabilities		70 403			74 318		70 581			72 708		69 513			71 488
Total current liabilities	60 858			93 483		104 362			111 739		114 801			119 320
Total equity and liabilities		178 392			226 170		246 731			269 800		285 275			308 446
Key data		2015			2016		2017			2018E		2019E			2020E
ROE	32,2%			21,2%		20,4%			17.4%		16.8%			15.3%
ROA		6,4%			5,5%		5,6%			5.3%		5.6%			5.6%
ROIC	18,7%			14,3%		13,9%			12.4%		12.0%			11.3%

Source: Company data, ATON Research

© 2018 ATON LLC. All rights reserved

vk.com/id446425943		18
EQUITY RESEARCH	CONSUMER AND RETAIL

Target Price
Target price per GDR (DCF),$	3.7
Target price per GDR (multiples),$	4.3
Average Target Price per GDR,$	4.0
Potential upside	9%

Source: Company data, ATON Research

Figure 53: Fwd P/E LNTA LI

18

16

14

12

10

8

6 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18

LNTA LI Equity Multiple (BF P/E) Multiple Average (2 Years)

Source: Bloomberg, ATON Research

Valuation

12M target price. To value Lenta we used a combination of DCF and multiples methods. Our combined valuation yields a 12-month target price of $4 price per GDR, which implies 9% upside potential to the CMP. Therefore, we reiterate our HOLD rating for the stock.

Multiples valuation. When considering our multiples valuation, we used 12M forward P/E and EV/ EBITDA ratios of the global EM peers (12.9x and 22.9x, respectively) and used a 57% discount to the target multiples. The market-based valuation resulted in a target price of $4.3 per GDR, implying 20% upside potential to the CMP.

Lenta’s cost of capital was calculated using: 1) the Russian corporate tax rate for retailers of 24%, 2) the RFR offered on the 10-year OFZ, 3) we assume a debt premium of 5% and an EMRP of 5%. Using the debt–to–equity ratio estimated in 2018 we derive a weighted average cost of company’s capital of 13.8%.

DCF. In order to calculate the terminal value, we assume that after 2026 future cash flows will grow at a constant rate of 2.5%. Given our DCF model we derive a target price of $3.7 per GDR which implies 1% upside potential.

Figure 54: Fwd EV/EBITDA LNTA LI

8

7

6

5

4 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18

LNTA LI Equity Multiple (BF EV/EBITDA) Multiple Average (2 Years)

Source: Bloomberg, ATON Research

Figure 55: Lenta FY19E Revenue estimates was down 5.8% this year

400

360	500000
320	490000
280
240	480000
200	470000
Nov-17 Feb-18 May-18 Aug-18
Price	BEst Standard Revenue 2019 A

Source: Company reports, ATON Research

Figure 56: Lenta FY19E EBITDA estimates decreased 11% in last 12m

400	49000
360	47500
320
	46000
280
240	44500
200	43000
Nov-17 Feb-18	May-18 Aug-18
Price	BEst Standard EBITDA 2019 A

Source: Bloomberg, Company, ATON Research

Risks

Downside risks

Deteriorating macroeconomic conditions: low inflation and slow economic growth will impact all players in the Russian economy

Format risk remains the key concern for long term performance. Hypermarkets, which remain the Lenta’s main format by revenue contribution, will be affected by the slower growth pace and traffic cannibalisation from smaller formats (proximity stores, discounters).

Industry consolidation and tougher competition: Lenta will suffer increasing pressure from larger players like Magnit and X5 Retail Group, especially taking into account their newly approved strategies that provide for significant faster expansion than Lenta’s.

Upside risks

Strong margins: Lenta has always been the industry leader in terms of EBITDA margin (due to the higher share of owned space, approximately 76%) and we expect that it will be able to maintain a high level of profitability.

Higher shopper retention achieved due to strong loyalty programme. In 2000 Lenta was the first retailer to introduce a loyalty programme and since then the number of active cardholders has surpassed 13.8mn people in 3Q18. If the group is able further build up this competitive advantage it may lead to higher LfL traffic than expected.

© 2018 ATON LLC. All rights reserved

vk.com/id446425943
	EQUITY RESEARCH	CONSUMER AND RETAIL
	Multiples Valuation		EV/EBITDA	P/E
	GEM peers, x		12,9	22,9
	Assumed premium/(discount)		-57%	-57%
	Lenta's target multiples, x		5,5	9,8
	Lenta's 2018E-2019E EBITDA, RUBmn		39 354
	Lenta's 2018E-2019E net income, RUBmn			14 655
	Lenta's implied EV, RUBmn		218 298
	Lenta's 2018E net debt, RUBmn		88 604
	Lenta's implied equity value, RUBmn		129 694	144 305
	Price per GDR, US$		4.1	4.6
	Price per GDR, US$		4.3

Source: Bloomberg, Company data, ATON Research

19

	WACC calculation
	Tax rate		24,0%
	Asset Beta		1,0
	Debt/Equity	1,1
	Geared Beta		1,8
	Risk free rate	8,5%
	Debt premium		5,0%
	Equity risk premium	5,0%
	Cost of equity		17,7%
	Cost of debt (after tax)	10,3%
	WACC		13,8%

Source: Bloomberg, Company data, ATON Research

DCF valuation	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
EBIT	26,835	28,038	28,805	27,315	25,652	23,745	21,612	20,121	19,374
Less taxation	-3,865	-4,402	-4,704	-4,517	-4,342	-4,080	-3,806	-3,718	-3,929
Tax adjusted EBIT	22,970	23,636	24,101	22,797	21,311	19,664	17,806	16,403	15,444
Depreciation and amortisation	11,236	12,599	13,307	13,890	14,415	14,941	15,468	16,009	16,567
Less CAPEX	-22,100	-14,041	-11,752	-9,208	-9,519	-9,273	-9,508	-9,861	-10,133
Change in working capital	-125	1,001	690	617	526	523	495	489	498
Unlevered free cash flow	11,981	23,195	26,346	28,096	26,732	25,856	24,261	23,040	22,376
WACC	13.8%
Discounted free cash flow	11,756	20,005	19,973	18,722	15,657	13,311	10,979	9,165	7,823
Future cash flow growth rate	2.5%
Terminal value	225,927
Discounted terminal value	78,990
PV of 2026E enterprise value	206,380
Net debt	88,604
Fair equity value	117,775
Number of GDRs, mn	487.1
Price target, $ per GDR	3.7
Potential upside	1%

Figure 57: Lenta new vs old forecasts comparison

		2018E			2019E
	New	Old	%	New	Old	%
Revenue	416 342	417 660	-0,3%	453 360	477 927	-5,1%
EBITDA	38 071	41 161	-7,5%	40 638	46 462	-12,5%
Net Income	13 702	13 977	-1,9%	15 608	17 013	-8.2%
	ATON	Cons	%	ATON	Cons	%
Revenue	416 342	423 634	-1,5%	453 341	469 060	-3,4%
EBITDA	38 071	39 048	-2,5%	40 638	42 596	-4,6%
Net Income	13 702	14 779	-7,2%	15 608	17 090	-8,6%

Source: ATON Research

© 2018 ATON LLC. All rights reserved

vk.com/id446425943

EQUITY RESEARCH CONSUMER AND RETAIL

O’KEY

Turnaround to Take More Time

OKEY LI							SELL
Target price share						$1.4
Potential downside						-10%
SHARE DATA
No. of ordinary GDRs (mn)							269
3M average daily t/o shares						0.1
(RUBmn)
Free float (%)						20%
Market capitalisation ($mn)						425
Enterprise value (RUBmn)							60 413
Major shareholder
NISEMAX Co							51%
GSU						30%
FINANCIALS		2017			2018E		2019E
(RUBmn)
Revenue		177,455		167,947			175,546
EBITDA	9,335			7,819		8,908
EBIT		7,590		3,284			3,817
Net income	3,167			171		948
EPGDR, RUB		11.8		0.6			3.5
DPGDR, RUB	5.4			7.1		1.3
Valuation
P/E (x)	8.9			164.6		29.8
EV/EBITDA (x)		6.5		7.7			6.8
EV/Sales (x)	0.3			0.4		0.3
RoA (%)		3.3%		0.2%			1.1%
RoE (%)	12.6%			0.8%		4.1%
RoIC (%)		11.6%		5.6%			6.6%
Performance
1 month (%)							6%
3 month (%)						-19%
YTD (%)							-37%
52-week high ($)						2.8
52-week low ($)							1.4

Source: Bloomberg, ATON Research

Figure 58: OKEY stock performance

3

2,5

2
1,5
1
Nov-17	Feb-18	May-18	Aug-18	Nov-1

OKEY LI

Source: Bloomberg, ATON Research

© 2018 ATON LLC. All rights reserved

O’KEY remains the only retailer that has not yet disclosed its 3Q18 operating results. While the group has been at pains to improve its profitability (gross margin as of 1H18 +60 bpts YoY, EBITDA margin +17 bpts), the more cautious guidance announced for FY18 highlights that strong competition remains one of the key issues for retailers, while a lack of visibility on a material profitability enhancement in the DA! Segment will continue to weigh on the stock. The appointment of Armin Burger as CEO of the Group (also CEO of DA! Brand) indicates an increasing focus on discounters. In the absence of strong catalysts and material improvements in the company’s core hypermarket format we maintain our SELL rating and lower our target price to $1.4 per GDR.

Poor macro continues to have negative impact on retailers’ business. The Group expects that shelf deflation will continue for a while and does not see the promoactivity declining in the mid-term. Promotions remain one of the key tools for retailers to attract customers and attitudes may only change if the market consolidates.

However, O’KEY continues to focus on cost optimisation as new initiatives are expected to boost EBITDA margin by 1 ppt in two years (+17 bpts YoY as of 1H18).

RUB7bn proceeds from supermarket sale will be directed at the development of discounters, and hypermarkets’ renovation. O’KEY decided to sell the supermarket business to X5 last year, and the divestiture was necessary to free up resources and concentrate on the three key pillars of the new O’KEY strategy: the core hypermarkets business, e-commerce, and discounters.

The selling space optimisation in hypermarkets remains a key priority in order to drive sales densities. Currently O’KEY targets sales density at RUB400 ths –

RUB500ths per sqm. In those stores that have trouble in complying with the threshold,

O’KEY Group will decrease selling space and will attract external partners (for example, off-price chain Familia) to the fill the vacant space. Under its strategic partnership with Familia, the total space leased out is 5.7k sqm (while the total selling space of the hypermarkets segment decreased to 529.6k sqm). New partners are selected from those chains that will not harm or cannibalise O’KEY’s business but will generate additional traffic for the Group.

Discounters will break-even when the chain exceeds 100-110 stores; at 200 stores, discounters’ EBITDA margin may reach 4-6%. O’KEY is not considering an SPO to fund the discounter expansion but may attract private equity financing if additional resources are needed for the rapid format expansion. According to the current guidance, O’KEY has revised downwards its opening plan for discounters, and guides for up to 25 new stores in 2018 and around 50 openings in 2019.

O’KEY sees potential in developing its online channel. Currently the company is able to process 150-200 orders per day in store which is insufficient to meet demand.

However, O’KEY is preparing to launch dark stores that are convenient for collections, and will increase the number of orders to up to 3-4 thousand per day. Moreover, the costs associated with compiling an order in a dark stores are expected to be 27%-33% lower than in a traditional store even without process automation (in-store expenses are around RUB550-600 per order, in dark stores costs will equal approximately RUB400).

The buyback does not mean that there will be no dividends. O’KEY Group announced that it will launch a buyback programme for the purposes of its new and as yet unpresented LTI programme. However, company has refuted rumours that the buyback programme will usurp its dividend payment. According to management, assuming the net debt to EBITDA ratio is at a comfort level of 2.7x-3.0x, the Group will be able to pay out RUB1.8-2bn in dividends.