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
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Food & drug retailers |
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10 September 2018 |
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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.
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Consensus estimates
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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Disclaimer
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Disclaimer
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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.