UniCredit Says Buy X5 Retail, Magnit, Sell Seventh Continent

X5 Retail Group NV (FIVE) and OAO Magnit, Russia’s two largest food retailers, were given “buy” ratings by UniCredit SpA, which said the improving economy and higher wages should boost food consumption next year and allow the chains to expand.

OAO Dixy Group, Russia’s third-largest food retailer, was also given a “buy” rating in reinstated coverage by Natalia Smirnova, an analyst at UniCredit in Moscow. Smirnova recommended selling shares of rival OAO Seventh Continent because of slower sales growth and the need to improve service.

Consumer confidence has risen steadily since the first quarter,” Smirnova wrote in a report dated yesterday. “Going forward, we expect this to allow retailers to increase prices in line with inflation. The appreciating ruble should also give a boost to the sector.”

The Russian economy will expand 1.3 percent and average wages will increase by 9 percent to $619 a month in 2010, UniCredit estimates. The ruble has gained 6 percent against the dollar this year. X5 plans to open as many as 185 outlets annually over the next two years, while Magnit will open as many as 500 discount stores and 16 superstores a year over the same period, according to UniCredit. Dixy plans to add about 100 stores a year, Smirnova wrote.

Investors should sell Moscow-based Seventh Continent, which operates “high-end supermarkets,” because the retailer’s strategy “is somewhat confused,” Smirnova said. “The stores are expensive for the middle class, who are switching to discounters, but service and assortment are not good enough to attract people with high incomes.”

Seventh Continent rose 1.6 percent to 261 rubles ($9.09) in Moscow. UniCredit’s Smirnova expects the shares to fall to $5 over 12 months, according to the report.

X5 shares rose 2.6 percent to $26.70 in London. UniCredit’s price estimate for the shares in $37.60. Magnit added 1.4 percent to $14.50. UniCredit expects the shares to reach $19.60. Dixy gained 0.1 percent to 197 rubles in Moscow. UniCredit’s price estimate for the shares is $7.90(226.75 rubles).

To contact the reporter on this story: Maria Ermakova in Moscow at mermakova@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net.

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