We raise our target price for Magnit from $25.9 to $31.1 per GDR (+20%) while maintaining our BUY rating on the stock.
Network expansion may provide a positive surprise in 2012. Magnit's 4Q11 results came in exceptionally strong. The figures suggest that the company generated more cash from operations in 2011 than we anticipated ($611mn). Coupled with $475mn in SPO proceeds received in late December we believe the company is well-positioned to finance its network expansion in 2012.
FY11 figures were strong and margins look sustainable. Top line reached $11.4bn, up 47% YoY, and the company was able to sustain its EBITDA margin despite food price deflation, increased social taxes, utilities tariff growth and higher fuel costs. Given its performance in tough times, we think Magnit could use any market momentum to spur its development. A surge in gross margin (26.7% in 4Q11 vs 24.3% for FY11) was attributable to more favourable purchasing terms, which suggests the company's profitability performance is sustainable, in our view. We also believe this demonstrates that investing gross margin into traffic in 1H11 was a good decision.
We increase our selling space expansion forecasts for Magnit on the back of stronger than expected profitability, which should result in even better operating cash flows than we earlier anticipated in 2012. This has boosted our average forecasts for revenue by 15%, EBITDA by 21%, and earnings by 27% in 2012-15.
First glance at valuations suggests there are more interesting stories in the EM food retail universe, in particular Cia Brasileira and Migros. Both companies are priced at a discount to Magnit on 2012-13E P/E (Bloomberg consensus) and offer similar growth prospects. However, both are more leveraged with 2011E net debt/EBITDA ratios exceeding 3x (Bloomberg), while Magnit's debt is more manageable (2011E net debt/EBITDA ratio of 1.5x, on our estimates). This implies lower risk for Magnit's growth if credit markets tighten further this year.
Back
