Billionaire Sees Supermarkets Rally as Incomes Surprise

X5 Retail Group NV (FIVE), the Russian supermarket operator controlled by billionaire Mikhail Fridman, rose in London as a better-than-forecast jump in disposable incomes signaled there’s little chance shoppers will abandon the company’s stores for discount chains.

Shares of the Moscow-based retailer surged 4.8 percent yesterday to $20.80, the highest level since July 17. The advance pushed the stock’s gain this year to 24 percent, the biggest among Russian retail companies traded in London. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. added 1.2 percent to a one-month high.

Real disposable incomes climbed 2.3 percent in July, beating analysts’ projections for a decline and boosting X5, which derives a third of its sales from supermarkets and hypermarkets catering to middle-class consumers. Wages adjusted for inflation increased 1.8 percent, also topping estimates. Russia is trying to prevent its $2 trillion economy from contracting amid U.S. and European sanctions over the conflict in Ukraine.

GRAPHIC: Bloomberg Visual Data

GRAPHIC: Bloomberg Visual Data

“X5 is the most exposed to supermarket retailers and therefore the biggest beneficiary of customers trading up” to higher-end stores, Marat Ibragimov, an analyst at BCS Financial Group in Moscow, said by phone. “Investors were emotionally ready for a re-rating of the stock so the macro statistics fell at a very good time.”

ETF Advances

The Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, added 1 percent to $25.23, while futures on the dollar-denominated RTS index remained little changed at 125,320 in U.S. hours. The RTS Volatility Index, which measures anticipated swings in futures, dropped 0.7 percent to 31 points. Moscow-based United Co. Rusal rose as much as 0.7 percent to HK$4.08 at 10:41 a.m. in Hong Kong trading.

Related: Why a Contrarian is Betting Big on Russian Stocks

While disposable incomes unexpectedly rose, retail sales growth remained near the lowest since January 2010 as sanctions batter the ruble and stoke inflation, Federal Statistics Service data showed. President Vladimir Putin has responded to American and European penalties by barring the import of a range of products.

Russia’s economy expanded a preliminary 0.8 percent from a year earlier between April and June, the weakest pace in five quarters. Gross domestic product will expand 0.5 percent this year, according to a Bloomberg survey, with economists from BNP Paribas SA and Credit Suisse Group AG projecting a contraction.

Magnit, Lenta

Those estimates still make OAO Magnit, Russia’s biggest retailer, a more attractive investment than X5, as there is a possibility that shoppers will move to Magnit’s discount stores, according to Renata Klita, an analyst at Blackfriars Asset Management Ltd. in London.

X5’s earnings aren’t “enough for me to sell a quality name like Magnit and invest in X5,” Klita wrote. “I would still prefer to have exposure to discounters/hypermarkets than to supermarkets.”

Magnit, controlled by billionaire Sergey Galitskiy, slipped 0.2 percent yesterday in London while Lenta Ltd., the second-biggest hypermarket chain, added 3.7 percent. Smaller competitor O’Key Group SA fell 0.8 percent, extending its 2014 slump to 24 percent.

X5’s net income surged 71 percent from a year earlier in the second quarter, the company said in a statement Aug. 14. Sales will jump 16 percent this year, according to the average of 16 analyst estimates compiled by Bloomberg.

The company trades at 13.6 times projected 12-month profit, the cheapest valuation among Russian retailers listed in London. Yesterday’s economic data could help X5 narrow its discount to Magnit, which has a price-to-earnings multiple of 21, according to Ibragimov.

“X5 has been the ugly duckling of the Russian food-retail industry for the past four years,” Ibragimov said. “We will see a major rally after X5 releases third-quarter numbers, which will signal a third consecutive quarter of strong performance.”

To contact the reporters on this story: Natasha Doff in London at ndoff@bloomberg.net; Priyanka Sharma in London at psharma142@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net; Daliah Merzaban at dmerzaban@bloomberg.net Marie-France Han, Matthew Oakley

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