Morgan Stanley Beating Goldman in Retail: Russia Overnigh

One day after Goldman Sachs Group Inc. reiterated its preference for X5 Retail Group NV among Russian retailers, Morgan Stanley reinforced its backing of competitor OAO Magnit.

Traders are siding with Morgan Stanley.

Global depositary receipts of Magnit gained 0.6 percent to $64.50 by 9:46 a.m. in London, after touching a record high of 8,719 rubles in Moscow yesterday. The stock has gained 80 percent this year, the best performance on Russia’s benchmark Micex index. X5 slipped 1 percent to $16.08 yesterday and was set for a 9.8 percent decline in 2013. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. slumped 0.5 percent as futures on Russia’s RTS Index fell in U.S. hours.

Morgan Stanley boosted its price estimate on Magnit’s global depositary receipts by 23 percent, reiterating a buy rating, a day after Goldman Sachs said a turnaround in the management of X5 Retail Group NV, Russia’s second-largest retailer, will boost competition for the No.1 supermarket chain. Magnit said on Oct. 28 that profit margin rose to a record high while X5’s third-quarter revenue fell short of analysts estimates.

“I side with Morgan Stanley as we own Magnit and believe in its potential to expand in Russian regions and further increase revenue,” Mansur Mammadov, a money manager at Kazimir Partners, which oversees $300 million in assets, said in a phone interview from Moscow Oct. 30. “I was surprised with Goldman’s report on X5. It will take another several quarters for X5 to actually turn around.”

Moscow Expansion

X5, which has lost almost two-thirds of its market value since mid-2011, formed a new management team as it plans to refurbish stores in a bid to bolster sales. X5 seeks to improve focus on the “individual needs” of its store formats and improve supplier relationships, Chief Executive Officer Stephan Ducharme told investors Oct. 11.

Magnit, owned by billionaire Sergey Galitskiy, plans to expand in Moscow and St. Petersburg, traditionally X5 strongholds.

Morgan Stanley increased its price estimate on Magnit to $80 per London-listed depositary receipt. Goldman said in an Oct. 29 note that X5 “can win the race”, reiterating a buy on the stock and keeping it on the bank’s list of the most recommended shares in the region.

Tanya Barkas, a spokeswoman for Morgan Stanley in New York, said the firm’s office in London, which was closed after regular business hours, oversees Magnit coverage. An e-mailed message to Anna Leath, a Goldman Sachs spokeswoman in New York, wasn’t immediately returned.

Market Share

ADRs of OAO Gazprom Neft, the worst-performing Russian oil stock in New York in at the time, have jumped 18 percent since Goldman Sachs predicted in August that it would rebound on prospects of higher output and dividends.

Magnit, which reported a record-high profit margin in the third quarter, can double its market share in the next three to four years, Natalya Kolupaeva, senior analyst at ZAO Raiffeisenbank at Moscow, said by phone yesterday.

“Magnit keeps amazing everyone,” Kolupaeva said. “It’s a stable, clear and transparent company. It is a leader in the market and will remain a leader. X5 can rise from the ashes, but the risks it may fail to do so are also great.”

Kolupaeva rates both stocks a hold and is in the process of revising her recommendation on Magnit, she said, declining to comment on whether she plans to upgrade it to a buy.

“Moscow-listed shares of Magnit are a real opportunity for investors,” Kolupaeva said. “The gap between London and Moscow is still wide and will shrink over time because the local shares become more accessible by foreign investors.”

London Premium

Magnit’s London depositary receipts traded at an 18 percent premium to the Moscow-listed shares yesterday, the narrowest gap since April 10, data compiled by Bloomberg show. Raiffeisenbank’s Kolupaeva expects the gap will shrink to about 5 percent in a year from now.

While none of the analysts covering Magnit recommends selling it, sell recommendation on X5 rose to an eight-month high in October, data compiled by Bloomberg shows. Bank of America Merrill Lynch raised X5 to a buy on Oct. 24, 10 days after JPMorgan Chase & Co. and HSBC Holdings Plc cut their recommendations to the equivalent of sell.

“World’s major banks have been lately showing a very different vision on how to play Russia’s retail sector,” Mammadov said.

The Bloomberg Russia-US gauge dropped to 103.69. The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund that holds Russian shares, slipped 0.7 percent to $29.34. The RTS Volatility Index, which measures expected swings in the index futures, dropped 7 percent to 21.70 today, while RTS stock-index futures decreased 0.5 percent to 147,960 in U.S. hours.

United Co. Rusal, a Moscow-based aluminum producer dropped 0.8 percent to HK$2.37 in Hong Kong trading. The MSCI Asia Pacific Index fell 0.4 percent.

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