X5 Gains to Outpace Magnit as Russia Retailers Rebound, BCS Says

X5 Retail Group, which has rebounded more than twice as much as OAO Magnit in 2015, will probably continue that trend as sales grow and traders see a compelling valuation discount, according to BCS Financial Group.

Both Russian food retailers, which are traded in London, sank about 30 percent in 2014 during a broad market selloff as plunging oil prices and sanctions linked to the Ukraine conflict squelched the economy. X5 has jumped 73 percent this year as sales rose each month, while Magnit gained 30 percent 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.”

X5 rose 9.1 percent to $21.05 last week, the highest in nine months, while Magnit increased 4.2 percent to $59 in London. A Bloomberg gauge of U.S.-traded Russian stocks gained 2.4 percent to 65.73 in the five days through Friday.

Consumer Shift

Soaring inflation and shrinking disposable income have prompted 48 percent of Russians to switch to cheaper food brands, marketing researcher Nielsen said last week. Even as some consumers turn to discounters such as X5 and Magnit from pricier grocers, Magnit has probably seen less of a benefit from the shift as its locations are mainly in towns with fewer than 500,000 people, Ibragimov said. More than 40 percent of X5’s stores are in the country’s densely populated central region.

Gross domestic product contracted 1.9 percent in the first quarter from a year earlier after a 0.4 percent 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.

‘Got Lucky’

Annual inflation slowed to 16.4 percent in April from 16.9 percent 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. “In a sense, X5 got lucky because the crisis happened, pushing it to make adjustments in its discount stores, which helped improve performance. X5 looks better than it did last year, but it still has a lot of improvements to make.”

X5 increased its sales by 19 percent last year, compared with Magnit’s 32 percent increase. Revenue growth at X5 was less than 10 percent in 2012 and 2013, allowing Magnit, controlled by the billionaire Sergey Galitskiy, to become the country’s largest retailer.

Sales Growth

Magnit’s net income margin will probably slip to 5.9 percent this year from 6.2 percent in 2014, according to the average of analyst estimates compiled by Bloomberg. They forecast an increase in X5’s margin to 2.2 percent from 2 percent.

“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.”

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