O’KEY Group — Discounting Russia

O’KEY Group — Discounting Russia

O’KEY’s H118 results confirm a business model in the process of modifying its channel mix through an accelerated roll-out of new DA! discounters. While Russian markets remain challenged, scale investments increase the company’s purchasing power and operational efficiency, reinforcing strong cost management. EBITDA margins continue to be driven by an increase in DA! profitability, supporting market forecasts of strong PBT growth of c 35% over the next three years.

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O’KEY Group

Discounting Russia

Food & drug retailers

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10 September 2018

Price

$1.97

Market cap

$530m

Share price graph

Share details

Code

OKEY

Listing

XLON

Shares in issue

269.1m

Business description

O’KEY Group is the eighth-largest Russian food retailer by revenue, operating 150 stores branded as 79 O’KEY hypermarkets and 71 DA! discounters. The company has strong brands and is known for the quality of products and best-in-class shopping experience.

Bull

Clear growth strategy to leverage the higher growth discounter channel.

High logistics centralisation.

Experienced international management team.

Bear

FX risks associated with the functional currency being the rouble.

Competitive Russian food-retail market.

DA! is currently loss-making.

Analysts

Paul Hickman

+44 (0)20 3681 2501

Tobias Beith

+44 (0)20 3077 5731

O’KEY’s H118 results confirm a business model in the process of modifying its channel mix through an accelerated roll-out of new DA! discounters. While Russian markets remain challenged, scale investments increase the company’s purchasing power and operational efficiency, reinforcing strong cost management. EBITDA margins continue to be driven by an increase in DA! profitability, supporting market forecasts of strong PBT growth of c 35% over the next three years.

H118 results: Cost control counters trading pressure

Revenue decreased 8.5% year-on-year, and there was a smaller decline of 1.4% after adjusting for the sale of the supermarket business, attributable to negative macroeconomic trends and increased competition. Net losses similarly adjusted (including related impairment in H117) decreased by 34% year-on-year to RUB877m, primarily driven by an increase in operational efficiencies balancing FX losses due to a weaker currency. Operating costs were well controlled through more favourable purchasing terms, contributing to a 17bp increase in EBITDA margin year-on-year to 4.4%.

2020 DA! store target: Accelerated openings

Year-on-year revenue from DA! (discount stores) rose 35.5%, offsetting the 11.3% decrease in revenue from O’KEY (hypermarkets). The company’s three-year plan encompasses both its hypermarket and discount channels; however, the accelerated roll-out of new DA! stores should continue to drive the group’s EBITDA margin. The strategy focuses on creating a streamlined private label product range in discounters while modifying the current hypermarket:discounter store mix of 53:47, with current guidance implying 36:64 by 2020. The company expects 25 DA! openings in 2018, up c 50% from the previous two years, and will need to average 29 pa to meet its new target of 150 stores by 2020.

Valuation: PBT growth with interim declines

Based on consensus forecasts PBT is set to increase by c 35% from FY17 to FY20; however, consensus suggests a decrease of 34% in FY18, in part due to adverse weather conditions in the first half of FY18. Using a peer group consisting of Koninklijke Ahold Delhaize, Casino Guichard Perrachon and Dino Polska, the group’s one-year forward EV/EBITDA multiple of 10.9x overshadows the 6.3x multiple O’KEY is trading at. Continued openings of DA! and improved operational efficiency across the company could see the discount begin to close.

Consensus estimates

Year
end

Revenue
(RUBm)

PBT
(RUBm)

EPS
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/17

177,455

3,795

2.9

5.5

45.3

4.2

12/18e

186,055

2,497

6.7

2.9

19.6

2.2

12/19e

200,345

3,705

8.8

2.8

14.9

2.1

12/20e

222,629

5,127

11.7

3.7

11.2

2.8

Source: O’Key Group, Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Future — Strong finish to FY18

Future has now completed its acquisition of Purch, fully funded by a successful rights issue. Trading results in the core Media business are ahead of earlier management expectations for FY18, helped by some strong product launches and World Cup-related campaigns. We have finessed our indicative forecasts, including Purch, and updated to reflect the trading update and adjusted historic EPS for the bonus element of the rights. There are clear opportunities to leverage the Purch assets, generating incremental growth, which we believe justify a higher rating.

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