Magnit Loses Russia Crisis-Proof Label as Inflation Soars

Russian retailers, once seen as the companies best equipped to withstand the nation’s economic turmoil, are losing the confidence of analysts amid stagnating wage growth and the fastest inflation in more than five years.

Banks slashed their 2015 price-to-earnings ratio forecasts by half for OAO Dixy Group and O’Key Group SA and by a third for OAO Magnit, according to data on estimated earnings for the 12 months through Dec. 31. That compares with a cut of about 20 percent for the multiple on the Micex Index, while valuation projections for the Emerging Markets Retailing Index have climbed 3.7 percent.

Concern is mounting that Russia’s worsening crisis will catch up with both discounters and hypermarkets facing customers who can’t afford the products they could a year ago. As recently as October, companies from Magnit to X5 Retail Group were upgrading their year-end sales estimates, and Fitch Ratings said in November retailers would be largely unaffected by the food import bans Russia imposed on the West in retaliation for sanctions related to the Ukraine conflict.

“People are extremely nervous about profit outlooks for all of the Russian retailers even though sales so far have held up well,” Charles Allen, an analyst at Bloomberg Intelligence, said by phone on Jan. 6. “Inflation is accelerating while the rate of wage growth has slowed quite sharply, and there has to be a concern that at some point this year there will be less spending on food.”

Magnit gained 1.2 percent to 10,671 rubles by 11:05 a.m. in Moscow. The retailer said today that its December retail sales climbed 37 percent to 87.4 billion rubles, bringing last year’s sales to 763 billion rubles, a 32 percent increase.

’Minimize Losses’

Analysts reduced their price-to-earnings projection for O’Key, the first retailer to warn that the food ban were cutting into sales, by 47 percent to a multiple of 9 last month. Magnit, Russia’s largest grocery-store chain, traded at a ratio of 14.1 times profit for the next 12 months compared with a multiple of 7.7 for Dixy and 10.6 for X5 Retail.

Krasnodar-based Magnit boosted its 2014 sales forecast in October and X5, Russia’s second-biggest food retailer controlled by billionaire Mikhail Fridman, upgraded its sales forecast to as much as 19 percent from 12 percent at the previous high end of the range.

“Food retailers will have a challenging year ahead, and they’ll have to try hard to minimize losses by cutting down on expenses, minimizing loans and even holding off on expansion plans,” Oleg Popov, a money manager at Allianz Investments in Moscow, said by phone Jan. 9. “The food ban harmed Russians more than Western food producers. People still have to eat, but the purchasing power is shrinking.”

Fitch Cuts

Russia’s credit rating was cut last week to the lowest investment grade by Fitch Ratings after plummeting oil prices and the conflict over Ukraine triggered the worst currency crisis since the country’s 1998 default. The weakening ruble helped push inflation to 11.4 percent in December, the fastest growth since 2009, while real disposable income fell 4.7 percent in November, the most in eight months.

Consumer spending may contract up to 6.5 percent this year if oil averages $60 a barrel under a stress scenario, according to country’s central bank.

The Bloomberg Russia-US Index of the most-traded stocks added 4.1 percent last week. The Market Vectors Russia ETF, the biggest exchange-traded fund tracking Russian equities advanced 2.8 percent to $15.21. Magnit’s global depository receipts dropped 2 percent to $42.435 today, down more than 35 percent from a high in October, while X5 Retail slid 2.4 percent to $12, extending a 44 percent drop since July.

“Once oil prices go up and sanctions are lifted, the Russian market will go up as well, but things are not going that way,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a Jan. 7 telephone interview. “The opportunities are present in Russia, but nobody can say what’s going to happen there tomorrow, and for investors it’s too expensive to risk.”

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