We upgrade the stock to a BUY rating from Hold and raise our target price by 5% to $27.9 per GDR (vs $26.7 previously) after the company held a conference call yesterday during which it presented its strategy for 2012, which looks balanced to us.
2012 investment programme to focus on efficiency improvements. X5 targets doubling its logistics capex and raising maintenance capex by 50% which would result in margin sustainability, in our view. It plans capex of RUB45bn ($1.49bn) in 2012, financed by operating cash flows (we estimate that X5's CFO covers 68% of planned capex) and the sale of its trading centres. As X5 did not provide clear guidance on selling-space expansion (while guiding for 15-20% YoY revenue growth in 2012), we assume that it does not have a clear expansion plan for the year. We therefore estimated how much cash it could raise by selling some of its trading centres. Our calculations suggest that X5 could expand its selling space by 17% in 2012 by spending $1.2bn in capex, which we have incorporated into our model.
More cash available for capex. The good news is that X5 generated a 7% EBITDA margin in FY11 based on preliminary numbers submitted to auditors, according to management. This implies that X5 has more cash available for efficiency improvements than we anticipated. Given X5's plans for maintenance ($174mn) and logistics capex ($331mn), it should be able to expand its network by 17% in 2012, ultimately resulting in 19% EBITDA growth in the period, on our numbers.
X5's GDR price a disappointment given its valuations. The stock currently trades at a 32% discount to EM peers on 2012E EV/EBITDA and is priced 33% below Magnit. Meanwhile, efficiency improvements should result in EBITDA margin becoming more sustainable while X5’s gradual deleveraging should support bottom line growth of 94% in 2011-13 (all Aton estimates).
We continue to prefer Magnit over X5 longer term given Magnit’s better operating efficiency and ability to pass rising costs onto suppliers. Nonetheless current valuations coupled with 2012E EBITDA and earnings growth for X5 vs Magnit suggest that X5's stock could outperform Magnit in the near term.
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