Foreign Investors Fall Out of Love With Russia’s Top Retailer

  • Spread between DRs, local shares at widest in almost two years
  • Magnit worst performer among Russia stocks in London this year

For Russia’s leading supermarket chain, a lot has changed in a year.

Back in August, investors were so smitten with global depository receipts of Magnit PJSC they paid a 39 percent premium on the Moscow stock price just to own it. Last week, the spread between the London- and Moscow-listed shares shrank to 15 percent.

With thousands of stores dotted around the country, the company controlled by billionaire Sergey Galitskiy was once a favorite among stock pickers now hunting for a better investment as rising competition chips away at Magnit’s sales growth. Local investors, instead, are staying because there is a dearth of consumer stocks to choose from.

“Magnit has fallen out of favor among foreign investors who had seen it as a special case within Russia, but that has clearly not held up,” Morgan Harting, a senior portfolio manager at AllianceBernstein Holding LP, said by phone last week. “Consumer-oriented stocks are attractive globally and in emerging markets, and global investors can look somewhere else for opportunities.”

Crimea, Sanctions

Foreign investors are dropping London-listed shares faster than traders are selling equity on the local exchange, causing the valuation gap between onshore and offshore-traded equities to narrow to levels unseen since July 2014. Back then, Russia’s annexation of Crimea from Ukraine spurred international sanctions and a selloff across the market. 

While this year most Russian stocks rebounded, Magnit is the worst performer in London and second-biggest loser at home.

The company’s founder stands out for not being part of a handful of oligarchs with ties to President Vladimir Putin and his circle of power players. He’s stated that he steers clear of politics.

Russia limits depositary receipt conversion to 25 percent of a company’s shares and 50 percent of listed stock. Companies like Magnit have already reached their limit so premiums abroad are higher.

The spread between local and global depositary receipts on Magnit has contracted partly because some global funds could be selling the stock before repositioning their portfolios for the second half of the year, according to Kirill Yankovskiy, director of equity sales at Otkritie Capital International.

Sell It

“As we are approaching the end of the first half of the year, we are probably seeing foreign investors selling Magnit to reposition their portfolios and make room for something else,” Yankovskiy said by phone last week. “They have to see evidence the company is going to turn things around before they’re back.”

The Krasnodar-based retailer has been reporting sliding sales growth since 2015, compared with an increase in the rate of expansion in revenue at rival X5 Retail Group NV.

Magnit said its revenue growth will accelerate in the second part of 2016. This prompted Uralsib Capital, Citigroup Inc. and VTB Capital to upgrade the stock to buy within the past month. Sales growth will rise about 17 to 18 percent in 2016, the company said in April, compared with a growth rate of about 25 percent in 2015.

On a scale from 1 to 5, Magnit has a consensus recommendation of 3.63, above the 3.46 average of 18 global peers, according to data compiled by Bloomberg. Magnit’s London-listed stock will probably rise 20 percent in the next 12 months, a mean of 16 analysts surveyed by Bloomberg show. This is the second-largest projected gain among Russian stocks in London.

Economic Slump

Macroeconomic headwinds have hurt Magnit as well. Russia’s retail sales have been slumping every month since January 2015 as the nation is set to stay mired in recession. Growth in the world’s largest energy exporter won’t start until the first quarter of 2017, according to a median of 18 economists surveyed by Bloomberg.

“There is lack of economic growth in the country, and on top of that Magnit is going through a challenging period,” said Vladimir Vedeneev, chief investment officer of Raiffeisen Asset Management in Moscow. “This doesn’t mean that investors don’t like the company itself, it’s just that in the current environment they think there could better stocks to invest in.”

Before it's here, it's on the Bloomberg Terminal.