06 November 2012 EEMEA/Russia&South Africa&Turkey Equity Research Food Retail
EEMEA food retail universe Research Analysts SECTOR REVIEW
Victoria Petrova 49 69 75 38 2272 [email protected] Selecting country opportunities Onur Muminoglu 90 212 349 0454 Figure 1: EEMEA coverage table [email protected] EV/EBITDA PE Dean Ginsberg Company & country Rating TP EBITDA CAGR 2012E 2013E 2012E 2013E 27 011 012 80 64 Potential Russia New Old New Old upside 12-15E [email protected] Magnit OP OP $42 $36 16% 16% 12,8 11,4 23,4 21,6 X5 N N $20 $21 6% 17% 8,0 7,1 19,4 14,9 Irina Karacharskova Dixy N OP RUB370 RUB430 14% 31% 8,0 6,3 54,0 22,0 7 495 967 8349 Okey UP UP $8.6 $8.0 -13% 27% 10,7 8,4 20,6 16,3 [email protected] Turkey BIM N N TRY76.9 TRY76.9 -5% 20% 24,4 19,0 36,5 27,9 Migros OP OP TRY23.75 TRY23.75 23% 14% 13,1 11,0 57,2 33,8 South Africa Spar N N R126 R126 4% 13% 12,0 10,6 20,0 16,6 Shoprite UP UP R142 R142 -27% 14% 17,6 15,0 29,5 23,5 MassMart N N R175 R175 -1% 23% 13,4 11,5 30,6 25,1 Pick n Pay OP OP R49 R49 15% 20% 9,9 10,7 29,8 29,7 Source: Credit Suisse estimates; priced as of 1 November 2012, Shoprite data is 2012A Following macro and company-specific developments in EEMEA food retail, we highlight opportunities and consider the trends. We are positive on Russian retailers due to (i) low modern retail penetration and their clear competitive advantages; (ii) supportive macro trends and (iii) potential upside in 2013 from regulatory changes. We expect sequential improvement in consumer spend in Turkey supported by (i) more favourable monetary environment ahead; (ii) the returns for saving tools have become even less attractive which should lead to an increase in consumption. South African food retail continues to show top line growth on the back of food inflation, space expansion and opportunities in Africa. We highlight our top picks: Magnit (OP, TP $42), Migros (OP, TP TRY23.75) and Pick n Pay (OP, TP R49). EEMEA context: We provide a detailed comparative analysis of retailers’ key metrics giving investors a cross regional overview of the EEMEA retail universe. We highlight that Dixy offers the highest EBITDA CAGR, Magnit offers strongest EBITDA margins, BIM has the strongest LfL and almost no debt, while SA retailers are characterised by superior net margins and low debt ratios. Exposure to sector fundamentals through country picks: Magnit (OP, TP increased to US$42) continues to be our Russian top pick, given (i) its exceptional execution, communication and earnings visibility, and (ii) a combination of stronger than expected 2012E growth and profitability. In Turkey, we prefer Migros given it is (i) well positioned to benefit from a potential consumer recovery; (ii) a potential M&A story and (iii) has shown strong execution. In South African, we like Pick n Pay (OP, R49), which is in a turnaround and awaiting the arrival of new CEO Richard Brasher (ex Tesco). We downgrade Dixy to Neutral with a revised TP of RUB370 (from RUB430), given the challenging integration process. We think lack of visibility on earnings limits the current investment case—we would prefer more clarity.
DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access
06 November 2012 Table of contents
Key charts: Cross regional performance comparison tables 4 Executive summary 5 EEMEA universe valuation 6 Russian macro update 7 Macro trends 8 Russia: Supportive macro and further regulatory catalysts 8 Turkish macro update 9 South Africa macro update 11 A note on Credit Suisse PEERs 12 Magnit (MGNTq.L) 13 Russian food retail top pick: Room for more surprises 13 Magnit MGNTq.L 14 Changes in the model 15 Credit Suisse HOLT® analysis 17 X5 Retail Group (PJPq.L) 19 Poor performance and lack of visibility 19 X5 Retail Group PJPq.L 20 Changes in the model 21 Credit Suisse HOLT analysis 23 Dixy Group of Companies (DIXY.MM) 25 Looking for better momentum, turning Neutral 25 Dixy Group of Companies DIXY.MM 26 Model revisions 27 Dixy execution risks: Lessons from X5 case study 27 Key risks to our forecasts 28 Dixy 3Q12 preview 30 Credit Suisse HOLT analysis 30 Okey (OKEYq.L) 32 Concerns over store openings, new format CAPEX and profitability profiles 32 Okey OKEYq.L 33 Changes in the model 34 Credit Suisse HOLT analysis 36 Turkish food retail: Prefer cyclical exposure in the Turkish consumer 38 BIM (BIMAS.IS) 39 Expect small recovery after weak 2Q11A 39 BIM BIMAS.IS 40 3Q preview 41 Migros (MGROS.IS) 43 Fundamentally strong 43 Migros MGROS.IS 44 3Q preview 45 South Africa retail macro trends 47 South Africa: Food retail sales remain robust, but generally priced in… 47 Spar Group (SPPJ.J) 49 2H12 EPS to be strong 49 Spar Group SPPJ.J 50 Operational update 51 Shoprite Holdings Limited (SHPJ.J) 55 1Q13 trading update: paying up for Africa …. 55 Shoprite Holdings Limited SHPJ.J 56 Focus Charts 57 What Shoprite share price is implying? 58 MassMart Holding (MSMJ.J) 61
EEMEA food retail universe 2 06 November 2012
Updating forecast for change in year end 61 MassMart Holding MSMJ.J 62 Outlook for FY12 64 Divisional outlook 65 Pick n Pay (PIKJ.J) 69 Picking a new leader for a turnaround…. 69 Pick n Pay PIKJ.J 70 Picking a new leader for a turnaround 71
EEMEA food retail universe 3 06 November 2012
Key charts: Cross regional performance comparison tables
Figure 2: EBITDA CAGR 2012-15E Figure 3: Expected LFL growth, yoy
35% 16% 31,0% 14% 30% 27,1% 12% 25% 23% 10% 19,60% 20% 20% 8% 16,6% 15,7% 6% 15% 12,80%13,50% 14% 4%
10% 2% 0% 5% 2011A 2012E 2013E -2%
0%
Spar Dixy Migros Magnit X5 Pick Payand BIM MassMart Okey Shoprite -4% X5 Magnit Okey Dixy BIM Migros (sales/sqm) MassMart Pick and Pay Shoprite Spar
Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 4: Gross margin, % Figure 5: EBITDA margin, %
30% 12%
25% 10%
20% 8%
15% 6%
10% 4%
5% 2%
0% 0%
Okey X5 Magnit Dixy BIM Migros MassMart Pick Payand Shoprite Spar
Dixy X5 Magnit Okey BIM Migros MassMart Pick Payand Shoprite Spar
2011A 2012E 2013E 2011A 2012E 2013E
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Net margin, % Figure 7: Net debt to EBITDA
6% 5.0x
5% 4.0x
4% 3.0x 3% 2.0x 2% 1.0x 1%
0.0x
Migros Pick and Pay Magnit Okey Dixy BIM MassMart Shoprite Spar
0% X5
Magnit BIM Pick and Pay X5 Okey Dixy Migros adj)(CS MassMart Shoprite Spar
-1% -1.0x
-2% -2.0x
2011A 2012E 2013E 2011A 2012E 2013E 2014E
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
EEMEA food retail universe 4 06 November 2012
Executive summary In this report, we highlight regional top picks which we rate Outperform. We suggest investors seek exposure to the sector fundamentals through Magnit, Migros and Pick n Pay. We rate Magnit Outperform given (i) its exceptional execution, communication and visibility of earnings and (ii) combination of stronger than expected 2012E growth and profitability. In Turkey, we prefer Migros given that it is (i) well positioned to benefit from a potential consumer recovery; (ii) a potential M& story and (iii) it has shown strong execution. We believe Pick n Pay (OP, R49), which is in the middle of a turnaround and awaiting the arrival of new CEO Richard Brasher (ex Tesco), offers the best entry point into the South African food retail sector. We downgrade Dixy to Neutral (from Outperform) and reiterate our Neutral ratings on BIM, Spar and MassMart. Okey and Shoprite remain our least preferred stocks and are rated Underperform.
Figure 8: Executive summary table
Companies rated Outperform Russia Turkey South Africa Magnit Migros Pick n Pay Upside to TP 16% 23% 15%
EV/EBITDA 2013 11,4 11,0 10,7 PE 2013 21,6 33,8 29,7
EBITDA margin in 2013E 9,5% 6,0% 3,2% Net margin in 2013E 4,5% 1,4% 1,1%
Sales growth in '13 (in local ccy) 27% 14% 9% EBITDA CAGR 12-15E 16% 14% 20%
FCF positive in 2014E 2013E 2015E
Net debt to EBITDA in 2013E 1,2 3,2 0,7 Companies rated Neutral Russia Turkey South Africa X5 Dixy BIM Spar MassMart Upside to TP 6% 14% -5% 4% -27%
EV/EBITDA 2013 7,1 6,3 19,0 10,6 11,5 PE 2013 14,9 22,0 27,9 16,6 25,1 = EBITDA margin in 2013E 6,9% 5,9% 5,1% 4,0% 4,5% Net margin in 2013E 1,9% 1,0% 3,6% 2,7% 2,1%
Sales growth in '13 (in local ccy) 17,3% 24,4% 21,7% 12,2% 11,6% EBITDA CAGR 12-15E 17% 31% 20% 13% 23%
FCF positive in 2014E 2014E FCF +ve FCF +ve FCF +ve
Net debt to EBITDA in 2013E 3,0 2,6 -0,7 -0,6 0,2 Companies rated Underperform Russia Turkey South Africa Okey N/A Shoprite Upside to TP -13% -27%
EV/EBITDA 2013 8,4 15,0 PE 2013 16,3 23,5
EBITDA margin in 2013E 8,0% 7,0% Net margin in 2013E 3,3% 4,2%
Sales growth in '13 (in local ccy) 29% 15% EBITDA CAGR 12-15E 27% 14%
FCF positive in 2013E FCF +ve
Net debt to EBITDA in 2013E 1,6 -0,8
Source: Company data, Credit Suisse estimate, prices and multiples as of 1 November 2012
EEMEA food retail universe 5
retail food EEMEA EEMEA universe valuation
Figure 9: EEMEA universe multiples:
universe
Source: Company data, Credit Suisse estimate, share prices and multiples as of 01.11.2012, Note: Shoprite 2012A
06 November 2012 06 November
6
06 November 2012
Russian macro update
Figure 10: Russian food and non-food inflation, yoy Figure 11: Russian real wages growth, yoy
14% 15% 13% 13% 13% 12% 13% 11% 10% 11% 10% 10% 9% 9% 8% 8% 7% 7% 7% 6% 6% 5% 5% 5% 4% 3% 4% 4% 4%
1% 2% Jan Apr July Oct Jan Apr July 2011 2012 0% Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Food Non-food 2011 2012
Source: Rosstat Source: Rosstat
Figure 12: Russian unemployment rate, yoy Figure 13: Real disposable income growth, yoy
7.0% 8% 6.8% 6.3% 6.6% 6.6% 6.5% 6% 6.5% 6.4% 6.4% 6.3% 4% 3.1% 6.2% 2.9% 2.8% 2.2% 2.3% 2.2% 6.1% 1.6% 6.0% 6.0% 2% 0.4% 0.4% 5.8% 5.8% 0.2% 0% 5.6% Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr 5.4% 5.4% 5.4% 5.4% -2% 2012
5.2% 5.2% 5.2% -4% -3.1% 5.0% Sep Nov Jan Mar May July Sep -6% -5.3% 2011 2012
Source: Rosstat Source: Rosstat
Figure 14: Food and non-food sales growth in Russia, yoy Figure 15: X5, Magnit, Okey and Dixy sales dynamics, yoy 60% 14% 12% 12% 11% 11% 50% 12% 11% 11%11% 11% 40% 10% 10% 10% 9% 9% 9% 9% 9% 9% 9% 9% 30% 8% 8% 8% 7% 7% 6% 7% 20% 6% 6% 5% 5% 5% 10% 4% 4% 4% 4% 3%1% 0% 2% 1% 1% 1% 1% 1% Apr June Aug Oct Dec Feb Apr Jun Aug 1% 1% 0% Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Jan Mar May July Sep Nov Jan Mar May July 2011 2012 Food Non-food X5 Magnit Okey Dixy
Source: Rosstat Source: Company data
EEMEA food retail universe 7 06 November 2012 Macro trends Russia: Supportive macro and further regulatory catalysts Macro is healthy We believe that current macro trends are supportive for Russian food retail companies. Real wages are growing at around 10% yoy this year, unemployment is the lowest it has been since the beginning of 2011 and in 2H12, food inflation has strengthened. Real food retail sales growth has declined since the beginning of the year, indicating limited prospects for growth in food consumption. Despite this, modern format retailers outperformed the market growth figure significantly, (see Figure 14 vs Figure 15), suggesting that modern formats offer a better shopping experience and good prices to customers who continue to prefer it to the traditional chain format. Major trends in the mid and long term In our view, the major drivers of Russian food retail sector remain: (1) the underpenetration of the market, which enables major players to gain further market share through aggressive store openings, (2) food inflation, which allows more rapid basket growth, as retailers have sufficient power to pass inflation on to the consumer; (3) the scale of current major players, which helps them negotiate better terms with suppliers and attract customers with lower prices. - Growth is attractive, while long-term trends suggest margin pressure and weaker traffic We believe companies should be able to support above 20% (on average) sales growth in the next two to three years with organic expansion, including regional growth in Russia. Their scale allows them to obtain better supply terms vs non-organised retail; however competition among modern format players is growing, which could result in gross margin pressure and weak traffic dynamics. - Inflation could surprise on the upside in 1H13E We also believe that food inflation could surprise on the upside next year due to a poor harvest and high grain prices in 2012. According to the Ministry of Agriculture, the harvest in Russia in 2012 is likely to be c.70–71mt, which is in line with internal consumption. This is slightly better than in 2010, when the country harvested c.60mt, leading to the introduction of an export ban and low double digit food inflation in 1H11 (11–14% monthly inflation). We believe that double digit LFL growth is unlikely in 1Q13E; however high single digit basket growth should be achievable given the low base effect. - Beer/spirits regulatory pressures suggest further upside We also expect retailers to gain more bargaining power over beer/spirits companies due to changes in the beer/spirits market regulation (Note: beer sales in kiosks and beer/spirits advertisements are to be banned from 2013). US$2.5bn in annual kiosk beer sales (source: AC Nielsen) is likely to be redirected to organised retailers, suggesting organic upside in sales. Above the line, the advertising ban on spirits/beer suggests that advertisement budgets could be invested in trade marketing, shelf management and in- store promotions, which would allow retailers to enjoy additional margin on alcohol sales, in our view.
EEMEA food retail universe 8 06 November 2012
- Shrinkage vs effective tax rate. Consensus with government might be possible? Companies continue to lobby parliament about the possibility of adding to the cost base those products lost to theft and more percentage of shrinkage, for the calculation of corporate income tax. We think there is a chance that in 2013, the parties involved could reach a consensus—if new rules were to be implemented (potentially from 2014E) this would lead to a lower effective tax rate for all retailers. Turkish macro update We expect a more favourable monetary environment ahead: Early indicators for the Turkish consumer have been sequentially weak since end-1Q12A, though we attribute part of this weakness to the strong base effect in 1H11A, followed by Ramadan falling in July this year. Although the recent tax increase on some consumer goods creates inflationary risk against the expected monetary easing in 4Q12E, we believe policymakers are unlikely to tolerate further weakness in economic activity. Contrary to some earlier cases, the latest tax hikes appear to have been aimed mainly at improving the Treasury’s revenues rather than at curbing the current account deficit. To maintain the same level of tax revenues, domestic economic activity will need to remain intact, too, in our view.
Figure 16: Turkey - Consumer loan growth Figure 17: Turkey - Credit card spend (yoy) 30.0 20%
25.0 15%
20.0 10% Aug 15.0 5% 10.0 0% 5.0 -5% 0.0 -10% -5.0
-15%
Jul-09 Jul-10 Jul-11 Jul-12
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
Jan-09 Jan-10 Jan-11 Jan-12
6-Jul-12
8-Jun-12 6-Jan-12
2-Mar-12
3-Feb-12
3-Aug-12
20-Jul-12
13-Apr-12 27-Apr-12
20-Jan-12 22-Jun-12
16-Mar-12 30-Mar-12
17-Feb-12
17-Aug-12 31-Aug-12 14-Sep-12 28-Sep-12 25-May-12 11-May-12 Credit card transactions in Turkey (real, TRY m) Spend per card (real, TRY) Consumer loans (annualised, 4-week moving avg, % week-on-week) Consumer loans (annualised, 13-week moving avg, % week-on-week) Source: Turkish Central Bank, Credit Suisse research Source: Turkish Interbank Credit Card Centre, Credit Suisse research Consumers may see lower funding costs anyway: Turkish banks’ consumer loan rates have only very recently start to follow the sharp decline in market interest yields. Even if policymakers leave the monetary environment unchanged, we think there is room for a more widespread decline in consumer loan rates as well.
EEMEA food retail universe 9 06 November 2012
Figure 18: The fall in market interest rates not yet reflected in the loan rates Annualized loan/deposit rates versus bond yields
22%
20%
18%
16%
14%
12%
10%
8%
6% Aug-10 Feb-11 Aug-11 Feb-12 Aug-12
GPCL Auto Mortgage Commercial Benchmark bond Deposit
*GPCL: General Purpose Loans; Source: Turkish Central Bank, CS estimates for August 2012 deposit rates Low deposit rates incentivising discretionary spending: Time-deposits continue to be a key investment tool for Turkish consumers. Average deposit rates offered by Turkish banks have tracked the declining market interest rates (Figure 18) and should create a positive substitution effect into discretionary spending. Employment data is supportive: In addition to a favourable monetary environment, the jobs market should also support discretionary spending. The survey of consumer goods manufacturers indicates the proportion of producers that expect a decline in output was below the seasonal average for October (the same was true for those expecting an increase, albeit to a lesser extent).
Figure 19: Turkey – Seasonally adjusted unemployment Figure 20: Consumer manufacturers’ survey Direction of output in the next 3 months? "Direction of output in the next 3 months?" Oct 16.0 100 15.0 90 14.0 80 70 13.0 avg. 60 in 12.0 50 Oct. 11.0 40 10.0 30 20 9.0 Seas. Adj. Unempl. (%) 10
8.0
Jul-10 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan-11 Jul-11 Jan-12 Jul-12
Jan-07 0
Sep-11 Jan-12 May-12 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Nov-11 Mar-12 Jul-12 Sep-12 Oct avg
Increase Flat Decrease Source: Turkish Statistics Office Source: Turkish Central Bank
EEMEA food retail universe 10 06 November 2012
South Africa macro update
Figure 21: Nominal and real wages growth, yoy in % Figure 22: Food and non-food inflation, yoy in %
25.0 14
12 20.0 11.6 11.1 11.0 10.7 15.0 10 10.1 8.7 8.9 9.1 8 10.0 7.3 7.5 7.3 6.8 6 6.3 6.0 6.1 6.1 6.3 6.1 6.1 6.0 6.1 5.7 6.0 5.7 5.0 5.3 5.3 5.5 5.4 5.5 5.1 4.8 5.0 4.9 5.05.1 4.9 4.2 4.6 4 4.1 3.8 0.0 3.7 3.53.7 Mar-90 Sep-92 Mar-95 Sep-97 Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 2.9 2 -5.0 0 -10.0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Nominal Wages growth, yoy Real Wages growth, yoy Food inflation Consumer inflation
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
Figure 23: Unemployment rate, % Figure 24: Real disposable income growth, yoy in %
35 8% 6.7% 6.5% 33 6.2% 5.7% 6% 31 4.5% 4.7% 3.9% 29 4% 3.6% 3.6% 3.5% 3.0% 3.3%3.0% 2.5% 27 2.4% 2% 1.5% 25 0.8%
23 0% 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 21 -2% -1.0% 19 -2.7% 17 -4% 15 -4.8% Jan-00 Jun-01 Nov-02 Apr-04 Sep-05 Feb-07 Jul-08 Dec-09 May-11 -6%
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
Figure 25: Food and non food sales growth, yoy in % Figure 26: Company stock performance since Dec-09, %
25 275
20 255
15 235
10 215 195 5 175 0 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 155 -5 135 -10 115 -15 95 -20 75 -25 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12
Food sales Total retail sales Massmart Shoprite Pick n Pay Spar
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
EEMEA food retail universe 11 06 November 2012
A note on Credit Suisse PEERs We have included PEERs maps for our four Russian stocks in each company section. PEERs is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage.
EEMEA food retail universe 12 06 November 2012
Europe / Russian Federation Food Retail
Magnit (MGNTq.L) Rating OUTPERFORM* INCREASE TARGET PRICE Price (01 Nov 12, US$) 36.36 Target price (US$) (from 36.00) 42.00¹ Market cap. (US$ m) 17,190.48 Russian food retail top pick: Room for more Enterprise value (US$ m) 18,595.6 surprises
*Stock ratings are relative to the coverage universe in each ■ Increase TP to $42 from $36 per GDR on (i) stronger current year LfL analyst's or each team's respective sector. performance, suggesting a stronger base for 2013E growth; and (ii) better ¹Target price is for 12 months. near-term profitability, demonstrated by exceptionally strong 3Q12 results. Research Analysts We maintain our Outperform rating and continue to highlight the stock as our Victoria Petrova preferred play on strong retail sector fundamentals in Russia. 49 69 75 38 2272 [email protected] ■ Strongest growth: Magnit remains the fastest-growing Russian retailer, Irina Karacharskova despite the sizeable base effect. We estimate 27% 2013 RUB sales growth 7 495 967 8349 (the top of management guidance), in line with or above that of its much [email protected] smaller peers.
■ Strong margins: Management highlighted the company enjoys purchasing conditions similar to X5, the largest Russian retailer by sales, and slightly better terms than smaller peers such as Dixy. This supports our view that Magnit’s superior margins are supported by internal efficiencies, better and owned logistics, direct import practices and economies of scale, ie, initiatives, suggesting sustainable margin superiority. We expect margins to decrease owing to higher competition and supplier cost inflation, albeit to remain above peers. We forecast 9.5% in 2013, 9.3% in 2014 and 8.5% thereafter. ■ Catalysts: We highlight the following sources of upside in 2013E: (i) faster food inflation due to a poor harvest and significant grain price increase over the year. Our CPI forecast is 5.7% in 2013 vs 6.6% in 2012; (ii) additional sales growth, supported by the kiosk ban on beer sales (c.$2.5bn/year) and further potential regulatory changes (ban on beer in small stores, potential change in tobacco regulation and sales of OTC drugs); (iii) stronger margins than we expect, supported by trade marketing in alcohol and other market opportunities. We expect Magnit’s October trading update and potential comments on 2013 guidance to be the next catalysts for the stock. ■ Valuation: Magnit trades on 2012E–13E EV/EBITDA of c12.8x and 11.4x, c.43% and 56% premiums vs local peers and 48%/40% discount to BIM. We see 16% potential upside and maintain our Outperform. Share price performance Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E Revenue (US$ m) 11,423.3 14,097.0 17,781.6 21,753.4 34 EBITDA (US$ m) 934.25 1,455.90 1,694.68 2,031.35 29 Pre-tax Profit Adjusted (US$ m) 561.3 993.5 1,075.0 1,352.0 24 CS adj. EPS (US$) 0.89 1.55 1.68 2.12 19 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Prev. EPS (US$) — 1.39 1.37 1.79 Price Price relative ROIC (%) 14.02 18.11 15.30 16.26 P/E (adj., x) 41.04 23.38 21.61 17.18 The price relative chart measures performance against the P/E rel. (%) 383.3 205.6 207.1 178.7 FTSE 100 IDX which closed at 5868.55 on 01/11/12 EV/EBITDA 19.6 12.8 11.4 9.4 On 01/11/12 the spot exchange rate was US$1.29/Eu 1. - Eu .77/US$1 Dividend (12/12E, US$) — IC (12/12E, US$ m) 4,552.08
Performance Over 1M 3M 12M Dividend yield (%) — EV/IC 4.1 Absolute (%) 5.5 9.2 51.6 Net debt/equity (12/12E, %) 44.6 Net debt (12/12E, US$ m) 1,405.1 Relative (%) 2.3 3.1 35.5 Number of shares (m) 472.79 Free float (%) 51.0
BV/share (12/12E, US$) 6.6 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
EEMEA food retail universe 13 06 November 2012
Magnit MGNTq.L Price (01 Nov 12): US$36.36, Rating: OUTPERFORM, Target Price: US$(from 36.00) 42.00 Income statement (US$ m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 11,423 14,097 17,782 21,753 No. of shares (wtd avg) 473 473 473 473 EBITDA 934 1,456 1,695 2,031 CS adj. EPS (US$) 0.89 1.55 1.68 2.12 Depr. & amort. (272) (342) (437) (497) Prev. EPS (US$) — 1.39 1.37 1.79 EBIT (CS) 663 1,114 1,257 1,534 Dividend (US$) — — — — Net interest exp. (116) (120) (182) (182) Dividend payout ratio — — — — Associates — — — — Free cash flow per share (1.58) (0.86) (1.32) 0.21 Other adj, 15 — — — (US$) PBT (CS) 561 993 1,075 1,352 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (142) (258) (279) (352) valuation Profit after tax 419 735 795 1,000 Growth(%) Minorities — — — — Sales 46.9 23.4 26.1 22.3 Preferred dividends — — — — EBIT 49.0 68.1 12.9 22.0 Associates & other — — — — Net profit 40.9 75.5 8.2 25.8 Net profit (CS) 419 735 795 1,000 EPS 32.5 75.5 8.2 25.8 Other NPAT adjustments — — — — Margins (%) Reported net income 419 735 795 1,000 EBITDA margin 8.2 10.3 9.5 9.3 EBIT margin 5.8 7.9 7.1 7.1 Cash flow (US$) 12/11A 12/12E 12/13E 12/14E Pretax margin 4.9 7.0 6.0 6.2 EBIT 663 1,114 1,257 1,534 Net margin 3.7 5.2 4.5 4.6 Net interest (116) (120) (182) (182) Valuation metrics (x) Cash taxes paid — — — — EV/sales 1.6 1.3 1.1 0.9 Change in working capital 182 (74) (60) (47) EV/EBITDA 19.6 12.8 11.4 9.4 Other cash & non-cash items 221 84 158 145 EV/EBIT 27.6 16.7 15.3 12.5 Cash flow from operations 949 1,004 1,173 1,450 P/E 41.0 23.4 21.6 17.2 CAPEX (1,696) (1,412) (1,798) (1,349) P/B 7.0 5.5 4.3 3.5 Free cash flow to the firm (747) (408) (625) 101 Asset turnover 2.1 2.2 2.2 2.3 Acquisitions — — — — ROE analysis (%) Divestments — — — — ROE stated-return on 20.1 26.3 22.4 22.4 Other investment/(outflows) — — — — equityROIC 14.0 18.1 15.3 16.3 Cash flow from investments (1,696) (1,412) (1,798) (1,349) Interest burden 0.85 0.89 0.85 0.88 Net share issue/(repurchase) 470 — — — Tax rate 25.4 26.0 26.0 26.0 Dividends paid — — — — Financial leverage 0.66 0.48 0.57 0.46 Issuance (retirement) of debt 740 (36) 700 — Credit ratios (%) Other (671) 122 (776) — Net debt/equity 44.3 44.6 53.0 40.3 Cash flow from financing 539 86 (76) — Net debt/EBITDA 1.2 1.0 1.2 1.0 activitiesEffect of exchange rates — — — — Interest coverage ratio 5.7 9.3 6.9 8.4 Changes in Net Cash/Debt (208) (323) (702) 101 . Net debt at start 874 1,082 1,405 2,107 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt 208 323 702 (101) (EUROPE) LTD. Estimates. Net debt at end 1,082 1,405 2,107 2,006
Balance sheet (US$ m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 534 90 164 265 Accounts receivable 18 40 50 61 34 Inventory 905 1,175 1,492 1,828 29 Other current assets 73 73 73 73 Total current assets 1,530 1,377 1,779 2,227 24 Total fixed assets 3,895 4,965 6,326 7,178 19 Intangible assets and goodwill 21 21 21 21 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Investment securities — — — — Other assets — — — — Price Price relative Total assets 5,447 6,364 8,127 9,427 Liabilities The price relative chart measures performance against the FTSE 100 IDX which Accounts payable 1,257 1,476 1,743 2,042 closed at 5868.55 on 01/11/12 Short-term debt 186 20 20 20 On 01/11/12 the spot exchange rate was US$1.29/Eu 1. - Eu .77/US$1 Other short term liabilities 6 6 6 6 Total current liabilities 1,450 1,501 1,769 2,068 Long-term debt 1,424 1,469 2,245 2,245 Other liabilities 129 247 139 139 Total liabilities 3,003 3,217 4,152 4,451 Shareholders' equity 2,441 3,143 3,971 4,972 Minority interest 4 4 4 4 Total equity & liabilities 5,447 6,364 8,127 9,427 Net debt (US$ m) 1,082 1,405 2,107 2,006
EEMEA food retail universe 14 06 November 2012
Changes in the model We increase our sales growth forecast for 2012 to 33.2% from 31.4% owing to an exceptionally strong LFL performance in 3Q12—one of the highest in the Russian food retail market—with positive traffic growth. Our updated model assumes 4Q12 sales growth at 33.5% in RUB. For 2013, we continue to forecast 27% sales growth in RUB, which is in line with the top end of current management guidance. We increase our EBITDA margin forecast in 2012 to 10.3% from 9.5% and our gross margin by 30bps to 25.8%. We believe the high profitability level is not sustainable in the long term and forecast it declining to 8.5%. Macro assumption change We change our RUB exchange rate assumption for 2012E and 2013E after our macro team adjusted its estimates. Our RUB/US$ exchange rate increases from 32.7 (RUB per 1 US$) to 31.7 in 2012E, and from 33.5 to 32 (RUB per 1 US$) in 2013E. These adjustments do not affect our RUB revenue forecasts, but have a direct influence on our US$ forecasts. Post our model rebalance, we increase our EBITDA by 13.3% in 2012E and by 11.1% (on average) in the long term, primarily due to stronger profitability expectations and a more favourable FX rate. Our updated DCF valuation model suggests a TP of $42 per GDR (up from $36 per GDR). We reiterate our positive view on the company and retain our Outperform rating. Our target EV/EBITDA multiples are 14.6x for 2012E and 12.9x for 2013E.
Figure 27: Magnit forecast changes, in US$m New 2012E 2013E 2014E 2015E 2016E Revenue 14,097 17,782 21,753 26,378 30,856 Gross profit 3,637 4,499 5,482 6,436 7,529 Gross margin 25.8% 25.3% 25.2% 24.4% 24.4% EBITDA 1,456 1,695 2,031 2,254 2,638 EBITDA margin 10.3% 9.5% 9.3% 8.5% 8.5% Net profit 735 795 1000 1121 1385 Net margin 5.2% 4.5% 4.6% 4.3% 4.5%
Old 2012E 2013E 2014E 2015E 2016E Revenue 13,550 16,689 20,492 25,666 29,890 Gross profit 3,455 4,105 5,041 6,314 7,353 Gross margin 25.5% 24.6% 24.6% 24.6% 24.60% EBITDA 1,285 1,421 1,734 2,174 2,533 EBITDA margin 9.5% 8.5% 8.5% 8.5% 8.5% Net profit 619 611 797 1079 1323 Net margin 4.6% 3.7% 3.9% 4.2% 4.43%
Change, % 2012E 2013E 2014E 2015E 2016E Revenue 4.0% 6.5% 6.2% 2.8% 3.2% Gross profit 5.3% 9.6% 8.7% 1.9% 2.4% Gross margin 0.3% 0.7% 0.6% -0.2% -0.2% EBITDA 13.3% 19.3% 17.2% 3.7% 4.1% EBITDA margin 0.8% 1.0% 0.9% 0.1% 0.1% Net profit 18.7% 30.3% 25.5% 3.9% 4.7% Net margin 0.6% 0.8% 0.7% 0.0% 0.1% Source: Credit Suisse estimates
EEMEA food retail universe 15 06 November 2012
DCF valuation
Figure 28: Magnit DCF valuation, in US$m 2012E 2013E 2014E 2015E 2016E 2017E EBIT 1,114 1,257 1,534 1,697 2,030 2,347 Taxes (290) (327) (399) (441) (528) (610) NOPAT 824 930 1,135 1,256 1,503 1,736 DD&A 342 437 497 556 607 659 CF 1,166 1,368 1,632 1,812 2,110 2,396 Change in WC (74) (60) (47) (35) (23) (18) Capex (1,412) (1,798) (1,349) (1,405) (1,332) (1,402) FCF (319) (490) 236 373 755 976 Discount rate 11.0% Terminal growth rate 3.5% DCF (287.7) (397.9) 172.5 245.4 448.2 521.6 Terminal value 12,719 Summ DCF 4,443 EV incl tax shields 17,752 Net debt (1,399) EqV 16,353 Number of shares, mln 473 Fair value, 35 Target price, US$ 42 Source: Credit Suisse estimate, Net debt as of 2012E
4Q12E preview Magnit will report 4Q12E and FY12E financial results in 1Q13. We expect a slight fall in EBITDA margin from 10.9% in 3Q12 to 10.5% in 4Q12E owing to supplies’ inflation pressure.
Figure 29: Magnit 4Q12E preview, in US$m in US$m 4Q12E 4Q11A YOY Revenue 3,829 3,071 24.7% Revenue (RUBm) 127,390 95,426 33.5% EBITDA 403 333 21.0% Net income 195 172 13.5%
EBITDA margin 10.5% 10.9% -0.3% Net margin 5.1% 5.6% -0.5% Source: Company data, Credit Suisse estimates
EEMEA food retail universe 16 06 November 2012
Credit Suisse HOLT® analysis We used the Credit Suisse HOLT approach to value our companies using our model assumptions. We use the Estimator tool for all companies to make the results comparable. This approach suggests c.19% potential upside from current levels with the HOLT valuation model arriving at warranted price of £26.81/GDR (or $43.1/GDR).
Figure 30: Credit Suisse HOLT valuation analysis
Source: Credit Suisse HOLT, price as of 1 November 2012
EEMEA food retail universe 17 06 November 2012
Figure 31: Magnit PEER map
Source: Credit Suisse PEERs research
EEMEA food retail universe 18 06 November 2012
Europe / Russian Federation Food Retail
X5 Retail Group (PJPq.L) Rating NEUTRAL* [V] DECREASE TARGET PRICE Price (01 Nov 12, US$) 18.90 Target price (US$) (from 21.00) 20.00¹ Market cap. (US$ m) 5,132.73 Poor performance and lack of visibility Enterprise value (US$ m) 8,528.4
■ Lower TP to $20 per GDR (from $21) after incorporating new macro *Stock ratings are relative to the coverage universe in each assumptions (+), lower growth expectations (-) and lower profitability (-). We analyst's or each team's respective sector. stay Neutral on (i) limited (c.6%) upside to our TP; (ii) a lack of immediate ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). positive catalysts and (iii) attractive multiples, even on conservative assumptions. Research Analysts Victoria Petrova ■ Weak LFLs, poor sales growth: X5 3Q12 sales growth and LFLs remain 49 69 75 38 2272 the weakest among peers. X5 was unable to grow the basket above or in [email protected] line with food inflation and prevent customer outflow. Thus, sales growth was Irina Karacharskova the poorest among peers exacerbated by continuing weak hypermarket 7 495 967 8349 [email protected] numbers. Promo campaigns announced by former management and continued by the current team have not shown significant traffic inflow so far.
■ Changes now over? We expect it to be at least six months before a new CEO is hired and we see a lack of leadership as a concern. While competitors grow market share, X5 might have to focus on internal issues. ■ Controlling shareholder focus: Alfa’s selling of its stake in TNK BP has raised questions among investors over its commitment to Russia—we think it is too early to draw any conclusions regarding Alfa's plans regarding a potential stake reduction in X5 or, on the opposite, increased focus on its organic performance and potential turnaround. The TNK BP deal could also suggest that Alfa is planning to focus more on its smaller assets such as X5. ■ The major catalyst remains the appointment of a new CEO, which we however see as unlikely in the next six months. 3Q12 financial results are likely to be a catalyst. We would concentrate on the company’s ability to sustain profitability with a focus on gross margin given its volatility in 1H12— 2Q12 (22.8%) vs 1Q12 (24.5%). ■ Valuation: At 7.1x 2013E EV/EBITDA and c14.89x 2013E PE, X5 trades at a c.38% discount to Magnit on both multiples. Share price performance Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E 48 Revenue (US$ m) 15,455.1 15,635.7 18,167.1 21,690.4 38 EBITDA (US$ m) 1,130.24 1,072.10 1,245.67 1,487.26 28 Pre-tax Profit Adjusted (US$ m) 405.1 359.7 468.5 664.9 CS adj. EPS (US$) 1.11 0.97 1.27 1.80 18 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Prev. EPS (US$) — — 1.28 1.91 Price Price relative ROIC (%) 9.65 8.32 8.88 10.39 P/E (adj., x) 16.99 19.39 14.89 10.49 The price relative chart measures performance against the P/E rel. (%) 158.6 170.4 142.6 109.1 FTSE 100 IDX which closed at 5868.55 on 01/11/12 EV/EBITDA 7.4 8.0 7.1 5.9 On 01/11/12 the spot exchange rate was US$1.29/Eu 1. - Eu .77/US$1 Dividend (12/12E, US$) — IC (12/12E, US$ m) 5,856.48
Performance Over 1M 3M 12M Dividend yield (%) — EV/IC 1.5 Absolute (%) -14.2 -3.6 -31.8 Net debt/equity (12/12E, %) 138.0 Net debt (12/12E, US$ m) 3,395.7 Relative (%) -15.1 -4.9 -38.7 Number of shares (m) 271.57 Free float (%) 32.2 BV/share (12/12E, US$) 9.1
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
EEMEA food retail universe 19 06 November 2012
X5 Retail Group PJPq.L Price (01 Nov 12): US$18.90, Rating: NEUTRAL [V], Target Price: US$(from 21.00) 20.00 Income statement (US$ m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 15,455 15,636 18,167 21,690 No. of shares (wtd avg) 272 272 272 272 EBITDA 1,130 1,072 1,246 1,487 CS adj. EPS (US$) 1.11 0.97 1.27 1.80 Depr. & amort. (428) (410) (463) (504) Prev. EPS (US$) — — 1.28 1.91 EBIT (CS) 702 662 783 983 Dividend (US$) — — — — Net interest exp. (298) (302) (314) (318) Dividend payout ratio — — — — Associates — — — — Free cash flow per share 0.49 (1.60) (1.06) 0.05 Other adj, 0.81 — — — (US$) PBT (CS) 405 360 469 665 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (103) (95) (124) (176) valuation Profit after tax 302 265 345 489 Growth(%) Minorities — — — — Sales 37.0 1.2 16.2 19.4 Preferred dividends — — — — EBIT 28.8 (5.7) 18.3 25.6 Associates & other — — — — Net profit 11.4 (12.4) 30.3 41.9 Net profit (CS) 302 265 345 489 EPS 11.4 (12.4) 30.3 41.9 Other NPAT adjustments — — — — Margins (%) Reported net income 302 265 345 489 EBITDA margin 7.3 6.9 6.9 6.9 EBIT margin 4.5 4.2 4.3 4.5 Cash flow (US$) 12/11A 12/12E 12/13E 12/14E Pretax margin 2.6 2.3 2.6 3.1 EBIT 702 662 783 983 Net margin 2.0 1.7 1.9 2.3 Net interest (298) (302) (314) (318) Valuation metrics (x) Cash taxes paid — — — — EV/sales 0.54 0.55 0.49 0.41 Change in working capital 174 (112) (69) (29) EV/EBITDA 7.4 8.0 7.1 5.9 Other cash & non-cash items 348 315 339 329 EV/EBIT 11.9 12.9 11.3 9.0 Cash flow from operations 926 563 738 965 P/E 17.0 19.4 14.9 10.5 CAPEX (792) (998) (1,026) (950) P/B 2.3 2.1 1.8 1.6 Free cash flow to the firm 134 (435) (288) 14 Asset turnover 1.8 1.7 1.8 2.0 Acquisitions — — — — ROE analysis (%) Divestments — — — — ROE stated-return on 14.2 11.4 13.1 16.0 Other investment/(outflows) (102) — — — equityROIC 9.7 8.3 8.9 10.4 Cash flow from investments (894) (998) (1,026) (950) Interest burden 0.58 0.54 0.60 0.68 Net share issue/(repurchase) — — — — Tax rate 25.4 26.4 26.4 26.4 Dividends paid — — — — Financial leverage 1.6 1.6 1.5 1.3 Issuance (retirement) of debt 113 481 300 50 Credit ratios (%) Other 74 (213) (300) (50) Net debt/equity 147.0 138.0 131.3 111.4 Cash flow from financing 187 268 — — Net debt/EBITDA 2.9 3.2 3.0 2.5 activitiesEffect of exchange rates (29) — — — Interest coverage ratio 2.4 2.2 2.5 3.1 Changes in Net Cash/Debt 190 (167) (288) 14 . Net debt at start 3,418 3,229 3,396 3,684 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt (190) 167 288 (14) (EUROPE) LTD. Estimates. Net debt at end 3,229 3,396 3,684 3,669
Balance sheet (US$ m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 385 431 443 508 48 Accounts receivable 362 366 425 541 Inventory 895 904 1,015 1,253 38 Other current assets 409 409 409 409 28 Total current assets 2,051 2,110 2,293 2,711 Total fixed assets 3,825 4,412 4,975 5,422 18 Intangible assets and goodwill 2,559 2,559 2,559 2,559 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Investment securities 141 141 141 141 Other assets 234 234 234 234 Price Price relative Total assets 8,810 9,456 10,203 11,067 Liabilities The price relative chart measures performance against the FTSE 100 IDX which Accounts payable 1,906 1,807 1,909 2,233 closed at 5868.55 on 01/11/12 Short-term debt 913 1,345 1,645 1,695 On 01/11/12 the spot exchange rate was US$1.29/Eu 1. - Eu .77/US$1 Other short term liabilities 885 1,152 1,152 1,152 Total current liabilities 3,704 4,305 4,707 5,081 Long-term debt 2,697 2,478 2,478 2,478 Other liabilities 213 213 213 213 Total liabilities 6,614 6,996 7,398 7,772 Shareholders' equity 2,196 2,461 2,806 3,295 Minority interest — — — — Total equity & liabilities 8,810 9,457 10,203 11,067 Net debt (US$ m) 3,229 3,396 3,684 3,669
EEMEA food retail universe 20 06 November 2012
Changes in the model We reduce our sales growth estimate for 2012 to 9.5% from 12% driven by basket growth below food inflation and continuing traffic outflow. Management reduced sales growth guidance for 2012 from c.15% to 7–9%, assuming c.10% growth in 4Q12E. We remain slightly more optimistic on 4Q12E sales and forecast c.13.1% of RUB sales growth. We have a more conservative view on long-term LFLs, suggesting negative traffic both in 2013E and 2014E, with 0% traffic thereafter. X5 basket growth was the weakest among peers in 9M12, despite the acceleration of inflation in 2H12. X5 seems to face difficulties with transferring food inflation to the final customer, which could prevent it from strengthening gross margin in 2H12E to the level delivered in 1Q12. Management said that X5 requires some time to pass all inflation on to the customer and this would be done in 4Q12E; however we remain cautious given peers were able to pass on inflation in 3Q12. We also lower our forecast for EBITDA margin by c.10 bps to 6.9% as we expect to see some pressure on margins in 2H12E. CAPEX in 2012 was reduced due to opening mix (owned vs leased stores): We also reduced our CAPEX in 2012E to c.RUB32bn from c.RUB45bn following the change in management guidance. Macro assumption change We change our RUB exchange rate assumption for 2012E and 2013E after our macro team adjusted its estimates. Our RUB/US$ exchange rate increases from 32.7 (RUB per 1 US$) to 31.7 in 2012E, and from 33.5 to 32 (RUB per 1 US$) in 2013E. These adjustments do not affect our RUB revenue forecasts, but have a direct influence on our US$ forecasts. As a result, we reduce our revenue forecast by c.7% and EBITDA by c.9% (in average) in the long term driven by both poor LFLs growth and decrease in profitability. Our updated DCF valuation model suggests TP of $20 per GDR (down from $21 per GDR). We continue to rate stock as Neutral. Our target multiple is 8.3x EV/EBITDA for 2012E and 7.4x EV/EBITDA for 2013E. 3Q12 preview We expect approximately no improvement in gross margin (QOQ and YOY) in 3Q12E due to higher inflation pressure, which the company was unable to pass to customers in the quarter. Given that SG&A pressure is unlikely to be significantly lower, we forecast deterioration in profitability in 3Q12, with a small improvement in 4Q12E. Overall, we do not expect 3Q12E to become a positive catalyst given our assumption that X5 is unlikely to deliver sustained strong numbers, as Magnit did. (Note: we are unable to compare numbers with Okey as it does not report on a quarterly basis).
Figure 32: X5 3Q12 preview, in US$m 3Q12E and 4Q12E preview YOY 3Q11 and 4Q11 numbers 3Q12E 4Q12E 2012E 3Q12E 4Q12E 2012E 3Q11 4Q11 2011 Sales, (RUBm) 115,882 139,445 495,652 10.4% 13.1% 9.5% 104,979.2 123,316.5 452,482.2 Sales, US$m 3,627 4,150 15,636 0.1% 4.7% 1.2% 3,623 3,965 15,445 Gross profit 831 955 3,643 -0.9% -2.6% -1.0% 838.3 980.9 3679 EBITDA 238 280 1,072 8.1% -18.7% -5.1% 219.8 344.5 1130.2 Net income 39 66 265 n/a -50.6% -12.4% -2.1 134 302.3
Gross margin 22.9% 23.0% 23.3% -0.2% -1.7% -0.5% 23.1% 24.7% 23.8% EBITDA margin 6.6% 6.8% 6.9% 0.5% -1.9% -0.5% 6.1% 8.7% 7.3% Net margin 1.1% 1.6% 1.7% 1.1% -1.8% -0.3% -0.1% 3.4% 2.0% Source: Company data, Credit Suisse estimates
EEMEA food retail universe 21 06 November 2012
Figure 33: X5: Change in forecasts, in US$m New 2012E 2013E 2014E 2015E 2016E Revenue 15,636 18,167 21,690 24,800 28,061 Gross profit 3,643 4,233 5,054 5,778 6,538 Gross margin 23.3% 23.3% 23.3% 23.3% 23.3% EBITDA 1,072 1,246 1,487 1,700 1,913 EBITDA margin 6.9% 6.9% 6.9% 6.9% 6.8% Net profit 265 345 489 625 772 Net margin 1.7% 1.9% 2.3% 2.5% 2.8%
Old 2012E 2013E 2014E 2015E 2016E Revenue 15,915 19,091 22,867 27,522 31,571 Gross profit 3,820 4,582 5,488 6,605 7,577 Gross margin 24.0% 24.0% 24.0% 24.0% 24.0% EBITDA 1,117 1,340 1,605 1,931 2,215 EBITDA margin 7.0% 7.0% 7.0% 7.0% 7.0% Net profit 284 325 472 651 832 Net margin 1.8% 1.7% 2.1% 2.4% 2.6%
Change, % 2012E 2013E 2014E 2015E 2016E Revenue -1.8% -4.8% -5.1% -9.9% -11.1% Gross profit -4.6% -7.6% -7.9% -12.5% -13.7% Gross margin -0.7% -0.7% -0.7% -0.7% -0.7% EBITDA -4.0% -7.0% -7.3% -12.0% -13.7% EBITDA margin -0.2% -0.2% -0.2% -0.2% -0.2% Net profit -6.7% 5.9% 3.7% -3.9% -7.2% Net margin -0.1% 0.2% 0.2% 0.2% 0.1% Source: Credit Suisse estimates
DCF valuation
Figure 34: X5: DCF valuation, in US$m Fair value and target price in $ 2012E 2013E 2014E 2015E 2016E 2017E EBIT 662 783 983 1 156 1 329 1 522 Taxes (175) (207) (260) (305) (351) (402) NOPAT 487 576 724 851 978 1 120 DD&A 410 463 504 544 583 622 CF 897 1 039 1 228 1 395 1 562 1 742 Change in WC (112) (69) (29) (31) (17) (18) Capex (998) (1 026) (950) (976) (1 003) (1 032) FCF (212) (56) 249 388 542 692 Discount rate 12% Terminal growth rate 3,5% DCF (190) (45) 177 247 307 350 Terminal value 4 558 Summ DCF 2 515 EV incl tax shields 7 897 Net debt 3 396 EqV 4 501 Number of shares, mln 272 Fair value, 17 Target price, 20 Source: Company data, Credit Suisse estimate, Net debt as of 2012E
EEMEA food retail universe 22 06 November 2012
Credit Suisse HOLT analysis We use the Credit Suisse HOLT Estimator tool to value X5 using our assumptions, arriving at a warranted price of $21.05/GDR, which suggests just 11% potential upside from current levels.
Figure 35: Credit Suisse HOLT valuation analysis
Source: Credit Suisse HOLT, price as of 1 November 2012
EEMEA food retail universe 23 06 November 2012
Figure 36: X5 PEER map
Source: Credit Suisse PEERs research
EEMEA food retail universe 24 06 November 2012
Europe / Russian Federation Food Retail
Dixy Group of Companies (DIXY.MM) Rating (from Outperform) NEUTRAL* DOWNGRADE RATING Price (01 Nov 12, Rbl) 324.08 Target price (Rbl) (from 430.00) 370.00¹ Market cap. (Rbl m) 40,428.98 Looking for better momentum, turning Neutral Enterprise value (Rbl m) 65,670.1
■ TP decrease and rating downgrade: We decrease our TP for Dixy from *Stock ratings are relative to the coverage universe in each RUB430 to RUB370 per share on the back of our downgrade to our analyst's or each team's respective sector. estimated EBITDA margins and increase in effective tax rate forecasts. We ¹Target price is for 12 months. downgrade our rating to Neutral as we think current lack of clarity on Research Analysts earnings limits the investment case—we would prefer better visibility. Victoria Petrova 49 69 75 38 2272 ■ Execution risks remain key: Dixy is likely to face profitability dilution in [email protected] 2H12E due to integration costs, which will influence overall margins in 2012E. Irina Karacharskova We believe that Dixy would have to overcome some execution issues, 7 495 967 8349 including potentially higher than initially expected costs of integration, longer [email protected] than expected processes and dilution/cannibalisation impact. ■ Looking at 2013E: We believe that while the consensus should be adjusted for weak EBITDA and net income in 2012E, this is to a large extent already priced in. The major stock driver should be 1-2Q13E financial results, which could show the first signs of turnaround in net and EBITDA margins. ■ Long-term highlights: Dixy has been able to demonstrate (i) its ability to open a large number of stores; and (ii) a focus on customer and shopping experience. We believe this, combined with fixing mid-term issues, should allow a turnaround, the first signs of which should serve as a positive signal. ■ Catalysts: Catalysts include the 10-month trading update (13-14 Nov) and 3Q12 financials (3-6 Dec), which we expect to be weak. Victoria shareholders might reduce or sell down their stakes in the company (they received c.13% post Victoria merger with Dixy) and Dixy’s management might decide to raise equity (one former Victoria shareholder has already sold his c.4% stake in Dixy at RUB305/share); these two actions might create short-term overhang. ■ Valuation: Dixy trades at 8.0x EV/EBITDA in 2012E and 6.3x in 2013E, 38% and 45% discounts vs. Magnit. However, Dixy is the most expensive company in the sector on our P/E estimates, which, along with limited upside to our revised TP, supports our downgrade to Neutral. Share price performance Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E 426 Revenue (Rbl m) 121,800.4 147,761.5 183,788.0 235,989.8 EBITDA (Rbl m) 7,590.25 8,179.56 10,848.47 14,239.61 326 Adjusted Net Income (Rbl m) 1,403.0 748.0 1,838.2 3,586.5 CS adj. EPS (Rbl) 11.25 6.00 14.73 28.75 226 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Prev. EPS (Rbl) — 14.61 23.26 37.21 Price Price relative ROIC (%) 5.19 3.20 5.70 8.52 P/E (adj., x) 28.82 54.05 21.99 11.27 The price relative chart measures performance against the RTS P/E rel. (%) 683.3 1,113.7 446.5 229.6 IDX which closed at 1444.2 on 01/11/12 EV/EBITDA 7.8 8.0 6.3 5.0 On 01/11/12 the spot exchange rate was Rbl40.48/Eu 1. - Eu .77/US$1 Dividend (12/12E, Rbl) — IC (12/12E, Rbl m) 49,705.85
Performance Over 1M 3M 12M Dividend yield (%) — EV/IC 1.3 Absolute (%) -3.4 -6.8 5.6 Net debt (12/12E, Rbl m) 25,241.1 Current WACC 12.5 Relative (%) -4.3 -8.1 -1.3 Net debt/equity (12/12E, %) 103.2 Free float (%) 32.5 BV/share (12/12E, Rbl) 196.1 Number of shares (m) 124.75
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
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Dixy Group of Companies DIXY.MM Price (01 Nov 12): Rbl324.08, Rating: (from Outperform) NEUTRAL*, Target Price: Rbl(from 430.00) 370.00 Income statement (Rbl m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 121,800 147,761 183,788 235,990 No. of shares (wtd avg) 125 125 125 125 EBITDA 7,590 8,180 10,848 14,240 CS adj. EPS (Rbl) 11.25 6.00 14.73 28.75 Depr. & amort. (3,400) (4,170) (5,013) (5,768) Prev. EPS (Rbl) — 14.61 23.26 37.21 EBIT (CS) 4,190 4,010 5,835 8,472 Dividend (Rbl) — — — — Net interest exp. (1,441) (2,122) (2,396) (2,554) Dividend payout ratio — — — — Associates — — — — Free cash flow per share (132.94) (52.56) (25.12) (16.24) Other adj, (75) — — — (Rbl) PBT (CS) 2,674 1,887 3,439 5,918 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (1,271) (1,139) (1,601) (2,331) valuation Profit after tax 1,403 748 1,838 3,587 Growth(%) Minorities — — — — Sales 89.6 21.3 24.4 28.4 Preferred dividends — — — — EBIT 148.3 (4.3) 45.5 45.2 Associates & other — — — — Net profit 443.8 (46.7) 145.7 95.1 Net profit (CS) 1,403 748 1,838 3,587 EPS 274.9 (46.7) 145.7 95.1 Other NPAT adjustments — — — — Margins (%) Reported net income 1,403 748 1,838 3,587 EBITDA margin 6.2 5.5 5.9 6.0 EBIT margin 3.4 2.7 3.2 3.6 Cash flow (Rbl) 12/11A 12/12E 12/13E 12/14E Pretax margin 2.2 1.3 1.9 2.5 EBIT 4,190 4,010 5,835 8,472 Net margin 1.2 0.5 1.0 1.5 Net interest 2,940 4,244 4,792 5,108 Valuation metrics (x) Cash taxes paid (1,463) (1,139) (1,601) (2,331) EV/sales 0.49 0.44 0.37 0.30 Change in working capital 802 (501) (256) (164) EV/EBITDA 7.8 8.0 6.3 5.0 Other cash & non-cash items (825) (2,197) (2,175) (1,893) EV/EBIT 14.1 16.4 11.8 8.4 Cash flow from operations 5,645 4,417 6,595 9,191 P/E 28.8 54.0 22.0 11.3 CAPEX (22,230) (10,974) (9,729) (11,216) P/B 1.7 1.7 1.5 1.4 Free cash flow to the firm (16,585) (6,557) (3,134) (2,026) Asset turnover 1.9 2.1 2.3 2.7 Acquisitions — — — — ROE analysis (%) Divestments — — — — ROE stated-return on 9.4 3.1 7.2 12.8 Other investment/(outflows) 200 — — — equityROIC 5.2 3.2 5.7 8.5 Cash flow from investments (22,030) (10,974) (9,729) (11,216) Interest burden 0.64 0.47 0.59 0.70 Net share issue/(repurchase) (5,748) — — — Tax rate 47.5 60.4 46.6 39.4 Dividends paid — — — — Financial leverage 0.9 1.0 1.1 1.0 Issuance (retirement) of debt — — — — Credit ratios (%) Other 10,240 — — — Net debt/equity 78.8 103.2 107.9 101.7 Cash flow from financing 4,492 — — — Net debt/EBITDA 2.5 3.1 2.6 2.1 activitiesEffect of exchange rates — — — — Interest coverage ratio 2.9 1.9 2.4 3.3 Changes in Net Cash/Debt (11,893) (6,557) (3,134) (2,026) . Net debt at start 6,792 18,684 25,241 28,375 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt 11,893 6,557 3,134 2,026 (EUROPE) LTD. Estimates. Net debt at end 18,684 25,241 28,375 30,401
Balance sheet (Rbl m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 2,384 327 493 367 426 Accounts receivable 2,620 3,239 4,028 5,172 Inventory 7,856 9,612 11,947 15,341 Other current assets 2,198 2,198 2,198 2,198 326 Total current assets 15,057 15,375 18,666 23,078 Total fixed assets 24,529 31,333 36,049 41,498 226 Intangible assets and goodwill 21,045 21,045 21,045 21,045 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Investment securities — — — — Other assets 2,849 2,849 2,849 2,849 Price Price relative Total assets 63,480 70,603 78,609 88,470 Liabilities The price relative chart measures performance against the RTS IDX which closed Accounts payable 15,893 17,768 20,636 25,010 at 1444.2 on 01/11/12 Short-term debt 11,258 15,758 19,058 20,958 On 01/11/12 the spot exchange rate was Rbl40.48/Eu 1. - Eu .77/US$1 Other short term liabilities 1,307 1,307 1,307 1,307 Total current liabilities 28,459 34,833 41,002 47,276 Long-term debt 9,810 9,810 9,810 9,810 Other liabilities 1,495 1,495 1,495 1,495 Total liabilities 39,764 46,138 52,306 58,580 Shareholders' equity 23,717 24,465 26,303 29,889 Minority interest — — — — Total equity & liabilities 63,480 70,603 78,609 88,470 Net debt (Rbl m) 18,684 25,241 28,375 30,401
EEMEA food retail universe 26 06 November 2012
Model revisions We revise our 2012E sales growth estimate down slightly, from 23% to 21.3% following some slowdown in growth in September due to dilution attributed to integration of Kvartals (former Victoria’s discounter chain). Moreover, Victoria stores in the Central Federal District are in the process of rebranding and delivered c.16.6% decline in sales in 3Q12 and c.3.42% decline for 9M12. Management reiterated their FY12E guidance at the level of 20-25% sales growth; however during the analyst and investor day (on October, 24th) said that the company was likely to be closer to the bottom of the range. 2012E EBITDA margin decreased from 6.1% to 5.5% due to integration costs We expect Dixy to deliver 4.8% EBITDA margin in 3Q12E and 5.5% in 4Q12E. As a result, we reduce our EBITDA estimate by c.9% (on average) in the long term primarily driven by a reduction in profitability. Net income was influenced more significantly due to an increase in effective tax rate in 2012E. Valuation Our updated DCF valuation model suggests a TP of RUB370 per share (down from RUB430 per share). We downgrade the stock to Neutral given only c.14% upside from current levels. Our target multiple is 8.7x 2012E EV/EBITDA and 6.9x 2013E EV/EBITDA. We target a 25.0x P/E multiple for 2013E under the assumption of a 47% effective tax rate. Dixy execution risks: Lessons from X5 case study We do not expect Dixy to replicate last years’ performance by X5, when it was significantly affected by its integration process combined with a lot of internal changes. We believe that investors should keep the following points of differentiation in mind, while assuming read-across from X5 Retail Group’s experience: (1) Hypermarkets: Part of X5’s weak performance came from hypermarkets, which accounted for c.15% of sales in 2011 and historically performed quite poorly. Unlike X5, Dixy stores like Megamart and Minimart accounted for c.10% of revenue in 2011 and have demonstrated solid organic performance over the past 2 years. (2) Management: X5 has been through significant changes in management over the past 2 years. The CEO, most of the format directors and a large part of operational management have left the company. A new team started the reorganization of internal procedures towards more a decentralised business model. Dixy has a stable key management, while changes in legal structure (to be done during 2013E) should not alter the company’s operating structure. (3) Sales densities: On our estimates, Kvartal/Deshavo/Kopilka sales per sq m were comparable with what Dixy stores had, while Kopeika had lower sales density, suggesting more challenging integration process, in our view.
EEMEA food retail universe 27 06 November 2012
Figure 37: Sales per sq m, in RUBm/year 350
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- 2010 2011
Dixy Kvartal/Deshevo/Kopilka Pyaterochka Kopeika
Source: Company data Key risks to our forecasts Traffic outflow due to cannibalisation and competition growth: X5 integration led to significant cannibalisation of own stores. Dixy neighbourhood stores LFL dynamics in 2012 was in line with the trend shown in 2011, while overall traffic improved slightly for 9M12. With competition getting tougher, and Dixy planning to deepen penetration in core regions, we do not expect to see positive traffic (in the Dixy format) in 2013E. Credit Suisse vs management guidance On growth: Management expects Dixy to be able to open 400-500 new stores annually (for the next three to five years) and to grow by 25% per year in sales (in RUB). Our model is in line with management guidance. On profitability: Management believes that 7-8% EBITDA margin and 1.5-2% net income margin is achievable in 2013-2015E. Management expects the realisation of integration synergies and elimination of integration costs, which should contribute to better profitability. Our long term assumptions are more conservative. We forecast EBITDA margin improvement primarily through better OPEX from 5.9% in 2013E to 6.4% in 2017E. On effective tax rate: Management is now strongly focused on improving the effective tax rate (ETR) as Dixy’s is now the highest in the sector. Management expects to achieve c.25-30% in 2013-2015E. We are more conservative, and expect it to decline from 60% in 2012E to 47% in 2013E and to 32% in 2017E. The major driver of a ETR decrease should be the optimisation of the company’s legal structure. Management is merging many of Dixy’s legal entities (currently 73) to achieve economies on the tax paid—i.e., a smaller number of companies should reduce the amount of non-deductible costs in intercompany transactions and thus reduce the amount of tax. At the beginning of the year there were 86 legal entities; by October 2012 this reduced to 73, by June 2013 management expects to reach 22, and by the end of 2013 there should be just 4 operating companies.
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Figure 38: Dixy: Change in forecast, in RUBm New 2012E 2013E 2014E 2015E 2016E Revenue 147,761 183,788 235,990 298,041 367,922 Gross profit 41,447 51,644 66,313 83,750 103,386 Gross margin 28.1% 28.1% 28.1% 28.1% 28.1% EBITDA 8,180 10,848 14,240 18,384 23,404 EBITDA margin 5.5% 5.9% 6.0% 6.2% 6.4% Net profit 748 1,838 3,587 5,838 9,022 Net margin
Old 2012E 2013E 2014E 2015E 2016E Revenue 150,035 191,048 245,133 308,116 378,118 Gross profit 41,631 53,386 68,499 86,099 105,660 Gross margin 27.7% 27.9% 27.9% 27.9% 27.9% EBITDA 9,097 12,155 15,633 20,002 24,616 EBITDA margin 6.1% 6.4% 6.4% 6.5% 6.5% Net profit 1,823 2,902 4,642 7,108 9,916 Net margin 1.2% 1.5% 1.9% 2.3% 2.6%
Change, % 2012E 2013E 2014E 2015E 2016E Revenue -1.5% -3.8% -3.7% -3.3% -2.7% Gross profit -0.4% -3.3% -3.2% -2.7% -2.2% Gross margin 0.3% 0.2% 0.2% 0.2% 0.2% EBITDA -10.1% -10.7% -8.9% -8.1% -4.9% EBITDA margin -0.5% -0.5% -0.3% -0.3% -0.1% Net profit -59.0% -36.7% -22.7% -17.9% -9.0% Net margin -1.2% -1.5% -1.9% -2.3% -2.6% Source: Credit Suisse estimates
DCF valuation
Figure 39: Dixy: DCF valuation, in RUBm DCF model 2012E 2013E 2014E 2015E 2016E 2017E Net income 748 1,838 3,587 5,838 9,022 12,419 + non cash items ------+ depreciation 4,170 5,013 5,768 6,640 7,506 8,295 + Interest expnses * (1 - tax) 1,698 1,917 2,043 2,109 1,910 1,512 - CAPEX - 10,974 - 9,729 - 11,216 - 12,052 - 12,437 - 11,926 - Working capital investment - 501 - 256 - 164 - 109 - 58 - 76 FCFF - 4,859 - 1,217 17 2,425 5,942 10,224 Discount factor 0.9 0.8 0.7 0.6 0.6 0.5 PV of FCFF - 4,318 - 961 12 1,513 3,294 5,036 Summ of PV of FCFF 4,575 Terminal value 57,751 EV, RUBm 62,327 Cash 327 Debt 25,568 Net debt, 2012e 25,241 Equity value, RUBm 37,086 Number of shares, mln 124.8 Fair value per share, RUBm 297 TP, RUB 370 Source: Credit Suisse estimates
EEMEA food retail universe 29 06 November 2012
Dixy 3Q12 preview 3Q12 financial results are likely to be weak due to integration costs and so are likely to be a negative catalyst, in our view. We assume 4Q12E shows gradual improvement in margins up to 5.5%.
Figure 40: Dixy: 3Q12E preview, in RUBm in RUBm 3Q12E 4Q12E 3Q yoy 4Q yoy 2012E 3Q11 4Q11 2011 Sales 35,902 41,024 22.7% 21.0% 147,761 29,258 33,894 121,800 Grossprofit 10,031 11,530 24.4% 18.6% 41,447 8,063 9,724 33,748 EBITDA 1,725 2,244 -2.1% 13.8% 8,180 1,761 1,972 7,590 Net income 22 225 n/a -32.8% 748 217 335 1,403
Gross margin 27.9% 28.1% 0.4% -0.6% 28.1% 27.6% 28.7% 27.7% EBITDA margin 4.8% 5.5% -1.2% -0.3% 5.5% 6.0% 5.8% 6.2% Net margin 0.1% 0.5% -0.7% -0.4% 0.5% 0.7% 1.0% 1.2% Source: Company data, Credit Suisse estimates Credit Suisse HOLT analysis We use HOLT Estimator tool to value Dixy by incorporating our assumptions into the HOLT valuation model, arriving at a warranted price of $10.79/share (or RUB342/share), which suggest just 8% upside to current price level.
Figure 41: Credit Suisse HOLT valuation analysis
Source: Credit Suisse HOLT, priced as of 1 November 2012
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Figure 42: Dixy PEER map
Source: Credit Suisse PEERs research
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Europe / Russian Federation Food Retail
Okey (OKEYq.L) Rating UNDERPERFORM* [V] INCREASE TARGET PRICE Price (01 Nov 12, US$) 9.85 Target price (US$) (from 8.00) 8.60¹ Concerns over store openings, new format Market cap. (US$ m) 2,650.21 Enterprise value (Rbl m) 100,877.5 CAPEX and profitability profiles ■ Modelling recent developments, assessing new risks; increase TP to *Stock ratings are relative to the coverage universe in each $8.6/GDR: We slightly rebalance our model to incorporate recent company- analyst's or each team's respective sector. ¹Target price is for 12 months. specific developments (3Q12 trading update) and overall macro trends (new [V] = Stock considered volatile (see Disclosure Appendix). FX forecasts, inflation revision and consumer sentiment). We address new challenges, related to store openings and new format launch. With c.13% Research Analysts downside to our TP we reiterate our Underperform rating. Victoria Petrova 49 69 75 38 2272 ■ Operating performance is key: While we see no major risks to 2012E [email protected] guidance and consensus, Okey’s ability to deliver on store openings is the key risk, influencing next year performance and questioning the Irina Karacharskova 7 495 967 8349 sustainability of future hypermarket rollout. Okey has opened 5 [email protected] hypermarkets of 14 guided for 2012E: opening 9 stores in 4Q12E might be challenging.
■ New format launch might change business model: We are concerned about Okey’s intention to launch a next door format in the central regions of Russia due to (i) challenging competitive environment with X5, Dixy and Magnit footprint; (ii) additional investments in logistics and unclear sources of financing (debt or equity); (iii) potential margin dilution given format specifics; (iv) Okey’s lack of expertise in next door format operations. We also believe that despite 10% selling space in supermarkets, Okey was offering investors a hypermarket pure play in Russia, and a multi-format approach might dilute its focus, putting it in direct competition with the rest of the Russian retailers. ■ No major 2012E surprises, focus on further openings: We do not expect any big surprises versus company guidance in 2012E and see EBITDA margin of 8% as sustainable longer term as (1) we see Okey business model as competitive, strong and stable, with high quality stores and its demonstrated ability to operate in very competitive markets, such as highly penetrated St Petersburg; (2) Okey has a strong track record showing sustainable and high gross margins over a sustained period (2007-11). ■ Catalysts: News flow on hypermarket openings. ■ Valuation: Okey trades at 10.7x EV/EBITDA in 2012E and 8.4x in 2013E— c.16% and 26% discounts to Magnit, which we see as justified. Share price performance Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E 15 Revenue (Rbl m) 93,134.4 117,716.2 151,893.9 201,318.1 EBITDA (Rbl m) 7,508.43 9,459.41 12,142.44 16,325.65 10 Pre-tax Profit Adjusted (Rbl m) 4,369.7 5,738.2 7,260.9 10,649.3 CS adj. EPS (Rbl) 12.04 14.93 18.89 27.70 5 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Prev. EPS (Rbl) — 15.55 18.86 25.86 Price Price relative ROIC (%) 17.05 14.26 14.88 18.74 P/E (adj., x) 25.58 20.64 16.31 11.12 The price relative chart measures performance against the P/E rel. (%) 238.9 181.4 156.3 115.6 FTSE 100 IDX which closed at 5868.55 on 01/11/12 EV/EBITDA 12.3 10.7 8.4 6.1 On 01/11/12 the spot exchange rate was US$1.29/Eu 1. - Eu .77/US$1 Dividend (12/12E, Rbl) — IC (12/12E, Rbl m) 35,510.45
Performance Over 1M 3M 12M Dividend yield (%) — EV/IC 2.8 Absolute (%) 1.0 7.1 34.0 Net debt/equity (12/12E, %) 102.7 Net debt (12/12E, Rbl m) 17,993.3 Number of shares (m) 269.06 Free float (%) 14.5
Relative (%) 5.3 3.8 39.4 BV/share (12/12E, Rbl) 65.1
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
EEMEA food retail universe 32 06 November 2012
Okey OKEYq.L Price (01 Nov 12): US$9.85, Rating: UNDERPERFORM [V], Target Price: US$(from 8.00) 8.60 Income statement (Rbl m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 93,134 117,716 151,894 201,318 No. of shares (wtd avg) 269 269 269 269 EBITDA 7,508 9,459 12,142 16,326 CS adj. EPS (Rbl) 12.04 14.93 18.89 27.70 Depr. & amort. (1,977) (2,047) (3,307) (3,954) Prev. EPS (Rbl) — 15.55 18.86 25.86 EBIT (CS) 5,389 7,232 8,603 12,063 Dividend (Rbl) — — — — Net interest exp. (752) (1,494) (1,342) (1,414) Dividend payout ratio — — — — Associates — — — — Free cash flow per share (8.26) (29.96) 0.47 10.66 Other adj, (267) — — — (Rbl) PBT (CS) 4,370 5,738 7,261 10,649 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (1,130) (1,721) (2,178) (3,195) valuation Profit after tax 3,240 4,017 5,083 7,454 Growth(%) Minorities — — — — Sales 12.7 26.4 29.0 32.5 Preferred dividends — — — — EBIT (0.1) 34.2 19.0 40.2 Associates & other — — — — Net profit 20.7 24.0 26.5 46.7 Net profit (CS) 3,240 4,017 5,083 7,454 EPS 20.7 24.0 26.5 46.7 Other NPAT adjustments — — — — Margins (%) Reported net income 3,240 4,017 5,083 7,454 EBITDA margin 8.1 8.0 8.0 8.1 EBIT margin 5.8 6.1 5.7 6.0 Cash flow (Rbl) 12/11A 12/12E 12/13E 12/14E Pretax margin 4.7 4.9 4.8 5.3 EBIT 5,389 7,232 8,603 12,063 Net margin 3.5 3.4 3.3 3.7 Net interest (752) (1,494) (1,342) (1,414) Valuation metrics (x) Cash taxes paid (1,396) (1,721) (2,178) (3,195) EV/sales 0.99 0.86 0.67 0.50 Change in working capital 1,333 941 1,227 1,217 EV/EBITDA 12.3 10.7 8.4 6.1 Other cash & non-cash items 1,827 2,047 3,307 3,954 EV/EBIT 17.1 13.9 11.8 8.3 Cash flow from operations 6,401 7,005 9,616 12,626 P/E 25.6 20.6 16.3 11.1 CAPEX (8,624) (15,066) (9,490) (9,758) P/B 5.8 4.7 3.8 3.0 Free cash flow to the firm (2,223) (8,061) 127 2,868 Asset turnover 2.1 2.1 2.4 2.7 Acquisitions — — — — ROE analysis (%) Divestments — — — — ROE stated-return on 24.9 25.2 26.0 30.3 Other investment/(outflows) (69) — — — equityROIC 17.0 14.3 14.9 18.7 Cash flow from investments (8,693) (15,066) (9,490) (9,758) Interest burden 0.81 0.79 0.84 0.88 Net share issue/(repurchase) — — — — Tax rate 25.9 30.0 30.0 30.0 Dividends paid (773) (803) (1,017) (1,491) Financial leverage 0.8 1.1 0.9 0.6 Issuance (retirement) of debt 171 6,600 500 (1,500) Credit ratios (%) Other (347) (6,600) (500) 1,500 Net debt/equity 63.8 102.7 87.5 63.5 Cash flow from financing (949) (803) (1,017) (1,491) Net debt/EBITDA 1.2 1.9 1.6 1.1 activitiesEffect of exchange rates (24) — — — Interest coverage ratio 7.2 4.8 6.4 8.5 Changes in Net Cash/Debt (3,265) (8,864) (890) 1,377 . Net debt at start 5,864 9,129 17,993 18,883 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt 3,265 8,864 890 (1,377) (EUROPE) LTD. Estimates. Net debt at end 9,129 17,993 18,883 17,506
Balance sheet (Rbl m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 2,942 678 288 165 15 Accounts receivable 1,924 2,023 2,610 3,459 Inventory 7,918 8,709 11,558 15,744 10 Other current assets 399 399 399 399 Total current assets 13,182 11,808 14,855 19,768 Total fixed assets 23,572 36,591 42,773 48,577 5 Intangible assets and goodwill 518 518 518 518 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Investment securities 573 573 573 573 Other assets 5,887 5,887 5,887 5,887 Price Price relative Total assets 43,732 55,376 64,606 75,322 Liabilities The price relative chart measures performance against the FTSE 100 IDX which Accounts payable 15,338 17,168 21,832 28,085 closed at 5868.55 on 01/11/12 Short-term debt 5,303 11,903 12,403 12,403 On 01/11/12 the spot exchange rate was US$1.29/Eu 1. - Eu .77/US$1 Other short term liabilities 411 411 411 411 Total current liabilities 21,052 29,483 34,646 40,899 Long-term debt 6,768 6,768 6,768 5,268 Other liabilities 1,608 1,608 1,608 1,608 Total liabilities 29,428 37,859 43,023 47,775 Shareholders' equity 14,304 17,517 21,583 27,547 Minority interest — — — — Total equity & liabilities 43,732 55,376 64,606 75,322 Net debt (Rbl m) 9,129 17,993 18,883 17,506
EEMEA food retail universe 33 06 November 2012
Changes in the model We have made several changes in our model, primarily updating just our CPI assumptions following changes in our economists’ forecasts. We also slightly adjust 2012E sales downwards on the back of a trading update. We have not at this stage incorporated the potential launch of the discounter format in our model—Okey has guided for the first 100 stores to be opened in 2014E. As a result of these changes we increase our TP from $8 to $8.6 per GDR primarily due to more favourable exchange rate. Our target EV/EBITDA multiples are 9.12x for 2012E and 7.17x for 2013E.
Figure 43: Okey: forecast change, RUBm New 2012E 2013E 2014E 2015E 2016E Revenue 117,716 151,894 201,318 241,959 283,476 Gross profit 26,898 34,707 46,001 55,287 64,774 Gross margin 22.8% 22.8% 22.8% 22.8% 22.8% EBITDA 9,459 12,142 16,326 19,400 22,707 EBITDA margin 8.0% 8.0% 8.1% 8.0% 8.0% Net profit 4,017 5,083 7,454 9,273 11,485 Net margin 3.4% 3.3% 3.7% 3.8% 4.1%
Old 2012E 2013E 2014E 2015E 2016E Revenue 120,764 151,765 192,360 233,833 277,097 Gross profit 27,594 34,678 43,954 53,430 63,316 Gross margin 22.8% 22.8% 22.8% 22.8% 23% EBITDA 9,704 12,132 15,599 18,749 22,196 EBITDA margin 8.0% 8.0% 8.1% 8.0% 8.0% Net profit 4,185 5,076 6,959 8,892 11,212 Net margin 3.5% 3.3% 3.6% 3.8% 4%
Change, % 2012E 2013E 2014E 2015E 2016E Revenue -2.5% 0.1% 4.7% 3.5% 2.3% Gross profit -2.5% 0.1% 4.7% 3.5% 2.3% Gross margin 0.0% 0.0% 0.0% 0.0% 0.0% EBITDA -2.5% 0.1% 4.7% 3.5% 2.3% EBITDA margin 0.0% 0.0% 0.0% 0.0% 0.0% Net profit -4.0% 0.1% 7.1% 4.3% 2.4% Net margin -0.1% 0.0% 0.1% 0.0% 0.0% Source: Company data, Credit Suisse estimates
2H12E preview Okey will issue 2H12E and FY12E financial results in 1Q13.
Figure 44: Okey: 2H12 preview, in RUBm in RUBm 2H12E YOY 2012E YOY Sales 64,181 28% 117,716 26% Gross profit 14,723 21% 26,898 26% EBITDA 5,755 21% 9,459 26% Net income 2,547 18% 4,017 24%
Gross margin 22.9% -1.3% 22.8% 0.0% EBITDA margin 9.0% -0.4% 8.0% 0.0% Net income margin 4.0% -0.3% 3.4% -0.1% Source: Credit Suisse estimates
EEMEA food retail universe 34 06 November 2012
DCF valuation
Figure 45: Okey DCF valuation, in RUBm 2012E 2013E 2014E 2015E 2016E 2017E EBIT 7,232 8,603 12,063 14,461 17,142 20,132 Taxes on EBIT (2,170) (2,581) (3,619) (4,338) (5,142) (6,039) NOPAT 5,062 6,022 8,444 10,123 11,999 14,092 DD&A 2,047 3,307 3,954 4,569 5,132 5,514 CF 7,110 9,329 12,398 14,691 17,131 19,606 Change in WC 941 1,227 1,217 1,026 502 538 Capex (15,066) (9,490) (9,758) (10,255) (8,995) (9,505) FCF (7,015) 1,066 3,858 5,462 8,637 10,639 Discount rate 13% Terminal growth rate 3.5% DCF (6,236) 842 2,709 3,410 4,793 5,248 Terminal value 60,666 Summ DCF 10,767 EV incl tax shields 77,176 Net debt (17,993) EqV 59,183 Number of shares, mln 269 Fair value, RUB 220 Target price, RUB 273 Target price, $ 8.6 Source: Company data, Credit Suisse estimates, net debt as of 2012E
EEMEA food retail universe 35 06 November 2012
Credit Suisse HOLT analysis We use the HOLT Estimator tool to value Okey using our valuation assumptions, arriving at a warranted price of $8.59/share, which suggests c.13% downside from current levels.
Figure 46: Credit Suisse HOLT valuation analysis
Source: Credit Suisse HOLT, priced as of 1 November 2012
EEMEA food retail universe 36 06 November 2012
Figure 47: Okey PEER map
Source: Company data, Credit Suisse estimates
EEMEA food retail universe 37 06 November 2012 Turkish food retail: Prefer cyclical exposure in the Turkish consumer Against a backdrop of a more favourable consumer environment, we continue to prefer more cyclical exposures in the Turkish consumer space to highly defensive names, particularly Tofas, which makes up c8% of our NAV estimate for Koc Holding (Turkish Consumer - Forecasting a brighter outlook, 15/10/2012). In addition to a more favourable outlook, major cyclical consumer names in Turkey (Arcelik, Tofas, Ford Otosan) 1) have stronger dividend yield outlooks than defensives, and 2) have a higher share of Eurozone in their revenue mix. Although the latest PMI surveys have not yet shown signs of recovery, Credit Suisse’s Economics Team believes that the recent policy announcements from the ECB can help the euro area to gradually pull out of recession (European Economics - Turning German, 21/09/2012). Migros remains our preference within Turkish food-retail: Among the food retailers, we think the multi-format Migros is better positioned to capture the potential upside in a consumer bounce-back scenario, relative to more defensive business models such as BIM. We continue to see Migros as the most likely M&A story within our Turkish consumer coverage given press reports earlier this year quoting the Chairman, Mr. Ozaydinli, as highlighting a potential change in the ownership structure in the future (Vatan daily, 15 June 2012). Execution has been beyond our expectations. YTD net store adds (in Turkey) were 14% above the upwardly revised guidance. More importantly, although multi-format is a more discretionary business model relative to BIM and BIZIM’s low-cost models, Migros’s yoy revenue performance was considerably more resilient than the other two in 2Q12A (Figure 48). Besides, the cost impact of accelerated store additions on EBITDA margin has been kept limited (2Q12A: 5.8%). We expect another defensive profitability performance in 3QE.
Figure 48: Revenue growth In TRY, yoy 35% 1Q12 2Q12 30% 25% 20% 15% 10% 5% 0% BIM Migros BIZIM
Source: Company data
EEMEA food retail universe 38 06 November 2012
Europe / Turkey Food Retail
BIM (BIMAS.IS) Rating NEUTRAL* COMPANY UPDATE Price (01 Nov 12, TRY) 81.00 Target price (TRY) 76.90¹ Market cap. (TRY m) 12,295.80 Expect small recovery after weak 2Q11A Enterprise value (TRY m) 11,946.3
■ We maintain our Neutral rating for BIM with a TP of 76.90. *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. ■ P/E premium carries downside risk… BIM shares have underperformed the ISE100 index by 4% since the release of weak 2Q12A results. The Research Analysts underperformance was driven by a combination of both the 2Q12A miss and Onur Muminoglu the defensive nature of the stock, which typically lags positive momentum in 90 212 349 0454 [email protected] the ISE100. On consensus numbers, BIM’s current P/E premium is above its
Andrew Kasoulis two-year average, implying short-term pressure on the stock price in our 44 20 7888 0324 opinion (Figure 49). [email protected] ■ …and downside risk to FY12E consensus? We expect a 4.9% FY12E
EBITDA margin versus consensus at 5.1%, which looks stretched to us after 1H12A average of 4.9%. Some of the drivers of the 2Q12A EBITDA margin were one-off (ad-spend inflation), but the double electricity tariff hikes (in April and then in October) could leave the FY12E margin below 5.0%. In the meantime, processed food inflation remained high in 3Q12, which we view as a negative read-across for BIM’s gross margin (Figure 50). ■ The competition is accelerating expansion: Although its bottom line remained negative as of 1H12A, BIM’s closest competitor by format (A101) is continuing to increase its footprint. The hard-discounter has added more stores than BIM over the past few years (Figure 52) and continues with its national brand-advertising strategy. In the meantime, having started operations this year, the UCZ retail chain quickly reached 385 stores as of October. Its business model looks to be in competition with BIM, highlighting the hard-discount neighbourhood format. ■ Catalysts: We expect 3Q12E IFRS results on 12 November. ■ Valuation: 12M forward consensus P/E is at a 152% premium to Turkish equities versus the two-year average of 132%. Share price performance Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E Revenue (TRY m) 8,189.1 10,007.6 12,174.6 14,335.7 85 EBITDA (TRY m) 424.43 490.56 624.41 735.41 65 Adjusted Net Income (TRY m) 298.9 337.2 440.6 524.5 CS adj. EPS (TRY) 1.97 2.22 2.90 3.46 45 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Prev. EPS (TRY) — — — — Price Price relative ROIC (%) 109.28 77.09 83.67 90.48 P/E (adj., x) 41.14 36.46 27.91 23.44 The price relative chart measures performance against the IST P/E rel. (%) 298.3 313.8 265.8 250.5 ULUSAL 100 IDX which closed at 71422.61 on 01/11/12 EV/EBITDA 28.1 24.4 19.0 16.0 On 01/11/12 the spot exchange rate was TL2.31/Eu 1. - Eu .77/US$1 Dividend (12/12E, TRY) 1.67 IC (12/12E, TRY m) 409.13
Performance Over 1M 3M 12M Dividend yield (%) 2.1 EV/IC 29.2 Absolute (%) 7.6 1.6 53.6 Net debt (12/12E, TRY m) -349.5 Current WACC 12.2 Relative (%) 6.7 0.3 46.7 Net debt/equity (12/12E, %) -46.1 Free float (%) 65.0
BV/share (12/12E, TRY) 5.0 Number of shares (m) 151.80 Source: Company data, Thomson Reuters, Credit Suisse estimates.
EEMEA food retail universe 39 06 November 2012
BIM BIMAS.IS Price (01 Nov 12): TRY81.00, Rating: NEUTRAL, Target Price: TRY76.90 Income statement (TRY m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 8,189 10,008 12,175 14,336 No. of shares (wtd avg) 152 152 152 152 EBITDA 424 491 624 735 CS adj. EPS (TRY) 1.97 2.22 2.90 3.46 Depr. & amort. (77) (93) (109) (121) Prev. EPS (TRY) — — — — EBIT (CS) 347 397 516 615 Dividend (TRY) 1.30 1.67 2.61 3.11 Net interest exp. 18 8 14 19 Dividend payout ratio 66.02 75.00 90.00 90.00 Associates — — — — Free cash flow per share 1.83 1.21 2.35 3.12 Other adj, 12 19 21 22 (TRY) PBT (CS) 378 425 551 656 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (79) (88) (110) (131) valuation Profit after tax 299 337 441 525 Growth(%) Minorities — — — — Sales 24.6 22.2 21.7 17.8 Preferred dividends — — — — EBIT 19.2 14.4 29.8 19.1 Associates & other — — — — Net profit 21.7 12.8 30.6 19.1 Net profit (CS) 299 337 441 525 EPS 21.7 12.8 30.6 19.1 Other NPAT adjustments — — — — Margins (%) Reported net income 299 337 441 525 EBITDA margin 5.2 4.9 5.1 5.1 EBIT margin 4.2 4.0 4.2 4.3 Cash flow (TRY) 12/11A 12/12E 12/13E 12/14E Pretax margin 4.6 4.2 4.5 4.6 EBIT 347 397 516 615 Net margin 3.7 3.4 3.6 3.7 Net interest 18 8 14 19 Valuation metrics (x) Cash taxes paid — — — — EV/sales 1.5 1.2 1.0 0.8 Change in working capital 74 38 110 91 EV/EBITDA 28.1 24.4 19.0 16.0 Other cash & non-cash items 20 2 19 12 EV/EBIT 34.3 30.1 23.0 19.1 Cash flow from operations 461 445 660 736 P/E 41.1 36.5 27.9 23.4 CAPEX (183) (261) (303) (262) P/B 20.0 16.2 13.0 11.4 Free cash flow to the firm 278 184 357 474 Asset turnover 4.7 4.9 4.8 4.9 Acquisitions — — — — ROE analysis (%) Divestments 7 4 — — ROE stated-return on 53.5 49.1 51.7 51.9 Other investment/(outflows) 12 (5) — — equityROIC 109.3 77.1 83.7 90.5 Cash flow from investments (164) (261) (303) (262) Interest burden 1.1 1.1 1.1 1.1 Net share issue/(repurchase) — — — — Tax rate 20.9 20.6 20.0 20.0 Dividends paid (182) (197) (253) (397) Financial leverage — — — — Issuance (retirement) of debt (8) — — — Credit ratios (%) Other 11 (4) — — Net debt/equity (59.2) (46.1) (47.9) (49.4) Cash flow from financing (179) (201) (253) (397) Net debt/EBITDA (0.86) (0.71) (0.73) (0.72) activitiesEffect of exchange rates (3) 2 — — Interest coverage ratio (18.9) (49.3) (37.1) (32.2) Changes in Net Cash/Debt 115 (15) 104 78 . Net debt at start (250) (365) (350) (453) Source: Company data, Thomson Reuters, Credit Suisse estimates. Change in net debt (115) 15 (104) (78) Net debt at end (365) (350) (453) (531)
Balance sheet (TRY m) 12/11A 12/12E 12/13E 12/14E Assets 15 Cash and cash equivalents 365 350 453 531 Accounts receivable 271 303 369 434 Inventory 405 519 600 707 10 Other current assets 34 55 55 55 Total current assets 1,074 1,227 1,477 1,727 5 Total fixed assets 648 807 1,028 1,169 Intangible assets and goodwill 3 3 3 3 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Investment securities — — — — Price Price relative Other assets 7 24 24 24 Total assets 1,733 2,060 2,531 2,922
Liabilities Accounts payable 890 1,069 1,315 1,571 Short-term debt — — — — Other short term liabilities 203 206 249 256 Total current liabilities 1,093 1,275 1,564 1,827 Long-term debt — — — — Other liabilities 24 26 21 21 Total liabilities 1,117 1,301 1,585 1,848 Shareholders' equity 616 759 946 1,074 Minority interest — — — — Total equity & liabilities 1,733 2,060 2,531 2,922 Net debt (TRY m) (365) (350) (453) (531)
EEMEA food retail universe 40 06 November 2012
Figure 49: BIM: 12m forward P/E premium to Turkish Figure 50: Food inflation versus BIM’s gross margin equities average (inverted) on consensus forecasts 200% 15.0 30.0 BIM gross 14% CPI processed margin% food (% yoy) (inverted) 14.0 25.0 175% 15% 13.0 20.0 150% 15.0 16% 12.0 125% 10.0 17% 11.0 5.0 100% 10.0 3Q12 18% 0.0
75% 9.0
3Q11 1Q12 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q12E -5.0 3Q05 19% Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 BIMAS: P/E premium to Turkish eq 2-yr avg Turkey avg P/E processed food inf in Turkey (% yoy) BIM gross margin (inverted)
Source: Thomson Reuters, Credit Suisse research Source: Turkish Central Bank, Company data, Credit Suisse estimates
Figure 51: Revenue growth Figure 52: Domestic store count In %, yoy 35% 4500 1Q12 2Q12 2.1x 30% 4000 3500 5.7x 25% 3000 20% 2500 15% 2000 10% 1500 5% 1000 500 0% A101 BIM BIM Migros BIZIM 0 Jan-10 Jan-11 Sep-11 Jan-12 Sep-12 Source: Company data Source: Ortakalan, Company data 3Q preview
■ High (processed) food inflation and a tough winter helped neighbourhood retailers’ like-for-like revenues in 4Q11A and 1Q12A, which was followed by a moderating revenue growth in 2Q12A. (Figure 51). For BIM, we expect another small erosion in yoy revenue growth in 3Q12E (20%). The following 4Q12E and 1Q13E comps will face a very strong base from the previous year.
■ Our 20% 3Q12E top-line growth estimate is driven by 12% space growth and 8% sales-density expansion.
■ High processed food inflation in 3Q12 is a negative indicator for our BIM gross margin estimate for 3Q12E. 4Q12E will face easier base comps (Figure 50).
■ 2Q12A EBITDA margin was hit by a number of opex drivers. Among them, ad-spend inflation should normalise as management stated that the heavy promotions of the new BIMCell product would be over by June 2012. Electricity price hikes have been effective since early April; therefore they already had their full-quarter effect in 2Q12. 4Q12E opex should include another recent hike to utility prices effective 1 October.
EEMEA food retail universe 41 06 November 2012
Figure 53: BIM – opex breakdown (2012E) Figure 54: BIM – opex-to-sales
Maintenance 14.0% 2% Ad Others 3% 12.0% Transportation 9% Personnel costs 0.3% 3% 45% 0.3% 0.3% 0.5% 0.3% 10.0% 0.3% 0.3% 0.3% 0.6% 0.6% Packaging 0.5% 0.7% 0.7% 0.5% 0.4% 0.6% 4% 8.0% Utilities 5% 6.0%
4.0% D&A 8% 2.0% Opex = 11.7% of sales in 0.0% FY12E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12e 4Q12e Rent 21% Personnel costs Rent D&A Utilities Packaging Transportation Ad Maintenance Others
Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ We expect EBITDA margin to improve seasonally from the very low base of 2Q12A but still remain slightly below the benchmark 5.0% in 3Q12E.
■ We are 5% below consensus on 3Q12E net earnings forecast.
Figure 55: BIM – 3Q12E preview in TRY millions, unless otherwise stated CS est CS est CS est Cons Cons 3Q11A 2Q12A 3Q12E yoy qoq 3Q12E yoy Revenues 2,160 2,353 2,594 20% 10% 2,602 20% Gross profit 344 370 408 19% 10% n/a n/a Gross margin 15.9% 15.7% 15.7% EBITDA 110 102 124 13% 21% 128 17% EBITDA margin 5.1% 4.3% 4.8% 4.9% Reported net income 78 69 85 8% 22% 89 14% CS-adj net income 78 69 85 8% 22% n/a Source: Company data, Credit Suisse estimates, CNBCe survey
EEMEA food retail universe 42 06 November 2012
Europe / Turkey Food Retail
Migros (MGROS.IS) Rating OUTPERFORM* COMPANY UPDATE Price (01 Nov 12, TRY) 19.35 Target price (TRY) 23.75¹ Market cap. (TRY m) 3,444.88 Fundamentally strong Enterprise value (TRY m) 4,971.4
■ We rate Migros Outperform with a TP of TRY23.75. *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. ■ M&A potential intact: We continue to see Migros as the most likely M&A story within our Turkish consumer coverage given press reports earlier this Research Analysts year quoting the Chairman, Mr. Ozaydinli, as highlighting a potential change Onur Muminoglu in the ownership structure in the future (Vatan daily, 15 June 2012). We note 90 212 349 0454 [email protected] that the current low-interest-rate environment should be favourable for
Ates Buldur ongoing sector M&A. We also think Migros’s first-mover store locations, 90 212 349 0459 profitable execution, sustained growth and good exposure to the mid-to-high [email protected] income segments might make it an attractive target for a strategic investor.
■ Execution is beyond expectations: 1) January–September net store adds (in Turkey) were c.170 annualised, above the upwardly revised guidance of 150. 2) Although Migros’s multi-format is a more discretionary exposure to Turkish food-retailing than BIM and BIZIM’s low-cost models, Migros’s yoy revenue performance was much more resilient than the other two in 2Q12A (Figure 48). 3) The cost impact of accelerated store additions on EBITDA margin has been kept limited (2Q12A: 5.8%). ■ Catalysts: We expect 3Q12E IFRS results towards mid-November. ■ Valuation: 12M forward consensus P/E is at a 27% discount to the Turkish equities average. Although this is in-line with the historical two-year average (24%), we believe M&A optionality makes a premium justifiable.
Share price performance Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E Revenue (TRY m) 5,753.1 6,471.8 7,372.2 8,227.5 31 EBITDA (TRY m) 376.41 378.82 439.49 496.96 21 Adjusted Net Income (TRY m) -279.7 60.2 101.9 144.0 CS adj. EPS (TRY) -1.57 0.34 0.57 0.81 11 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Prev. EPS (TRY) — — — — Price Price relative ROIC (%) 10.66 8.13 8.91 10.68 P/E (adj., x) -12.32 57.20 33.81 23.93 The price relative chart measures performance against the IST P/E rel. (%) -89.3 492.3 321.9 255.7 ULUSAL 100 IDX which closed at 71422.61 on 01/11/12 EV/EBITDA 13.3 13.1 11.0 9.5 On 01/11/12 the spot exchange rate was TL2.31/Eu 1. - Eu .77/US$1 Dividend (12/12E, TRY) — IC (12/12E, TRY m) 2,841.81
Performance Over 1M 3M 12M Dividend yield (%) — EV/IC 1.7 Absolute (%) 1.0 -2.8 24.4 Net debt (12/12E, TRY m) 1,526.5 Current WACC 12.4 Net debt/equity (12/12E, %) 116.1 Free float (%) 19.5
Relative (%) -6.4 -13.9 -5.8 BV/share (12/12E, TRY) 6.5 Number of shares (m) 178.03
Source: Company data, Thomson Reuters, Credit Suisse estimates.
EEMEA food retail universe 43 06 November 2012
Migros MGROS.IS Price (01 Nov 12): TRY19.35, Rating: OUTPERFORM, Target Price: TRY23.75 Income statement (TRY m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 5,753 6,472 7,372 8,228 No. of shares (wtd avg) 178 178 178 178 EBITDA 376 379 439 497 CS adj. EPS (TRY) (1.57) 0.34 0.57 0.81 Depr. & amort. (124) (128) (131) (135) Prev. EPS (TRY) — — — — EBIT (CS) 253 250 308 362 Dividend (TRY) — — 0.05 0.17 Net interest exp. (548) (87) (246) (227) Dividend payout ratio — — 8.01 20.51 Associates — — — — Free cash flow per share 0.04 (0.14) 0.66 0.85 Other adj, (20) (25) (11) (12) (TRY) PBT (CS) (316) 138 51 123 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (53) (11) (10) (25) valuation Profit after tax (369) 127 41 98 Growth(%) Minorities — — — — Sales (9.6) 12.5 13.9 11.6 Preferred dividends — — — — EBIT 11.9 (0.9) 23.0 17.6 Associates & other 90 (67) 61 46 Net profit (1,075.7) (121.5) 69.2 41.3 Net profit (CS) (280) 60 102 144 EPS (1,075.7) 121.5 69.2 41.3 Other NPAT adjustments (90) 67 (61) (46) Margins (%) Reported net income (369) 127 41 98 EBITDA margin 6.5 5.9 6.0 6.0 EBIT margin 4.4 3.9 4.2 4.4 Cash flow (TRY) 12/11A 12/12E 12/13E 12/14E Pretax margin (5.5) 2.1 0.7 1.5 EBIT 253 250 308 362 Net margin (4.9) 0.9 1.4 1.7 Net interest (548) (87) (246) (227) Valuation metrics (x) Cash taxes paid — — — — EV/sales 0.87 0.77 0.66 0.57 Change in working capital (122) (107) 51 40 EV/EBITDA 13.3 13.1 11.0 9.5 Other cash & non-cash items 591 80 149 126 EV/EBIT 19.9 19.9 15.8 13.0 Cash flow from operations 173 136 262 302 P/E (12.3) 57.2 33.8 23.9 CAPEX (166) (160) (145) (150) P/B 2.6 3.0 2.7 2.6 Free cash flow to the firm 8 (24) 117 152 Asset turnover 1.0 1.2 1.4 1.5 Acquisitions — — — — ROE analysis (%) Divestments 598 1 — — ROE stated-return on (28.3) 10.2 3.3 7.6 Other investment/(outflows) 47 34 — — equityROIC 10.7 8.1 8.9 10.7 Cash flow from investments 479 (124) (145) (150) Interest burden (1.3) 0.6 0.2 0.3 Net share issue/(repurchase) — — — — Tax rate (16.9) 7.7 20.0 20.0 Dividends paid — — — (8) Financial leverage 1.9 2.1 1.7 1.5 Issuance (retirement) of debt (262) (20) (142) (301) Credit ratios (%) Other (465) 58 142 301 Net debt/equity 131.8 116.1 104.0 87.5 Cash flow from financing (727) 38 — (8) Net debt/EBITDA 4.2 4.0 3.2 2.5 activitiesEffect of exchange rates 1 (0) (0) (0) Interest coverage ratio 0.5 2.9 1.3 1.6 Changes in Net Cash/Debt (74) 49 117 143 . Net debt at start 1,502 1,576 1,527 1,410 Source: Company data, Thomson Reuters, Credit Suisse estimates. Change in net debt 74 (49) (117) (143) Net debt at end 1,576 1,527 1,410 1,266
Balance sheet (TRY m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 1,010 857 832 675 Accounts receivable 67 58 66 74 31 Inventory 679 661 752 840 Other current assets 41 58 58 58 21 Total current assets 1,798 1,634 1,709 1,647 11 Total fixed assets 1,119 1,146 1,159 1,174 Intangible assets and goodwill 2,502 2,499 2,499 2,499 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Investment securities — — — — Price Price relative Other assets 63 57 57 57 Total assets 5,481 5,337 5,425 5,377 Liabilities The price relative chart measures performance against the IST ULUSAL 100 IDX Accounts payable 1,387 1,285 1,435 1,570 which closed at 71422.61 on 01/11/12 On 01/11/12 the spot exchange rate was TL2.31/Eu 1. - Eu .77/US$1 Short-term debt 14 153 553 453 Other short term liabilities 178 222 260 288 Total current liabilities 1,579 1,659 2,249 2,312 Long-term debt 2,574 2,233 1,690 1,490 Other liabilities 133 129 129 129 Total liabilities 4,285 4,021 4,069 3,931 Shareholders' equity 1,195 1,315 1,356 1,446 Minority interest 0.48 0.51 0.51 0.51 Total equity & liabilities 5,481 5,337 5,425 5,377 Net debt (TRY m) 1,576 1,527 1,410 1,266
EEMEA food retail universe 44 06 November 2012
Figure 56: Migros: 12m forward P/E premium to Turkish Figure 57: Migros - Store adds in Turkey equities average Net of closures on consensus forecasts 0% 15.0 180 -5% 14.0 160 -10% 140 13.0 -15% 120 -20% 12.0 100 -25% 11.0 80 -30% 60 10.0 -35% 40 -40% 9.0 20 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 0 MGROS: P/E premium to Turkish eq 2-yr avg Turkey avg P/E 3Q12A 9M12A Guidance annualised annualised
Source: Thomson Reuters, Credit Suisse research Source: Company data
3Q preview
■ Store additions slowed in August and September to 72 annualised on average, after a very high January-July run-rate of c200 annualised openings. The slowdown was partly due to overhang from pull-forward openings in July and also Ramadan capturing most of August. We forecast 160 net store additions in FY12E (plus 2 abroad).
■ We expect Migros to meet its FY12E target of “double-digit revenue growth” in 3Q12E as well. The launch of the successful “nostalgia” campaign last year sets a strong base for H212E.
■ Our 12% 3Q12E top-line growth estimate is driven by 11% space growth and 1% sales-density expansion.
■ Not only revenue growth but also the level of EBITDA margin was surprisingly resilient in 2Q12A against the cost of accelerating store adds. According to management, the following drivers helped maintain profitability: 1) the more efficient distribution network after the significant logistics investments in the past two years (enabling less inventory space per store/more fresh-category sales/less shrinkage ratio); 2) smaller stores are gaining share in the format mix and Migros is using less promotions in these smaller formats; and 3) the higher use of tailor-made promotions instead of across-the-board discounts.
■ We estimate 5.9% EBITDA margin for FY12E (1H12A: 6.0%). The guidance is 6.0- 6.5% but management’s EBITDA definition includes some additional items such as provisions for employee termination benefits (c0.5% of sales).
■ New regulations have restricted payable days of food retailers by 60+30 days effective July 2012. We think the regulatory curbing of payable days will move the intrinsic interest component embedded in CoGS from below-the-line interest income to lower CoGS (hence margin positive).
■ 3Q12E will likely see sizable reversals of non-cash FX gains generated in 1H12A given the company’s EUR880m net short position as of June 2012.
■ FX gains (losses) are not included in the corporate tax base, hence they yield higher effective tax rates when the TRYEUR depreciates.
■ We are broadly in-line with consensus on 3Q12E bottom-line.
EEMEA food retail universe 45 06 November 2012
Figure 58: Migros – 3Q12E preview in TRY millions, unless otherwise stated CS est CS est CS est Cons Cons 3Q11A 2Q12A 3Q12E yoy qoq 3Q12E yoy Revenues 1,613 1,552 1,805 12% 16% 1,833 14% Gross profit 406 414 471 16% 14% n/a n/a Gross margin 25.2% 26.7% 26.1% EBITDA 111 90 108 -3% 20% 115 4% EBITDA margin 6.9% 5.8% 6.0% 6.3% Reported net income 91 73 -1 n/m n/m -3 -103% CS-adj net income -21 15 11 n/m -25% n/a Source: Company data, Credit Suisse estimates, CNBCe survey
EEMEA food retail universe 46 06 November 2012 South Africa retail macro trends South Africa: Food retail sales remain robust, but generally priced in… Economic output continues to expand… Economic output in South African continues to expand, but at a weak pace, driven primarily by continued growth in household consumption expenditure (HCE). We believe that current macro trends are supportive for South African food retail companies. We stress, however, that from a valuation perspective, the market is already discounting strong results for all the companies except Pick n Pay which we believe is a turnaround stock. Real disposable income growth is currently growing at c3% yoy, which bodes well for both discretionary and non-discretionary sales. Food inflation has been low single digit, and given the current maize prices, we anticipate food inflation to hover at mid single digits for the remainder of 2012 and into early 2013. Food retail sales continue to be buoyant because of food inflation, a growing population, social grants and continued entry into the less penetrated rural areas. We believe the primary drivers of the re-rating of the South African food retail sector relative to its developed market peers have been the sustained increase in global food inflation witnessed since 2006 and the growth prospects which the continent (Africa) has to offer. Moreover, the South African food retail sector has high market concentration which allows it to take better advantage of higher global food inflation through improved topline growth while being able to maintain gross margins. The South African food retailers have enjoyed consistently higher CFROI® relative to a majority of their emerging market peers over the past five years; this return profile explains why South African food retailers have re-rated against the emerging market peer group as a whole, as well as the developed market sector. Across all the store formats, sales remain relatively strong, with the lower end continuing to perform well. On a relative basis, Hypers continue to struggle when compared with the lower-, middle- and upper-end food retail formats, all of which have a more convenient offering. In our view, Shoprite continues to gain market share at the lower end of the market, while Woolworths continues to do so at the upper end. Spar continues to hold its market share relatively stable, while Pick n Pay has been the net loser of market share over the past few years. We estimate that across the formal food retailing environment, market share can be divided as follows: Shoprite (~34%), Pick n Pay (~30-31%), Spar (28- 29%), Woolworths (8-9%) as of November 2012. Major trends in the mid and long term The major drivers for South African food retail sector are: (1) Continued underpenetration of the rural market which enables the major players to continue opening retail space. We estimate that the formal market controls c60% of the food retail market, with the remainder of the market being serviced by the traditional “cash and carry” type operators. Massmart claims to have market share of c10% across the entire food retail market (ie. 25% market share of the informal market). (2) Food inflation is here to stay in the short term, which allows for continued basket growth. Retailers continue to maintain gross margins, and higher prices are passed directly to consumers
EEMEA food retail universe 47 06 November 2012
(3) The scale of the four largest players has allowed them to continue putting pressure on the suppliers. (4) Growth into Africa remains an opportunity for some of the food retailers. Shoprite is currently the best positioned of the food retailers to expand into Africa (given its current presence, logistics and balance sheet). Shoprite generates c12% of its sales from Africa, while Pick n Pay is generating c6-7% of its till sales from outside South Africa. Massmart’s food growth strategy into Africa will be premised on the rollout of Foodco stores within Game stores. Woolworths will not be expanding its food offering into Africa, as it is too high end, and the logistics remain too problematic given their quality focus. In our view, the growth prospects for Spar are currently limited, given its business model of owning distribution centres and servicing independently owned stores. Growth in local market to be driven by inflation, store openings and Africa… We believe that companies are able to support low double-digit growth from their South African operations (on average) owing to store openings (space growth of 4-5%) and inflation (est low- to mid-single digit, 3-6%). The delta for top-line growth will be from growth into Africa; currently we believe that Shoprite (Underperform, TP R142) is the best positioned to continue expanding into Africa, but we stress that the share price is already pricing this in (refer to Shoprite section in this report). In the short term, inflation could surprise on the upside in 1H13 Similar to other markets, we believe that food inflation could surprise on the upside over the next few months, owing to poor global harvest, higher global maize prices and a weaker ZAR. Various companies are at different stages of their respective strategies… We note that Pick n Pay is the last of the major food retailers in South Africa to move towards a centralised distribution business model. Pick n Pay is currently focusing on improving its distribution, category buying, store replenishment systems and customer interaction (Smartshopper Loyalty programme), which should result in it reclaiming market share losses. Shoprite is currently focusing on its growth strategy in Africa, which is likely to result in a significant medium-term capex programme at both the store level and potential new distributions centres in Angola and Nigeria. Spar continues to focus on being a low-cost logistics and distributor of merchandise to its various franchisee stores, while Massmart is focusing on pushing into the retail food market, through both its stand-alone food retail stores (Cambridge) and its Foodco stores (via the Game footprint), and hybrid wholesale/retail stores through its cash and carry offering. Woolworths continue to focus on the upper end of the market (and aspirational), focusing on fresh and convenient while striving to remain innovative. Its loyalty programme continues to position it well, with customers receiving the benefit at the till point. Cost control The food retailers are all focusing aggressively on managing their internal costs, with particular focus on regional and national head offices, staffing costs (moving to flexible labour), and general operating costs which include energy, logistics and other related costs.
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South Africa Food Retail (Emerging EMEA (Africa))
Spar Group (SPPJ.J) Rating NEUTRAL* Price (01 Nov 12, R) 121.00 COMPANY UPDATE Target price (R) 126.00¹ 52-week price range 12,974.00 - 9,800.00 2H12 EPS to be strong Market cap. (R m) 20,857.70 Enterprise value (R m) 20,454.40 ■ Performance: Spar continues to perform well across its food, alcohol and DIY business units. We note that a number of ‘one-offs’ in 1H12 are not *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. expected to re-occur in 2H12: 1) R12m costs due to industrial action, 2) an STC tax charge of R40m being levied on last year’s dividends; and 3) Research Analysts reduced losses across the corporate-owned stores (1H12: -R10m, 2H12E: Dean Ginsberg -R8m). 27 011 012 80 64 [email protected] ■ Market share: We note that Spar continues to gain market share (we estimate 27-28%) within the South African food space, having increased turnover by +13.6% in 1H12, compared with Shoprite (1H12: +13.2% at interims, market share: 34%), Pick n Pay (FY12: +8.6% in 2H12, market share c30%) and Woolworths (1H12: +11.7%, market share 8-9%). ■ Tops and Build it: Tops continues to perform well; we forecast, turnover in FY12 to increase 19%, on the back of continued liquor inflation of c6.2%, organic growth and store openings (523 stores). Build it also continues to perform well, with turnover forecast to increase 18%, on the back of product inflation of c6% and additional store openings (269 stores). ■ Target price of R126: Our TP is based on a weighted blend of our DCF, multiples and DDM analysis,. Spar and Pick n Pay are our preferred entry points into the SA food sector. Spar is currently trading on a forward PE to September 2013E of c16.6x and on a forward FY13E dividend yield of c3.7%. We stress that South African food retailers continue to trade at lower multiples than those in Turkey, Russia and LatAm (although have higher dividend yields), but appear high compared with European and US food retail stocks based on Credit Suisse estimates. It remains evident that foreign investors continue to be driving SA retail valuations. Share price performance Financial and valuation metrics
Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c9800. Year 09/11A 09/12E 09/13E 09/14E 12662 EPS (CS adj.) (R) 5.23 6.06 7.29 8.32 Prev. EPS (R) — — — — 11662 P/E (x) 23.1 20.0 16.6 14.5 10662 P/E rel. (%) 151.8 146.9 144.4 140.6 9662 Revenue (R m) 38,458.7 43,621.5 48,939.7 54,537.7 Nov-11 Mar-12 Jul-12 EBITDA (R m) 1,526.9 1,732.6 1,975.3 2,209.3 Price Indexed Price Relative OCFPS (R) 4.04 4.36 5.46 6.25 On 11/01/12 the ALL SHARE closed at 37664.81 P/OCF (x) 23.8 27.7 22.1 19.4 EV/EBITDA (current) 13.7 12.0 10.6 9.4 Net debt (R m) 71 -403 -1,174 -2,218 ROIC (%) 37.20 48.48 67.66 98.99
Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 172.38 IC (current, R m) 2,560.50 2011A — — — — BV/share (Next Qtr., R) — EV/IC (x) — 2012E — — — — Net debt (Next Qtr., R m) — Dividend (Next Qtr., R) —
Net debt/tot cap (Next Qtr., %) — Dividend yield (%) — 2013E — — — — Source: Company data, Thomson Reuters, Credit Suisse estimates.
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Spar Group SPPJ.J Price (01 Nov 12): R121.00, Rating: NEUTRAL, Target Price: R126.00 Income statement (R m) 09/11A 09/12E 09/13E 09/14E Per share data 09/11A 09/12E 09/13E 09/14E Sales revenue 38,459 43,621 48,940 54,538 No. of shares (wtd avg) 183 185 185 185 EBITDA 1,527 1,733 1,975 2,209 CS adj. EPS (R) 5.23 6.06 7.29 8.32 Depr. & amort. (123) (131) (147) (164) Prev. EPS (R) — — — — EBIT (CS) 1,404 1,602 1,828 2,046 Dividend (R) 3.77 4.55 5.46 6.22 Net interest exp. (25) (11) (6) (5) Dividend payout ratio 72.11 75.03 74.87 74.77 Associates 7 — — — Free cash flow per share 3.19 3.37 4.35 5.21 Other adj, 18 17 50 96 (R) PBT (CS) 1,405 1,608 1,872 2,137 Key ratios and 09/11A 09/12E 09/13E 09/14E Income taxes (452) (490) (526) (600) valuation Profit after tax 953 1,118 1,346 1,537 Growth(%) Minorities — — — — Sales 10.4 13.4 12.2 11.4 Preferred dividends — — — — EBIT 7.8 14.1 14.2 11.9 Associates & other 3 — — — Net profit 4.3 17.1 20.3 14.2 Net profit (CS) 955 1,118 1,346 1,537 EPS 3.3 15.9 20.3 14.2 Other NPAT adjustments — — — — Margins (%) Reported net income 955 1,118 1,346 1,537 EBITDA margin 4.0 4.0 4.0 4.1 EBIT margin 3.7 3.7 3.7 3.8 Cash flow (R) 09/11A 09/12E 09/13E 09/14E Pretax margin 3.7 3.7 3.8 3.9 EBIT 1,404 1,602 1,828 2,046 Net margin 2.5 2.6 2.7 2.8 Net interest (8) 7 43 91 Valuation metrics (x) Cash taxes paid (411) (441) (474) (540) EV/sales 0.54 0.47 0.40 0.34 Change in working capital 204 (284) (108) (115) EV/EBITDA 13.7 12.0 10.6 9.4 Other cash & non-cash items (452) (78) (281) (329) EV/EBIT 14.9 12.8 10.8 9.1 Cash flow from operations 738 805 1,008 1,153 P/E 23.1 20.0 16.6 14.5 CAPEX (155) (183) (206) (191) P/B 8.9 8.3 7.2 6.0 Free cash flow to the firm 583 622 803 963 Asset turnover 4.6 4.5 4.3 4.1 Acquisitions (82) — — — ROE analysis (%) Divestments — 2 2 3 ROE stated-return on 40.8 43.1 46.3 45.1 Other investment/(outflows) (17) — — — equityROIC 37.2 48.5 67.7 99.0 Cash flow from investments (254) (181) (203) (188) Interest burden 1.0 1.0 1.0 1.0 Net share issue/(repurchase) (82) — — — Tax rate 32.2 30.5 28.1 28.1 Dividends paid (625) (386) (464) (529) Financial leverage 0.1 0.1 0.1 0.1 Issuance (retirement) of debt — — — — Credit ratios (%) Other 677 255 (166) (784) Net debt/equity 2.9 (14.9) (37.7) (59.9) Cash flow from financing (29) (131) (630) (1,313) Net debt/EBITDA 0.0 (0.2) (0.6) (1.0) activitiesEffect of exchange rates — — — — Interest coverage ratio 56.9 150.7 289.1 380.6 Changes in Net Cash/Debt 8 474 771 1,044 Net debt at start 79 71 (403) (1,174) Quarterly data 09/11A 09/12E 09/13E 09/14E Change in net debt (8) (474) (771) (1,044) EPS for Q1 — — — — Net debt at end 71 (403) (1,174) (2,218) EPS for Q2 — — — — EPS for Q3 — — — — Balance sheet (R m) 09/11A 09/12E 09/13E 09/14E EPS for Q4 — — — — Assets Cash and cash equivalents 96 595 1,392 2,467 Accounts receivable 4,905 5,534 6,204 6,910 Source: Company data, Thomson Reuters, Credit Inventory 1,135 1,253 1,406 1,566 Suisse estimates. Other current assets 42 42 42 42 Total current assets 6,178 7,425 9,044 10,985 Total fixed assets 1,550 1,601 1,657 1,681 Intangible assets and goodwill 382 382 382 382 Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c9800. Investment securities — — — — Other assets 192 190 188 187 12662 Total assets 8,302 9,597 11,271 13,235 11662 Liabilities Accounts payable 5,392 6,277 7,470 8,771 10662 Short-term debt — — — — Other short term liabilities 204 374 407 447 9662 Total current liabilities 5,596 6,651 7,877 9,218 Nov-11 Mar-12 Jul-12 Long-term debt — — — — Price Indexed Price Relative Other liabilities 217 246 277 312 Total liabilities 5,812 6,897 8,155 9,530 On 11/01/12 the ALL SHARE closed at 37664.81 Shareholders' equity 2,490 2,700 3,117 3,704 Minority interest — — — — Total equity & liabilities 8,302 9,597 11,271 13,235 Net debt (R m) 71 (403) (1,174) (2,218)
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Operational update At the interim stage, Spar was performing well, with turnover for 1H12 +13.6% at R21.7bn. We note that GP margins were slightly lower (1H12: 7.9%, 1H11: 8%) at the interim period on the back of volume rebates that were achieved by certain franchisees. We retain our Neutral rating and our target price of R126. Our forecasts include space growth of c3%, food inflation (currently 5.5-6%, and 5% for FY13), and continued strong performance across Tops and Build it. Despite current food inflation at the wholesale DC level averaging 7.2% (includes liquor related inflation of c6.2%), weighted food inflation for Spar is currently lower at c6% due to mix change. Sustained higher food inflation would likely increase our forecasts. We note that the following items occurred in 1H12 and will not be repeated in 2H12:
■ 1H12: STC tax was R40m, not to be repeated in 2H12. 1H12: R12m loss from the industrial action at Kwa-Zulu Natal DC will not be repeated in 2H12.
■ 1H12: The corporate-owned retail stores realised a loss of R10m; we anticipated the loss to reduce to cR8m in 2H12, with the group currently negotiating the sale of two stores, and the purchase of one store in Platterkloof in Cape Town, R5-6m turnover / month store. The retail stores generated R280m of wholesale turnover during 1H12, with an operating margin of around 4%, implying wholesale operating profits of cR11.2m (this implies that on net, combining the wholesale and retail contributions, the retail stores do not make a net loss).
■ The lower group gross profit margins (1H12: 7.9%, 1H11: 8%) can be explained by additional rebates being given to existing large Spar retail franchisees.
■ We note that inventory levels have risen since September FY11; this is attributable to a few factors including food inflation, as well as a result of the timing due to the Easter week-end being in April this year. The various divisions built up stock to service retail demands over this busy trading period. We also note that there was a holiday in the 3rd week of April last year, so the inventory build-up is not comparable to last year’s figures. In addition, stock levels have increased due to the imports warehouse for the Build it chain.
■ We forecast an improvement in 2H12 EPS growth driven by the various one-off costs not being repeated and due to the fact that STC taxes will not be incurred in 2H12. Current food inflation at the wholesale DC level is +7.2% (includes liquor-related sales where inflation is c6.2%, although it would appear that actual inflation (c6%) is lower due to mix changes). Outlook for Build it Build it increased 1H12 turnover at the wholesale level by +19.2% to R2.25bn during the period, which was driven by DIY related inflation of c6-6.5%. Despite the Build it stores not being owned, at the retail level, we stress that sales increased by c17% (14% organic), which implies that franchisees have been buying more merchandise from the broader wholesale division (increased loyalty). With a current base of c277 stores, space growth continues to increase by c4-5%. The group generated R69m through the new Build it import DC, which implies annualised revenues of R130-R140m. We stress that the DC experienced a significant increase in throughput (+72%), but was still loss making at 1H12. The group has experienced double-digit growth, and we expect this to continue during FY12. Management has indicated that the replacement cycle in terms of DIY and building has started but will slow from current levels (though remain double-digit).
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Management is of the view that Build it has market share of c15-16%, the number 2 player behind Builders Warehouse (owned by MassMart). Cashbuild (Not Rated) and the unlisted Essential Hardware buying group are likely the number 3 and 4 players in the market, based on their turnover and store bases. Build it franchisees typically acquire 80% of their merchandise from the broader Spar Group, with c25% of turnover being derived from cement sales. What does the Spar group currently look like? Below we highlight the current split in Spar’s wholesale turnover and breakdown of the current store portfolio. Tops currently contributes c7.2% of the group’s turnover, while Build it contributes c10.5%. We note that the Tops liquor stores are typically situated close to or alongside the Spar stores, with the Spar franchisee typically holding the Tops franchise agreement. There is currently a base of 859 Spar stores across Southern Africa (South Africa, Namibia, Botswana and Mozambique) where the group operates. As of March 2012, the group had a total store base across its businesses of 1,648 stores (867 total Spars, 523 Tops, 269 Tops, and other store formats).
Figure 59: 1H12 divisional turnover splits (Rm) Figure 60: Store portfolio (as of 1H12)
Savemore Pharmacy 16 stores 13 stores SuperSpar Buildit 277 stores Tops 269 stores R1,568 7%
Spar R17,878 Build it Spar 83% R2,270 450 stores 10% Tops 523 stores
Kwik Spar Total of 867 Spar 140stores stores
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Over the course of FY12, the group is looking to add 25 new Spar Stores, 32 additional TOPS stores, c21 Build it stores, 12 Savemor stores and 10 Pharmacy stores to its base. What’s happening with costs and will food inflation drop? Internally the group continues to keep costs well under control, with costs increasing at c6- 6.5%. One big unknown for FY12 is the fuel price impact (c10% of total costs), which has been trending upwards. Another key factor is food inflation, given the recent rally in maize, wheat and soybeans on the back of the lack of rain in the US. We currently expect food inflation in South Africa to remain at the 5-6% level for the duration of CY12. What’s happening with Spar’s Corporate stores? Spar currently owns 10 stores. The stores lost a total of R10m in 1H12 (FY11: loss of R29.9m, although real effective loss of R23m, after adjusting for lease smoothing, stock consolidation issues and working capital interest). With Spar’s business model being one of a franchisor, it continues to seek buyers for these stores. Currently four of the stores are profitable, while six are loss making. At this point, we continue to forecast losses (est: R18m) from these stores in FY12. Stores across the broader Spar franchise typically make GP margins of 13-23%, depending on their product mix and customer demographics, Spar is targeting its corporate stores to make GP margins of 16-18% (currently c15-16%).
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What’s happening to market shares according to Spar? Spar believes its retail market share is c27-28%, 2% below Pick n Pay (30%), versus Shoprite’s 34% and Woolworths at 8-9%. We forecast the core Spar Group to increase turnover by c10-11% over the course of FY12, with the growth being derived from space (3%), inflation (6%) and volume/mix increases (2-3%). What’s happening at Tops? The group’s liquor division continues to perform well, experiencing turnover growth of c19- 20%. With a base of 523 Top stores, and with 1H12 turnover of R1.6bn, the group continues to add additional stores to the base. Growth is being driven primarily by organic volume growth, combined with liquor inflation (c6.2%). Management has stated that it is struggling to secure additional liquor licences in the South Rand region. What was capex during 1H12 and what are the capex plans? Capex year to date is at R70m, versus the full year budget of R180m (tracking below budget, but we expect IT related capex at the back end of 2H12). The group has completed the major capex upgrades across its six distribution centres. The group continues to increase the capacity of the Eastern Cape (est. R40m), Kwa-Zulu Natal (dry goods) and North Rand distribution centres. The group is currently focusing on assisting its smaller format stores to upgrade. The group plans to spend R180-200m/per year over the next three years, with around R180m earmarked for FY12. It continues to look for land on the West Rand, with a view to rolling out a new DC in 2014/15. What is Spar doing to its supply chain? The group remains committed to improving the supply chain while improving price points and sourcing. In light of this, it is focusing on optimising procurement through centralised buying opportunities, especially around promotional activities. Is Spar investing in Africa? Spar currently operates 58 stores across Namibia, Botswana and Mozambique. The Spar Group owns 35% of Spar Zimbabwe, while Zimbabwean-listed Innscore (Not Rated) owns the other 65%. We believe Spar Zimbabwe needs to embark on a capex programme to improve its service delivery to the 65 Zimbabwean based Spar stores. With new Spar stores opening in Zambia, Spar is currently supplying limited merchandise into the Zambian economy. In addition, Spar is exporting Spar-branded merchandise into Malawi. Spar management is still considering whether independent retailers in Africa are “looking for a DC” or whether its strategy should be for a DC to be looking for independent retailers; as such, its growth strategy into Africa remains cautious, given the risks. Spar has also stated that it is taking into account the cultural resistance of much of the population to shopping in markets and as such is considering supplying hawkers with non-perishable type products. Does Spar offer house brands? Currently cR5bn of Spar’s turnover (15% of the Spar stores) is derived from house brands.
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And what about the lower end of the market? The group intends to offer the “Savemor” concept to lower end informal retailers, who are looking to improve their offering and secure preferred suppliers and improve logistics. Currently the group has c11 of these stores. It costs the average shop owner between R100k and R200k to convert an informal store to a “Savemor” store. Valuation? We maintain our Neutral rating and R126 target price, as highlighted below. In our view, Spar and Shoprite look fully priced at current levels (refer to comp tables). That said, we note that they look less expensive (on a forward PE and dividend yield basis) than their equivalent peers across Russia, Turkey and LatAm markets, based on Credit Suisse forecasts; however, the scope for growth within those markets currently appears better on the back of consolidation opportunities within those emerging markets.
Figure 61: Valuation table (in ZAR) Valuation Summary TVM Adjusted Valuation Weighting Discounted cash flow 128.57 60% PE Valuation 124.90 30% Dividend discount model (DDM) 114.02 10% Weighted Average Target Price 126.00 100% Note: Our DCF utilises a discount rate of 11.4% and a growth rate into perpetuity of 3% Source: Credit Suisse estimates On a relative basis, the food-related retailers across Europe and the US appear to offer better value on a forward PE and EBITDA basis. We remain of the view that the South African food retailers require food inflation in order to cover fixed cost overhead growth (internal cost inflation), with little growth achieved organically. As such, we think it is evident that the SA food retailers need to expand within Africa to create sustained long-term organic growth.
EEMEA food retail universe 54 06 November 2012
South Africa Food Retail (Emerging EMEA (Africa))
Shoprite Holdings Limited (SHPJ.J) Rating UNDERPERFORM* Price (01 Nov 12, R) 174.17 COMPANY UPDATE Target price (R) 142.00¹ 52-week price range 18,263.00 - 11,881.00 1Q13 trading update: paying up for Africa …. Market cap. (R m) 99,377.82 Enterprise value (R m) 93,805.74 ■ Shoprite reported in line 1Q2013 results: Sales increased 15.6% for the 1Q13, versus our full year revised estimates of +15.2% (previously 14.8%). *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. We maintain our target price of R142 and Underperform rating.
Research Analysts ■ South African supermarkets: South African supermarket operations (~76% Dean Ginsberg of turnover) increased turnover by 12.2% on the back of inflation of +3.6% 27 011 012 80 64 and real like-for-like sales growth of 8.6%. (CS: FY12E: +12.2%). [email protected]
■ African operations: Turnover increased 26.4% in constant currencies (+34.3% incl forex movements) on the back of 20 new (year-on-year) store openings. We forecast full year African growth of 30% on the back of the weaker ZAR. For FY13E, we forecast the African operations contribute ~12.6% towards turnover and ~12.3% towards EBIT. (Africa to contribute 15% in 2015F). ■ Furniture and other divisions: Furniture sales (4% of group sales) remained robust at +11.9% (versus CS FY12E +11%), while revenues from other divisions (7% of group sales) increased by a greater than expected +29%. We forecast other divisions to grow by 21%. ■ Investment Case: In our view, investors continue to over-pay for Shoprite’s growth prospects although we acknowledge strong growth potential from Africa. Assuming a forward FY13E PE of 18.2x on the SA operations, this implies a forward FY13E PE of 61.5x for the African operations based on our estimates (FY14E PE of 45.9x, FY15E PE of 34.5x). ■ Retain Underperform: We believe Shoprite’s valuation (30x historic, 24x FY13 fwdP/E) is high relative to the group’s current growth prospects and we retain our Underperform rating. We suggest that food retailer, Pick n Pay (Outperform, TP R49), offers better value as a turnaround opportunity.
Share price performance Financial and valuation metrics
Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c12215. Year 06/12A 06/13E 06/14E 06/15E 17881 EPS (CS adj.) (R) 5.90 7.40 8.59 9.90 15881 Prev. EPS (R) — — — — P/E (x) 29.5 23.5 20.3 17.6 13881 P/E rel. (%) 193.7 173.1 176.5 170.2 11881 Revenue (R m) 82,730.6 94,936.4 106,708.3 119,723.8 Nov-11 Mar-12 Jul-12 EBITDA (R m) 5,653.4 6,626.3 7,546.0 8,608.8 Price Indexed Price Relative OCFPS (R) 6.50 7.89 7.74 8.56 On 11/01/12 the ALL SHARE closed at 37664.81 P/OCF (x) 23.2 22.1 22.5 20.3 EV/EBITDA (current) 17.6 15.0 13.2 11.5 Net debt (R m) -3,881 -5,572 -6,976 -8,848 ROIC (%) 34.71 40.73 42.49 45.02
Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 570.58 IC (current, R m) 8,926.69 2012A — — — — BV/share (Next Qtr., R) — EV/IC (x) — 2013E — — — — Net debt (Next Qtr., R m) — Dividend (Next Qtr., R) — Net debt/tot cap (Next Qtr., %) — Dividend yield (%) — 2014E — — — —
Source: Company data, Thomson Reuters, Credit Suisse estimates.
EEMEA food retail universe 55 06 November 2012
Shoprite Holdings Limited SHPJ.J Price (01 Nov 12): R174.17, Rating: UNDERPERFORM, Target Price: R142.00 Income statement (R m) 06/12A 06/13E 06/14E 06/15E Per share data 06/12A 06/13E 06/14E 06/15E Sales revenue 82,731 94,936 106,708 119,724 No. of shares (wtd avg) 513 533 533 533 EBITDA 5,653 6,626 7,546 8,609 CS adj. EPS (R) 5.90 7.40 8.59 9.90 Depr. & amort. (1,090) (1,187) (1,334) (1,497) Prev. EPS (R) — — — — EBIT (CS) 4,563 5,440 6,212 7,112 Dividend (R) 3.19 3.86 4.49 5.18 Net interest exp. (224) (263) (263) (263) Dividend payout ratio 54.16 52.15 52.23 52.30 Associates — — — — Free cash flow per share 0.42 2.73 2.13 2.95 Other adj, 142 527 619 717 (R) PBT (CS) 4,482 5,703 6,568 7,567 Key ratios and 06/12A 06/13E 06/14E 06/15E Income taxes (1,439) (1,739) (1,971) (2,270) valuation Profit after tax 3,043 3,964 4,598 5,297 Growth(%) Minorities (16) (17) (18) (19) Sales 14.4 14.8 12.4 12.2 Preferred dividends — — — — EBIT 16.8 19.2 14.2 14.5 Associates & other — — — — Net profit 20.6 30.4 16.1 15.2 Net profit (CS) 3,027 3,947 4,580 5,278 EPS 19.0 25.5 16.1 15.2 Other NPAT adjustments — — — — Margins (%) Reported net income 3,027 3,947 4,580 5,278 EBITDA margin 6.8 7.0 7.1 7.2 EBIT margin 5.5 5.7 5.8 5.9 Cash flow (R) 06/12A 06/13E 06/14E 06/15E Pretax margin 5.4 6.0 6.2 6.3 EBIT 4,563 5,440 6,212 7,112 Net margin 3.7 4.2 4.3 4.4 Net interest 33 263 356 455 Valuation metrics (x) Cash taxes paid (1,885) (1,461) (1,655) (1,907) EV/sales 1.2 1.0 0.9 0.8 Change in working capital 649 607 58 (51) EV/EBITDA 17.6 15.0 13.2 11.5 Other cash & non-cash items (25) (642) (846) (1,043) EV/EBIT 20.9 17.2 14.9 12.7 Cash flow from operations 3,335 4,207 4,125 4,565 P/E 29.5 23.5 20.3 17.6 CAPEX (3,118) (2,753) (2,988) (2,993) P/B 6.8 6.2 5.3 4.6 Free cash flow to the firm 976 2,280 2,034 2,470 Asset turnover 2.7 2.7 2.8 2.8 Acquisitions — — — — ROE analysis (%) Divestments 149 237 267 299 ROE stated-return on 29.5 28.0 28.2 28.1 Other investment/(outflows) (142) — — — equityROIC 34.7 40.7 42.5 45.0 Cash flow from investments (3,111) (2,516) (2,721) (2,694) Interest burden 1.0 1.0 1.1 1.1 Net share issue/(repurchase) 3,410 — — — Tax rate 32.1 30.5 30.0 30.0 Dividends paid — — — — Financial leverage 0.31 0.27 0.23 0.20 Issuance (retirement) of debt 4,358 (5) (5) — Credit ratios (%) Other (3,980) 5 5 4 Net debt/equity (30.3) (37.5) (40.5) (44.4) Cash flow from financing 3,787 — — — Net debt/EBITDA (0.7) (0.8) (0.9) (1.0) activitiesEffect of exchange rates — — — — Interest coverage ratio 20.4 20.6 23.6 27.1 Changes in Net Cash/Debt 4,011 1,691 1,404 1,871 Net debt at start 130 (3,881) (5,572) (6,976) Quarterly data 06/12A 06/13E 06/14E 06/15E Change in net debt (4,011) (1,691) (1,404) (1,871) EPS for Q1 — — — — Net debt at end (3,881) (5,572) (6,976) (8,848) EPS for Q2 — — — — EPS for Q3 — — — — Balance sheet (R m) 06/12A 06/13E 06/14E 06/15E EPS for Q4 — — — — Assets Cash and cash equivalents 7,939 9,625 11,025 12,892 Accounts receivable 921 1,213 1,361 1,525 Source: Company data, Thomson Reuters, Credit Suisse estimates. Inventory 8,680 9,093 10,221 11,453 Other current assets 2,270 2,270 2,270 2,270 Total current assets 19,811 22,201 24,877 28,140 Total fixed assets 9,669 10,998 12,385 13,582 Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c12215. Intangible assets and goodwill 894 858 823 791 Investment securities — — — — 17881 Other assets 532 532 532 532 15881 Total assets 30,906 34,589 38,617 43,045 Liabilities 13881 Accounts payable 12,717 14,030 15,367 16,715 Short-term debt 52 46 42 38 11881 Other short term liabilities 290 480 661 869 Nov-11 Mar-12 Jul-12 Total current liabilities 13,058 14,557 16,070 17,621 Price Indexed Price Relative Long-term debt 4,007 4,007 4,007 4,007 Other liabilities 1,033 1,172 1,330 1,511 On 11/01/12 the ALL SHARE closed at 37664.81 Total liabilities 18,098 19,736 21,406 23,139 Shareholders' equity 12,745 14,773 17,113 19,789 Minority interest 63 80 98 116 Total equity & liabilities 30,906 34,589 38,617 43,045 Net debt (R m) (3,881) (5,572) (6,976) (8,848)
EEMEA food retail universe 56 06 November 2012 Focus Charts
Figure 62: Group turnover and margins (Rm) Figure 63: Group ROE (%) 140 000 7.00% 45 120 000 6.00% 40 100 000 5.00% 35 80 000 4.00% 30 25 60 000 3.00% 20 40 000 2.00% 15 20 000 1.00% 10 - 0.00%
5
FY06 FY07 FY08 FY09 FY10 FY11 FY12
FY05 0
FY13E FY14E FY15E
FY06 FY07 FY08 FY09 FY10 FY11 FY12
Turnover EBIT Margins FY05
FY13E FY15E FY14E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 64: Divisional contributions (FY13E) Figure 65: Contributions from African operations (%) Other 17.0% divisions Furniture 7% 15.0% 4% Super- markets 13.0% non RSA 12.6% 11.0%
9.0%
Super- 7.0% markets RSA 5.0%
76%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
FY14E FY15E FY13E Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 66: Number of corporate stores Figure 67: Headline EPS (lhs) vs. NAV/per share (rhs)(cents) 1600 1 200 4 000 Headline EPS 1400 3 500 1 000 1200 NAV 3 000 800 1000 2 500
800 600 2 000
600 1 500 400 400 1 000 200 200 500 0
- -
FY03 FY11 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY12
FY13E
FY06 FY07 FY08 FY09 FY10 FY11 FY12
FY14E FY15E FY13E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
EEMEA food retail universe 57 06 November 2012
What Shoprite share price is implying? Based on our forecasts for the core South African operations, we have attempted to calculate the implied multiple investors are paying for the African operations, after adjusting for the cash on the balance sheet. Based on an assumed forward FY13 forecast of 18.2x PE on the South African core operations(1.5x the ALSI PE rating), a forward FY13 PE of 7.8x on the furniture operations and a 11.7x forward multiple on the “other operations”, we derive an implied forward FY13 PE of 61.5x on Shoprite’s Africa retail operations. Similarly, the implied FY14 forward PE equates to a 45.9x multiple on the African operations.
Figure 68: Implied valuation: African operations (Rm) Operating profits Operating Multiple Implied PE Implied % of FY13E FY14E FY13E FY14E FY13E FY14E Valuation Valuation Shoprite South Africa 4,384 4,866 14.0x 12.6x 18.2x 16.4x 61,377 60.6% Furniture operations 204 249 6.0x 4.9x 7.8x 6.4x 1,2239 1.5% Other operations 184 202 9.0x 8.2x 11.7x 10.6x 1,655 2.2% Implied value of African operations 668 894 47.3x 35.3x 61.5x 45.9x 31,593 28.8% Implied value of group 5440 6212 17.3x 15.2x 22.5x 19.7x 95 847 93.1% Add cash 7 000 6.9% Market Cap 102 847 Source: Credit Suisse estimates We believe that these forward multiples are too high, as such, we refer investors to our forecasts and calculations for the African operations below. We note that a DCF on the African operations generates a far higher implied valuation versus a PE multiple approach, due to the magnitude of forecast growth for the African division. We note however, that while the growth prospects are high, there is significant forecast risk, combined with political/macro uncertainty across the countries where Shoprite is expanding. We stress that we are forecasting top line growth above 20% pa for the next five years, and we forecast EBIT margins to reach 7%. Based on these forecasts, the contributions from the African operations to turnover and profitability in FY18, will be 19.4% and 22.2% respectively.
Figure 69: Free Cash Flow: African operations (Rm) FY13E FY14E FY15E FY16E FY17E FY18E Sales (Rm) 11,926 14,908 18,188 22,189 27,071 33,026 Growth in sales (%) 30% 25% 22% 22% 22% 22% EBIT (Rm) 668 894 1191 1509 1895 2312 EBIT Margins 5.6% 6.0% 6.6% 6.8% 7.0% 7.0% + Non-cash charges 191 239 291 355 433 528 Implied EBITDA 859 1133 1482 1864 2328 2840 Growth in EBITDA (%) 32% 31% 26% 25% 22% Less tax -200 -268 -357 -453 -568 -694 Less Africa Capex -298 -373 -455 -499 -677 -826 FCF 241 343 488 690 812 991 Growth in FCF (%) 42% 42% 41% 18% 22% Source: Credit Suisse estimates Figure 70 highlights the sensitivity of the African operations to varying terminal growth rates and discount rates. We stress that, in order to achieve a valuation of ~R29bn for the African operations, implied growth into perpetuity (beyond our five-year forecasts), would have to be above 8.5%, while still assuming a discount rate below 13.5% . A valuation of ~R29bn, would imply that Shoprite Africa is worth ~29% of Shoprite’s group valuation, a far cry from our forecast of a 12.6% contribution to top line.
EEMEA food retail universe 58 06 November 2012
Figure 70: Sensitivity Analysis (Discount rates vs. Terminal growth rate : Discount Rate 10.5% 11.5% 12.5% 13.5% 14.5% 7.0% 20,747 15,948 12,895 10,782 9,234 7.5% 23,911 17,728 14,019 11,547 9,783 8.0% 28,342 20,018 15,394 12,452 10,416 Terminal growth rate 8.5% 34,987 23,070 17,112 13,537 11,155 9.5% 68,215 33,754 22,267 16,523 13,077 10.5% 65,806 32,576 21,498 15,959 11.5% 63,503 31,448 20,762 12.0% 125,357 41,399 24,605
Source:, Credit Suisse estimates Below we highlight the growth from the African operations, and the forecast contribution to turnover.
Figure 71: Shoprite’s Africa operations: forecast turnover and contributions to group turnover (Rm)
35 000 21.0% 30 000 19.0%
25 000 17.0%
20 000 15.0% 13.0% 15 000 11.0% 10 000 9.0%
5 000 7.0%
- 5.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F
Contributions from Africa (ZAR) % of turnover (%)
Source: Company data, Credit Suisse estimates Valuation: We derive a target price of R142 for the Shoprite group, using a weighted combination of a DCF, Sum-of-the-Parts, PE relative and dividend discount model (DDM).
Figure 72: Valuation summary (Rand) Valuation Weighting Discounted cash flow 142.05 55% Sum of the Parts (SoTP) 151.08 15% PE Valuation 141.76 25% Dividend discount model (DDM) 115.61 5% Weighted Average Target Price 142.00 100% Source: Company data, Credit Suisse estimates With a foreign shareholding of c48%, and with management having a stake of c16-17%, and the Government Pension Fund c13.5%, the implied shareholding held by the remaining South African investors is c22%, leaving many investors with an underweight position. We remain of the view that foreign investors are paying a premium for the “Africa” growth potential, as such we retain our Underperform rating and our target price of R142 .
EEMEA food retail universe 59 06 November 2012
We believe Pick n Pay(Outperform, TP R49) offers better value into the South African food sector.
Figure 73: Valuation table (Calendarised multiples) MARKET CAP P/E EV/EBITDA Div Yield VALUATION CLOSE 12M TP UPSIDE RATING ZAR 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E
JD Group Ltd 10 624 47,07 54,00 14,7% OUTPERFORM 11,0x 9,4x 8,2x 8,2x 6,2x 5,5x 4,4% 5,2% 6,1% Lewis Group 6 766 68,75 90,00 30,9% OUTPERFORM 8,1x 7,2x 6,6x 6,7x 6,2x 5,7x 6,1% 7,0% 7,7% Mr. Price 34 152 135,17 116,00 -14,2% NEUTRAL 30,3x 24,8x 20,8x 17,6x 14,9x 12,9x 2,2% 2,7% 3,1% MassMart Holding 38 607 177,50 175,00 -1,4% NEUTRAL 43,2x 30,6x 25,1x 15,2x 13,4x 11,4x 2,2% 2,3% 2,6% Pick n Pay 20 042 42,74 49,00 14,6% OUTPERFORM 29,1x 29,7x 17,9x 9,7x 10,4x 7,7x 3,1% 2,6% 4,1% Steinhoff International Holdings 53 498 29,60 37,00 25,0% OUTPERFORM 10,9x 8,7x 7,7x 9,7x 7,2x 6,0x 2,6% 3,3% 3,6% Shoprite Holdings Limited 100 422 174,17 142,00 -18,5% UNDERPERFORM 32,1x 26,2x 21,8x 18,4x 15,7x 13,6x 1,6% 2,0% 2,4% Spar Group 21 461 121,00 126,00 4,1% NEUTRAL 22,3x 19,0x 16,0x 13,6x 12,0x 10,6x 3,3% 3,9% 4,7% The Foschini Group 29 641 124,50 154,00 23,7% OUTPERFORM 17,3x 13,8x 11,7x 10,3x 8,6x 7,3x 3,3% 4,1% 4,9% Truworths International Limited 43 410 94,00 102,00 8,5% NEUTRAL 19,2x 16,4x 14,4x 16,6x 14,6x 13,1x 3,1% 3,6% 4,1% Woolworths Holdings Limited 56 440 66,60 67,00 0,6% OUTPERFORM 27,9x 22,1x 18,5x 18,4x 14,7x 12,5x 2,6% 3,4% 4,1% Source: Company data, Credit Suisse estimate, price as of 01.11.2012, Shoprite data and Pick n Pay data 2012A
EEMEA food retail universe 60 06 November 2012
South Africa General Merchandise Stores (Emerging EMEA (Africa))
MassMart Holding (MSMJ.J) Rating NEUTRAL* Price (01 Nov 12, R) 177.50 COMPANY UPDATE Target price (R) 175.00¹ 52-week price range 18,550.00 - 15,300.00 Updating forecast for change in year end Market cap. (R m) 38,498.62 Enterprise value (R m) 39,305.13 ■ We retain our Neutral rating and our target price of R175. We note that FY12 results will be reported for a 26-week “financial year”. *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. ■ Trading outlook: The October trading update indicated +16.6% increase in
Research Analysts sales (comparable sales +7.8%) for the 14 weeks ending 30 September Dean Ginsberg 2012. This compares with our annualised forecast sales growth to December 27 011 012 80 64 2012 of +16.4% which is premised on the back of new store openings, food [email protected] inflation and acquisitions. We expect sales growth in FY13 to be driven by space growth (+7.9%), although we continue to forecast little margin improvement at the operating line. FY14 will benefit from operational leverage and net margin improvements. ■ Capex cycle: The group is nearing the end of its investment cycle, which has resulted in a higher cost base (40 new stores, New DCs, New IT systems). ■ Contributions: Across the group, food and liquor sales contribute ~54.5% towards turnover, while General Merchandise contributes ~32.1%. the remainder of sales are contributed by Home Improvement ~13.4%. Inflation remains ~6-7% across the food categories, with lower inflation forecast across General Merchandise (benign) and Home Improvement (low single digit). Contributions from Africa are currently ~7.8% of turnover. ■ Valuation: We maintain our Neutral rating, and target price of R175. We expect margin uplift and the benefits from Wal-Mart to now only be achieved in FY14. Our preferred entry points into the South African retail market are Steinhoff, The Foschini Group and Pick n Pay (all rated Outperform).
Share price performance Financial and valuation metrics
Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c16000. Year 12/11A 12/12E 12/13E 12/14E 18527 EPS (CS adj.) (R) 4.11 5.79 7.07 10.69 17527 Prev. EPS (R) — — — — 16527 P/E (x) 43.2 30.6 25.1 16.6 15527 P/E rel. (%) 283.4 225.5 218.5 160.7 14527 Revenue (R m) 52,950.1 66,380.5 74,081.0 82,704.5 Nov-11 Mar-12 Jul-12 EBITDA (R m) 2,535.0 2,869.6 3,360.4 4,621.6 Price Indexed Price Relative OCFPS (R) 6.12 6.37 6.65 8.31 On 11/01/12 the ALL SHARE closed at 37664.81 P/OCF (x) 27.6 27.9 26.7 21.4 EV/EBITDA (current) 15.2 13.4 11.5 8.3 Net debt (R m) -188 807 732 41 ROIC (%) 31.49 27.63 30.29 42.59
Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 216.89 IC (current, R m) 3,993.60 2011A — — — — BV/share (Next Qtr., R) — EV/IC (x) — 2012E — — — — Net debt (Next Qtr., R m) — Dividend (Next Qtr., R) —
Net debt/tot cap (Next Qtr., %) — Dividend yield (%) — 2013E — — — — Source: Company data, Thomson Reuters, Credit Suisse estimates.
EEMEA food retail universe 61 06 November 2012
MassMart Holding MSMJ.J Price (01 Nov 12): R177.50, Rating: NEUTRAL, Target Price: R175.00 Income statement (R m) 12/11A 12/12E 12/13E 12/14E Per share data 12/11A 12/12E 12/13E 12/14E Sales revenue 52,950 66,381 74,081 82,704 No. of shares (wtd avg) 216 221 221 222 EBITDA 2,535 2,870 3,360 4,622 CS adj. EPS (R) 4.11 5.79 7.07 10.69 Depr. & amort. (476) (697) (741) (811) Prev. EPS (R) — — — — EBIT (CS) 2,059 2,173 2,620 3,811 Dividend (R) 3.86 4.00 4.66 7.05 Net interest exp. (140) (224) (246) (271) Dividend payout ratio 93.96 69.07 65.94 65.94 Associates — — — — Free cash flow per share 6.30 6.40 6.68 8.34 Other adj, (414) 45 41 61 (R) PBT (CS) 1,504 1,993 2,414 3,601 Key ratios and 12/11A 12/12E 12/13E 12/14E Income taxes (585) (638) (773) (1,152) valuation Profit after tax 919 1,356 1,642 2,449 Growth(%) Minorities (42) (44) (44) (44) Sales 11.6 25.4 11.6 11.6 Preferred dividends (38) (6) (7) (7) EBIT 10.3 5.5 20.6 45.5 Associates & other (34) (39) (40) (40) Net profit (22.5) 45.0 22.4 51.6 Net profit (CS) 882 1,279 1,565 2,372 EPS (24.3) 41.0 22.1 51.2 Other NPAT adjustments — — — — Margins (%) Reported net income 882 1,279 1,565 2,372 EBITDA margin 4.8 4.3 4.5 5.6 EBIT margin 3.9 3.3 3.5 4.6 Cash flow (R) 12/11A 12/12E 12/13E 12/14E Pretax margin 2.8 3.0 3.3 4.4 EBIT 2,059 2,173 2,620 3,811 Net margin 1.7 1.9 2.1 2.9 Net interest (107) (179) (205) (210) Valuation metrics (x) Cash taxes paid (645) (639) (774) (1,153) EV/sales 0.72 0.59 0.53 0.47 Change in working capital (625) (245) (127) (142) EV/EBITDA 15.2 13.4 11.5 8.3 Other cash & non-cash items 683 303 (34) (455) EV/EBIT 18.6 18.1 15.0 10.1 Cash flow from operations 1,364 1,413 1,480 1,851 P/E 43.2 30.6 25.1 16.6 CAPEX — — — — P/B 9.7 9.1 8.1 6.9 Free cash flow to the firm 1,364 1,413 1,480 1,851 Asset turnover 3.1 3.4 3.4 3.3 Acquisitions (171) (18) (20) (22) ROE analysis (%) Divestments — — — — ROE stated-return on 23.7 31.0 34.2 44.9 Other investment/(outflows) (1,127) (1,333) (1,491) (1,255) equityROIC 31.5 27.6 30.3 42.6 Cash flow from investments (1,298) (1,351) (1,511) (1,276) Interest burden 0.73 0.92 0.92 0.94 Net share issue/(repurchase) — (6) (7) (7) Tax rate 38.9 32.0 32.0 32.0 Dividends paid — — — — Financial leverage 0.34 0.40 0.38 0.34 Issuance (retirement) of debt 615 200 220 — Credit ratios (%) Other (975) (1,251) (107) (118) Net debt/equity (4.5) 17.8 14.2 0.7 Cash flow from financing (360) (1,057) 106 117 Net debt/EBITDA (0.07) 0.28 0.22 0.01 activitiesEffect of exchange rates (20) — — — Interest coverage ratio 14.7 9.7 10.6 14.1 Changes in Net Cash/Debt (314) (995) 75 691 Net debt at start (502) (188) 807 732 Quarterly data 12/11A 12/12E 12/13E 12/14E Change in net debt 314 995 (75) (691) EPS for Q1 — — — — Net debt at end (188) 807 732 41 EPS for Q2 — — — — EPS for Q3 — — — — Balance sheet (R m) 12/11A 12/12E 12/13E 12/14E EPS for Q4 — — — — Assets Cash and cash equivalents 1,549 929 1,112 1,920 Accounts receivable 2,585 3,114 3,474 3,876 Source: Company data, Thomson Reuters, Credit Suisse estimates. Inventory 6,200 7,820 8,727 9,743 Other current assets 1,094 103 103 103 Total current assets 11,428 11,966 13,416 15,643 Total fixed assets 2,718 4,169 4,930 5,385 Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c16000. Intangible assets and goodwill 2,358 2,853 2,838 2,825 18527 Investment securities 320 290 305 320 Other assets 451 528 548 570 17527 Total assets 17,274 19,807 22,037 24,742 16527 Liabilities 15527 Accounts payable 9,391 12,003 13,395 14,955 Short-term debt 250 273 287 301 14527 Other short term liabilities 2,247 1,413 1,531 1,659 Nov-11 Mar-12 Jul-12 Total current liabilities 11,887 13,690 15,213 16,915 Price Indexed Price Relative Long-term debt 1,111 1,463 1,557 1,660 Other liabilities 94 114 118 123 On 11/01/12 the ALL SHARE closed at 37664.81 Total liabilities 13,093 15,266 16,888 18,698 Shareholders' equity 3,966 4,289 4,854 5,705 Minority interest 216 252 295 339 Total equity & liabilities 17,274 19,807 22,037 24,742 Net debt (R m) (188) 807 732 41
EEMEA food retail universe 62 06 November 2012
Figure 74: Turnover: Divisional contributions (June 2012) Figure 75: Trading profit contributions (June 2012)
Masscash 13% Mass- Mass- Masscash discounters discounters 38% 24% 33% Massbuild 17%
Mass- Massbuild warehouse 13% 25% Mass- warehouse 37% Source: Company data Source: Company data
Figure 76: Contribution by category: June 2012 Figure 77: Contribution by Geography: June 2012 Non SA Sales, 7.8%
General Merchan- dise, 32.10% Food and Liquor, 54.50%
Home Improve- South ment, Africa, 13.40% 92.2%
Source: Company data Source: Company data
Figure 78: Capex breakdown (Rm) Figure 79: Profitability ratios 1 800 3.0% 80.0% 1 600 2.5% 70.0% 1 400 1 200 2.0% 60.0% 1 000 1.5% 50.0% 800 40.0% 600 1.0% 400 30.0% 0.5% 200 20.0% 0 0.0% ROE before transaction costs (%) 10.0% ROCE (%) 0.0% Capex Expansionary Maintenance Capex as % of Sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
EEMEA food retail universe 63 06 November 2012
Outlook for FY12 Massmart has adjusted its year end to coincide with parent shareholder Wal-Mart. Management has guided to another 12 months of high costs, resulting in limited margin expansion. The group is nearing the end of its investment cycle, which is resulting in higher depreciation costs also being incurred. With Massmart having changed its year end to December (from June), the published FY12 results will only be for a 26-week financial year. We stress that our forecasts are for a full 12-month period, however in the table below, we have adjusted our forecasts to show the implied 26-week trading period as well. With Massmart having released a trading update for the first 14 weeks ending 30 September 2012 indicating sales growth of +16.6% (and comparable store sales +7.8%), we believe the group should achieve our full year sales growth forecasts of +16.4%.
Figure 80: Massmart: Implied proforma numbers FY11 52 Weeks Chg (%) *Implied FY11 *Implied FY12 Chg (%) 26 weeks **26 weeks Chg (%) Reported ended 24 (Dec Yr end (Dec Yr end FY11 FY12F June 2012 CS adjusted) CS adjusted) (implied) Revenue 53 090 61 363 15.6% 57 178 66 539 16.4% 31 547 36 723 16.4% Sales 52 950 61 209 15.6% 57 067 66 381 16.4% 31 492 36 664 16.4% Massdiscounters 13 333 14 806 11.0% 14 158 15 916 12.4% 7 819 8 930 14.2% Masswarehouse 12 723 15 371 20.8% 13 930 16 853 21.0% 7 800 9 282 19.0% Massbuild 7 271 8 138 11.9% 7 729 8 710 12.7% 4 240 4 813 13.5% Masscash 19 624 22 895 16.7% 21 251 24 901 17.2% 11 633 13 640 17.3% Other 139 154 10.3% 158 55 59 7.8% (-) Cost of Sales -43 282 -49 957 15.4% -46 768 -54 166 15.8% -25 917 -30 127 16.2% Gross Profit 9 668 11 252 16.4% 10 299 12 214 18.6% 5 575 6 537 17.3% Gross Profit Margin 18.3% 18.4% 18.0% 18.4% 17.7% 17.8% Other Operating Income 139 146 5.0% 111 158 42.0% 55 67 21.3% Total operating costs -7 273 -8 670 19.2% -7 598 -9 336 22.9% -3 946 -4 579 16.0% EBITDA 2 535 2 729 7.6% 2 812 3 070 7.6% 1684 2 066 19.8% EBITDA Margins 4.8% 4.5% 4.9% 4.6% 5.3% 5.6% (-) Depreciation -476 -594 24.8% -535 -697 30.3% -276 -378 37.3% Operating Profit 2 059 2 135 3.7% 2 306 2 173 -5.8% 1 408 1 688 19.9% Operating Profit Margin 3.9% 3.5% 4.0% 3.3% 4.5% 4.6% Profit Before Tax 1 504 1 834 21.9% 1 678 1 993 18.8% 1 318 1 519 15.3% (-) Tax Expense -585 -618 5.6% -634 -638 0.7% -411 -431 4.8% Profit After Tax 919 1 216 32.3% 1 044 1 356 29.8% 907 1 089 20.0% Attributable Earnings 839 1 174 39.9% 993 1 305 29.8% 893 1 067 19.4%
Headline EPS (cents) 433 565 30.3% 484 590 22.1% 416 492 18.3% Diluted HEPS (cents) 411 552 34.4% 468 579 23.9% 406 483 18.9% *Annualized ** What CS expects to be reported for the 26-week year end. Profitability is skewed towards year end (December sales). Source: Company data, Credit Suisse estimates
We expect annualised sales growth to December 2012 to be strong (+16.4%) on the back of new store openings, food inflation and acquisitions, although we stress that there will be little net margin improvements. Growth in FY13 will be driven by space growth (+7.9%) and continued inflation. FY14 will benefit from operational leverage and net margin improvements. Across the group, food and liquor sales contribute ~54.5% towards turnover, while General Merchandise contributes ~32.1%. The remainder of sales are contributed by Home Improvement ~13.4%. Inflation remains ~6-7% across the food categories, with
EEMEA food retail universe 64 06 November 2012 lower inflation forecast across General Merchandise (benign) and Home Improvement (low single digit). We anticipate the cost impact of the Wal-Mart transaction to normalise at cR50m/year from FY13 (FY12: R185m, FY11: R409m). Wal-Mart has helped Massmart become a better retailer, in our view. In the medium term, we expect Massmart to benefit from reduced agency and logistics related fees, as the group leverages its global relationships. Divisional outlook Massdiscounters (Game, Dionwired, Foodco) Game continues to be hurt by deflation across the electronics and appliances ranges, but volumes continue to remain strong. The group has seen an element of cannibalization from the recently opened Makro stores, although it does continue to gain market share across most general merchandise categories. The African operations continue to perform well, with many of the countries where Game operates experiencing strong economic consumer growth. Dionwired continues to perform well, trading through 18 stores. The group has launched its online trading platform, which has recently started to gain traction. Foodco is now trading across 20 Game stores (3 in Africa), with all stores performing at or above expectations. In our view, Foodco is forecast to add 20-30% to Massdiscounters sales over the next five years with very little additional space being added to existing stores. The new regional distribution centres, store conversions and additional depreciation are a drag on profitability. Over the next 18 months, an additional 15 Foodco stores are planned. The group remains focused on improving its fresh supply chain. Despite the group having experienced deflation across the electronics and appliance categories over the past 18 months, there are early signs of inflation out of China, which will be compounded by the weaker ZAR in 2H12. Masswarehouse (Makro and Fruit Spot) The group continues to perform well, on the back of new store openings, and continued strong sales across food, general merchandise and liquor. The acquisition of Fruitspot in January will help the group’s fresh supply offering and supply chain. A further two additional Makro stores are anticipated to contribute in 2H12, with Cape Gate and Bloemfontein stores recently being opened. Growth in existing distribution centres combined with a new distribution centre will result in additional depreciation, while new store openings will result in higher costs. The group remains committed to improving and optimising the logistics and distribution functions. Massbuild (Builders Warehouse, Builders Express and Builders Trade Depot) The group continues to experience strong sales growth across the Builders Warehouse and Express stores. The group is focusing more aggressively on trade customers across the Builders Warehouse divisions, by offering trade credit (via RCS) and by increasing its product offering. Growth into Africa is accelerating, with the first Builder Warehouse store open in Botswana (Gaborone) and additional stores planned for Zambia (Lusaka) and Mozambique in FY13. The group remains committed to cost cutting, and GP margins have improved on the back of mix change. Furthermore, the group is focusing on automated replenishment, and has
EEMEA food retail universe 65 06 November 2012 experienced fewer write-offs, less promotional activity and has spent less on advertising, all helping operating margins. A new regional distribution centre (RDC) is anticipated to be opened in April 2013. Masscash (CBW, Jumbo, Cambridge) Trade space continues to expand, following the acquisition of Rhino Cash and Carry (15 stores), and as a result of the acquisition of two wholesale stores from the now defunct Metro group in South Africa. Food inflation continues to benefit top line growth. We estimate that Cambridge and Rhino currently contribute c20% of group sales (~R4.5bn). The recent appointment of Jon Martinek (from Asda), will strengthen the group’s retail food operations. Margins should improve on the back of the base effect of higher charges, closure of a loss making acquisition and as a result of shrinkage control. Capex: The group’s capex programme remains on track, with c90% committed to stores (IT, new stores and refurbishments) and 10% committed to new distribution centres. Capex as a percentage of sales has increased to 2.7% (from 1.5%); we expect this ratio to remain relatively stable and will then start to decline.
Figure 81: Net Capex (Rm)
Source: Company data, Credit Suisse estimates Below we highlight the group’s organic store rollout programme over the next three years.
Figure 82: Organic growth schedule, (Rm) 2013E 2014E 2015E Masswarehouse 2 2 3 MassBuild 5 7 6 Mass Discounters 14 11 19 Masscash 7 10 12 Total 28 30 40 Space growth (%) 7.9% 7.1% 6.2% Source: Company data, Credit Suisse estimates Other: The group has gearing of c32%, and although we forecast this to be stable, the group could gear itself for growth. Furthermore, we stress that the group prefers to own property as opposed to leases, and this could result in property acquisitions.
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Across the group, the company says it is experiencing “inconsistent” mid-month sales, although there is no clear trend. Across the Game stores, the group is experiencing more credit card usage, while in Makro it has experienced an increase in trade credit (although bad debts are stable). Management believes its consumers are doing reasonably well, despite the middle income consumer being slightly more indebted. Interestingly, shrinkage has increased somewhat, although we think it is still within acceptable levels. House brands (private label) have increased to c11-12% for the entire group, with a marked increase in food. According to the company, the target is to have house brands accounting for c20% of total sales. Looking ahead, the group expects agency fees and logistics costs to reduce as it leverages off Wal-Mart’s global relationships, although at this stage we would expect it to re-invest any gains back into margin. With annualised food retail sales across Cambridge and Foodco being around R9bn (15% of group sales), we note that the group is targeting to have food retail sales of cR20bn within the next five years, by focusing on fresh, fruit and veg, meat, bakery, deli and prepared foods across their various retail chains. There is a strong focus on direct farm sourcing and building on the group’s current critical mass (43 Cambridge stores, 20 Foodco stores, 5 Makro Fresh and 104 Saverites). We note that Massmart is committed to expanding the food offering into East and West Africa. The group continues to be focused on its supply chain, having built its first dry grocery distribution centre, and home improvement DC. Furthermore, the group remains committed to improved merchandise, lower waste and shrinkage, improved merchandise quality, increased private brand and supply chain efficiencies. Targets: Below, we highlight the current medium-term management targets, versus our forecasted financial targets. Based on our forecasts, Massmart is currently behind its medium-term targets, and will only be achieving the operating margin targets in 2016.
Figure 83: Financial ratios and medium term targets 2009 2010 June 2011 Dec 2012E 2013E Medium Term Management targets Group return on sales 4.5% 3.9% 3.9% 3.7% 4.1% > 5.5% Interest bearing Debt:Equity 12% 18% 20% 24% 34% < 30% Return on Capital employed (ROCE) 67% 56% 53% 53% 60% >45% Return on equity 41% 34% 24% 35% 35% >35% Operating Margins 4.5% 3.9% 3.9% 3.7% 4.0% 5.5% Source: Company data, Credit Suisse estimates Prospects: We note that Massmart’s sales figures have been trading up in the mid- to high teens (14 weeks of 2H12: sales +16.6%, with comp sales of +7.8%), on the back of new store openings, food inflation and acquisitions. Sales growth to December 2012 is anticipated to be good, although we stress that there will be no net margin improvements. Growth into FY13 will be driven by space growth (+7.9%), although there will continue to be little margin improvements. FY14 will benefit from operational leverage and net margin growth. Valuation: We maintain our price target at R175 and our Neutral rating.
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Figure 84: Weighted valuation table (R) Valuation Summary TVM Adjusted Valuation Weighting Discounted cash flow 181.45 50% PE Valuation 171.32 40% Dividend discount model (DDM) 157.57 10% Weighted Average Target Price 175.00 Note: Our DCF utilises a discount rate of 11.5% and a terminal growth rate of 3%. Source: Credit Suisse estimates Below we highlight the valuations of the retail stocks across the South African market. Our preferred entry points into the South African retail market are Steinhoff, The Foschini Group and Pick n Pay. We stress that the South African furniture stocks continue to offer value based on dividend yields and low PE valuations, but in our view, there is no short term catalyst for any re-rating.
Figure 85: Retail valuation (Calendarised multiples) MARKET CAP P/E EV/EBITDA Div Yield VALUATION CLOSE 12M TP UPSIDE RATING ZAR 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E
JD Group Ltd 10 624 47,07 54,00 14,7% OUTPERFORM 11,0x 9,4x 8,2x 8,2x 6,2x 5,5x 4,4% 5,2% 6,1% Lewis Group 6 766 68,75 90,00 30,9% OUTPERFORM 8,1x 7,2x 6,6x 6,7x 6,2x 5,7x 6,1% 7,0% 7,7% Mr. Price 34 152 135,17 116,00 -14,2% NEUTRAL 30,3x 24,8x 20,8x 17,6x 14,9x 12,9x 2,2% 2,7% 3,1% MassMart Holding 38 607 177,50 175,00 -1,4% NEUTRAL 43,2x 30,6x 25,1x 15,2x 13,4x 11,4x 2,2% 2,3% 2,6% Pick n Pay 20 042 42,74 49,00 14,6% OUTPERFORM 29,1x 29,7x 17,9x 9,7x 10,4x 7,7x 3,1% 2,6% 4,1% Steinhoff International Holdings 53 498 29,60 37,00 25,0% OUTPERFORM 10,9x 8,7x 7,7x 9,7x 7,2x 6,0x 2,6% 3,3% 3,6% Shoprite Holdings Limited 100 422 174,17 142,00 -18,5% UNDERPERFORM 32,1x 26,2x 21,8x 18,4x 15,7x 13,6x 1,6% 2,0% 2,4% Spar Group 21 461 121,00 126,00 4,1% NEUTRAL 22,3x 19,0x 16,0x 13,6x 12,0x 10,6x 3,3% 3,9% 4,7% The Foschini Group 29 641 124,50 154,00 23,7% OUTPERFORM 17,3x 13,8x 11,7x 10,3x 8,6x 7,3x 3,3% 4,1% 4,9% Truworths International Limited 43 410 94,00 102,00 8,5% NEUTRAL 19,2x 16,4x 14,4x 16,6x 14,6x 13,1x 3,1% 3,6% 4,1% Woolworths Holdings Limited 56 440 66,60 67,00 0,6% OUTPERFORM 27,9x 22,1x 18,5x 18,4x 14,7x 12,5x 2,6% 3,4% 4,1% Source: Company data, Credit Suisse estimates, price as of 01.11.2012, Shoprite data and Pick n Pay data is 2012A
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South Africa Food Retail (Emerging EMEA (Africa))
Pick n Pay (PIKJ.J) Rating OUTPERFORM* Price (01 Nov 12, R) 42.74 COMPANY UPDATE Target price (R) 49.00¹ 52-week price range 4,784.00 - 4,000.00 Picking a new leader for a turnaround…. Market cap. (R m) 20,532.18 Enterprise value (R m) 21,867.55 ■ Right man for the job? Pick n Pay recently announced the appointment of Richard Brasher as group CEO. He was the former head of Tesco UK, *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. having been with Tesco for >25yrs. He is a seasoned retailer having strong experience across: supply chains, international sourcing, logistics, general Research Analysts merchandise, housebrands and loyalty programmes. Our understanding is Dean Ginsberg that Brasher is familiar with the Pick n Pay offering, and we regard his 27 011 012 80 64 [email protected] appointment as a positive catalyst in the group’s turnaround. ■ Disappointing 1H13 results: We revised our earnings lower on 22 October following disappointing 1H13 results. 1H 13 Turnover increased by a lower than expected +5.9% to R28.3bn (like-for-like +3.2%), with the group experiencing stock and direct store related delivery issues. Gross margins were lower at 17.6% (1H12: 18%) and were negatively impacted by distribution centre related issues investing back into price, the growth of the loyalty programme and category related buying problems. Trading profits were materially lower (-41.5%) on the back of contract terminations, internal changes and continued internal investments. ■ Outlook: Pick n Pay’s turnaround will be measured. We note that the group is moving its category buying teams from regional to central which could result in further short-term teething problems, and the current heartland customer remains relatively soft. Early indications across pilot stores are that the category buying is working well. We are forecasting operating margins of 4% in CY14 (FY15E – Feb year end), versus FY13E margins of 1.8%. ■ Rating Despite the recent disappointing results, we retain our Outperform rating and R49 target price. We believe that the group is “kitchen sinking” its costs in anticipation of the turnaround and arrival of the new CEO.
Share price performance Financial and valuation metrics
Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c4050. Year 02/12A 02/13E 02/14E 02/15E EPS (CS adj.) (R) 1.43 1.44 2.56 4.09 4567 Prev. EPS (R) — 2.05 2.70 3.48 4067 P/E (x) 29.8 29.7 16.7 10.4 P/E rel. (%) 195.7 218.6 145.0 101.0 3567 Revenue (R m) 55,330.5 60,218.5 67,421.0 74,821.0 Nov-11 Mar-12 Jul-12 EBITDA (R m) 2,083.2 1,925.6 2,797.3 3,929.8 Price Indexed Price Relative OCFPS (R) 2.58 1.30 3.14 3.79 On 11/01/12 the ALL SHARE closed at 37664.81 P/OCF (x) 16.5 32.8 13.6 11.3 EV/EBITDA (current) 9.9 10.7 7.3 5.2 Net debt (R m) 329 1,335 1,491 1,296 ROIC (%) 31.16 18.82 28.22 40.97
Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 480.40 IC (current, R m) 2,732.70 2012A — — — — BV/share (Next Qtr., R) — EV/IC (x) — 2013E — — — — Net debt (Next Qtr., R m) — Dividend (Next Qtr., R) — Net debt/tot cap (Next Qtr., %) — Dividend yield (%) — 2014E — — — —
Source: Company data, Thomson Reuters, Credit Suisse estimates.
EEMEA food retail universe 69 06 November 2012
Pick n Pay PIKJ.J Price (01 Nov 12): R42.74, Rating: OUTPERFORM, Target Price: R49.00 Income statement (R m) 02/12A 02/13E 02/14E 02/15E Per share data 02/12A 02/13E 02/14E 02/15E Sales revenue 55,331 60,218 67,421 74,821 No. of shares (wtd avg) 476 476 476 476 EBITDA 2,083 1,926 2,797 3,930 CS adj. EPS (R) 1.43 1.44 2.56 4.09 Depr. & amort. (816) (903) (1,011) (1,122) Prev. EPS (R) — 2.05 2.70 3.48 EBIT (CS) 1,307 1,067 1,812 2,845 Dividend (R) 1.31 1.07 1.90 3.03 Net interest exp. (135) (110) (90) (86) Dividend payout ratio 91.35 74.07 74.07 74.07 Associates (2) 20 22 24 Free cash flow per share (0.80) (2.24) (0.47) 0.25 Other adj, — — — — (R) PBT (CS) 1,170 978 1,744 2,783 Key ratios and 02/12A 02/13E 02/14E 02/15E Income taxes (408) (293) (523) (835) valuation Profit after tax 762 684 1,221 1,948 Growth(%) Minorities — — — — Sales 8.1 8.8 12.0 11.0 Preferred dividends — — — — EBIT (10.3) (18.3) 69.8 57.0 Associates & other (81) — — — Net profit (13.1) 0.4 78.4 59.6 Net profit (CS) 681 684 1,221 1,948 EPS (13.1) 0.4 78.3 59.6 Other NPAT adjustments — — — — Margins (%) Reported net income 681 684 1,221 1,948 EBITDA margin 3.8 3.2 4.1 5.3 EBIT margin 2.4 1.8 2.7 3.8 Cash flow (R) 02/12A 02/13E 02/14E 02/15E Pretax margin 2.1 1.6 2.6 3.7 EBIT 1,307 1,067 1,812 2,845 Net margin 1.2 1.1 1.8 2.6 Net interest (701) (572) (968) (1,491) Valuation metrics (x) Cash taxes paid (462) (293) (523) (835) EV/sales 0.38 0.36 0.33 0.29 Change in working capital 490 (499) 127 131 EV/EBITDA 9.9 10.7 7.3 5.2 Other cash & non-cash items 594 916 1,048 1,154 EV/EBIT 16.0 20.5 12.2 7.7 Cash flow from operations 1,228 620 1,497 1,804 P/E 29.8 29.7 16.7 10.4 CAPEX (1,611) (1,686) (1,719) (1,683) P/B 8.5 7.7 6.8 5.7 Free cash flow to the firm (383) (1,067) (223) 121 Asset turnover 4.7 5.0 5.1 5.1 Acquisitions — — — — ROE analysis (%) Divestments 45 60 67 75 ROE stated-return on 29.9 27.2 43.3 59.3 Other investment/(outflows) 1,260 — — — equityROIC 31.2 18.8 28.2 41.0 Cash flow from investments (306) (1,626) (1,652) (1,609) Interest burden 0.90 0.92 0.96 0.98 Net share issue/(repurchase) — — — — Tax rate 34.8 30.0 30.0 30.0 Dividends paid — — — — Financial leverage 0.67 0.59 0.51 0.42 Issuance (retirement) of debt — — — — Credit ratios (%) Other 87 (0) (0) (0) Net debt/equity 13.7 50.7 49.6 36.3 Cash flow from financing 87 (0) (0) (0) Net debt/EBITDA 0.16 0.69 0.53 0.33 activitiesEffect of exchange rates — — — — Interest coverage ratio 9.7 9.7 20.0 33.1 Changes in Net Cash/Debt 1,009 (1,007) (156) 195 Net debt at start 1,338 329 1,335 1,491 Quarterly data 02/12A 02/13E 02/14E 02/15E Change in net debt (1,009) 1,007 156 (195) EPS for Q1 — — — — Net debt at end 329 1,335 1,491 1,296 EPS for Q2 — — — — EPS for Q3 — — — — Balance sheet (R m) 02/12A 02/13E 02/14E 02/15E EPS for Q4 — — — — Assets Cash and cash equivalents 1,272 226 34 194 Accounts receivable 2,114 2,145 2,401 2,665 Source: Company data, Thomson Reuters, Credit Suisse estimates. Inventory 3,335 3,885 4,350 4,827 Other current assets — — — — Total current assets 6,721 6,256 6,785 7,686 Total fixed assets 3,949 4,671 5,312 5,798 Daily Nov 03, 2011 - Nov 01, 2012, 11/03/11 = c4050. Intangible assets and goodwill 800 800 800 800 Investment securities 81 81 81 81 4567 Other assets 269 289 311 335 Total assets 11,818 12,097 13,288 14,700 Liabilities 4067 Accounts payable 7,012 7,099 7,957 8,843 Short-term debt — — — — 3567 Other short term liabilities 793 793 793 793 Nov-11 Mar-12 Jul-12 Total current liabilities 7,805 7,892 8,750 9,636 Price Indexed Price Relative Long-term debt 771 733 696 661 Other liabilities 838 838 837 837 On 11/01/12 the ALL SHARE closed at 37664.81 Total liabilities 9,414 9,463 10,283 11,134 Shareholders' equity 2,404 2,634 3,005 3,565 Minority interest — — — — Total equity & liabilities 11,818 12,097 13,288 14,700 Net debt (R m) 329 1,335 1,491 1,296
EEMEA food retail universe 70 06 November 2012
Picking a new leader for a turnaround
■ Drivers: With 1H13 inflation of +6.3% and space growth of +1.9%, the group lost market share (est 31-32%). We expect space growth to be +4.1% in 2H13 and +8.1% in FY14. The group needs to grow store footprint on the back of customer demand and competitive factors (225 new stores are planned over next 18 months). The focus is currently on smaller Pick n Pay stores and lower end Boxer stores (+20%), although upmarket flagship stores remain on track.
■ Costs: The roll out of the Cape based Distribution Center (DC) has resulted in higher occupancy costs and higher inventory levels in the short term. The move to a flexible mobility staffing system should result in even lower staff costs in 2H13. The Longmeadown DC was brought in-house which resulted in additional costs and contract termination fees. In addition, external consultants contracts were cancelled, with the group bringing expertise in house. Management estimates that excluding one- off cancellation costs, other discretionary costs, and category buying issues, operating profits for FY13 would have been ~15% higher.
■ Distribution centres: The Cape based Philippi DC is run in house and is currently more productive, with fewer picking errors than the Longmeadow DC, this has led to the group deciding to in-source control of the Longmeadow DC, which has resulted in one-off contract cancellation fees. As a result of centralised buying, the group is currently re-addressing the way it deals with suppliers, furthermore, automated stock replenishment ordering systems are being integrated into the process.
■ Loyalty programme: It appears that the Smartshopper loyalty programme with ~5.8m active customers has not yet stemmed market share losses. Looking forward (CY14), we expect the group to re-negotiate its Smartshopper loyalty agreement with the various franchise stores, and this should result in higher margins for Pick n Pay. Furthermore, we stress that Smartshopper loyalty points will be accessible at the till points early next year.
■ Valuation: We continue to back Pick n Pay’s turnaround strategy. We rate Pick n Pay as an Outperform with a target price of R49. We expect to see early signs of the turnaround in FY13, with even stronger benefits in FY14. We anticipate group trading margins to improve from c1.8% to c4% by CY14 (FY15E – Feb year end),
Figure 86: Weighted valuation table, (Rm) Valuation Summary Valuation Weighting Discounted cash flow 52.11 60% PE Valuation 43.19 30% Dividend discount model (DDM) 47.61 10% Weighted Average Target Price 49.00 100% Source: Credit Suisse estimates
EEMEA food retail universe 71 06 November 2012
Unless otherwise indicated, all prices are taken at the close of the trading session of the pricing date quoted.
Companies Mentioned (Price as of 01 Nov 12) Aeon Co Ltd. (8267, ¥867, OUTPERFORM, TP ¥1,300, MARKET WEIGHT) Almacenes Exito S.A. (EXITO, peso34,800.00, OUTPERFORM, TP peso30,000.00) BIM (BIMAS.IS, TRY81.00, NEUTRAL, TP TRY76.90) C.P. All PCL (CPALL.BK, Bt40.00, OUTPERFORM, TP Bt55.00) Dixy Group of Companies (DIXY.MM, Rbl324.08, NEUTRAL, TP Rbl370.00) E-MART CO. Ltd. (139480.KS, W241,500, NEUTRAL, TP W250,000) FamilyMart (8028, ¥3,845, OUTPERFORM, TP ¥4,100, MARKET WEIGHT) Hypermarcas (HYPE3, R$16.27, OUTPERFORM [V], TP R$16.00) J. Front Retailing (3086, ¥412, NEUTRAL, TP ¥460, MARKET WEIGHT) JD Group Ltd. (JDGJ.J, R47.07, OUTPERFORM, TP R54) Lawson, Inc. (2651, ¥5,870, NEUTRAL, TP ¥5,300, MARKET WEIGHT) Lewis Group (LEWJ.J, R68.75, OUTPERFORM, TP R90) Lotte Shopping (023530.KS, W339,500, OUTPERFORM, TP W470,000) Magnit (MGNTq.L, $36.36, OUTPERFORM, TP $42.00) MassMart Holding (MSMJ.J, R177.5, NEUTRAL, TP R175) Migros (MGROS.IS, TRY19.35, OUTPERFORM, TP TRY23.75) Mr. Price (MPCJ.J, R135.17, NEUTRAL, TP R116) Okey (OKEYq.L, $9.85, UNDERPERFORM [V], TP $8.60) Pao de Acucar (PCAR4, R$92.00, OUTPERFORM, TP R$92.98) Pick n Pay (PIKJ.J, R42.74, OUTPERFORM, TP R49) President Chain Store (2912.TW, NT$142.00, NEUTRAL, TP NT$140.00) S.A.C.I. FALABELLA (FALAB, CLP4,935.60, NEUTRAL, TP CLP4,400.00) Seven & i Holdings (3382, ¥2,468, OUTPERFORM, TP ¥3,100, MARKET WEIGHT) Shoprite Holdings Ltd. (SHPJ.J, R174.17, UNDERPERFORM, TP R142) Soriana (SORIANAB, peso42.46, OUTPERFORM, TP peso42.00) Spar Group (SPPJ.J, R121, NEUTRAL, TP R126) Steinhoff International Holdings (SHFJ.J, R29.6, OUTPERFORM, TP R37) The Foschini Group (TFGJ.J, R124.5, OUTPERFORM, TP R154) TNK-BP Holding (TNBP.MM, Rbl64.60, NEUTRAL, TP Rbl80.00) Truworths International Ltd. (TRUJ.J, R94, NEUTRAL, TP R102) Wal-Mart Stores, Inc. (WMT, $72.77, NEUTRAL, TP $80.00) Walmex (WALMEXV, peso38.66, NEUTRAL, TP peso38.00) Woolworths Holdings Ltd. (WHLJ.J, R66.6, OUTPERFORM, TP R67) X5 Retail Group (PJPq.L, $18.90, NEUTRAL [V], TP $20.00)
Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. As of October, 2 2012 Analysts’ stock rating are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% or more, (depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-
EEMEA food retail universe 72 06 November 2012
15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10- 15% levels in the Neutral stock rating definition, respectively. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight: The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight: The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight: The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 40% (49% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. 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EEMEA food retail universe 74 06 November 2012 South Africa Equity Research
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