Russia’s X5 Rallies After Revenue Growth Outpaces Market Leader

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X5 Retail Group NV, Russia’s second-largest retailer, rose to a six-week high after its quarterly sales growth exceeded that of market leader PJSC Magnit for the first time in six years amid measures to boost store traffic.

Global depositary receipts rose 4.4 percent in London on Monday to the highest level since May 29. The shares have jumped 57 percent this year, more than any other Russian food retailer, after plunging 27 percent in 2014.

X5, controlled by an investor group including billionaire Mikhail Fridman, said Monday that its second-quarter sales rose 28 percent to 199 billion rubles ($3.5 billion), outpacing the 27 percent growth reported last week by Magnit. Revenue jumped as the company’s efforts to renovate stores, improve logistics and product assortment helped increase traffic as shrinking disposable income pushed consumers to shift to discount stores.

“We saw good second-quarter results, and it looks like X5 still has the potential to further improve traffic,” Marat Ibragimov, an analyst at BCS Financial Group, said by phone from Moscow on Monday. “X5 is making an across-the-board effort to improve its performance. The second-quarter headline numbers should trigger the stock re-rating.”

Analyst Ratings

On a scale from 1 to 5, X5 Retail’s global-depositary receipts have an analyst consensus rating of 4.7, data compiled by Bloomberg show. The stock has 17 buy recommendations, up from an eight-year low of five in February.

The Moscow-based retailer posted the biggest increase in sales since 2011 at a time when the country is forecast to enter its first recession in six years. Russia’s gross domestic product will contract 3.5 percent this year, economists surveyed by Bloomberg estimate. GDP shrank 4.9 percent in May, government data showed last month.

X5, which in April said that its sales growth may slow as consumer prices decelerate, managed to show a 15.6 percent increase in like-for-like sales in the second quarter despite three months of slowing inflation, the company said Monday.

The retailer posted two years of single-digit sales growth in 2012 and 2013 at a time when Krasnodar-based Magnit reported an annual increase in revenue of about 30 percent. To catch up, X5 installed a new management team led by Chief Executive Officer Stephan DuCharme as part of a shakeup aimed at improving the retailer’s performance.

Hesitant Investors

“Some investors are still hesitant to be too optimistic about X5’s second-quarter results,” Natalya Kolupaeva, an analyst at ZAO Raiffeisenbank in Moscow, said by phone Monday. “The company hasn’t been too stable in the pace of its sales growth. We saw that 2012 and 2013 were not quite successful for X5, and the retailer is now catching up.”

A Bloomberg gauge of U.S.-traded Russian stocks rose 1.1 percent to 54.53 on Monday, a third straight gain. Magnit rose 1.7 percent to $53.51 in London. X5 trades at about 11 times current earnings compared with a ratio of 22.9 for Magnit, data compiled by Bloomberg show.

X5’s revenue will grow 24 percent this year, according to the average of 14 analysts surveyed by Bloomberg. The 28 percent sales growth in the second quarter “creates a substantial upside potential to the full-year consensus,” Ibragimov said.

X5’s stock is rated 17 buy and 3 hold, with an average 12-month price target of $22.64, implying an 18 percent return from Monday’s close, according to analyst coverage compiled by Bloomberg. Magnit is rated 10 buy and 7 hold, with an average forecast 12-month return of 14 percent.

“There is a chance that X5 will perform better than some analysts think,” Ibragimov said. “The valuation discount along with strong second-quarter numbers should provide an upside to X5’s consensus rating.”

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