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Is Magnit fairly priced based on comparables?

Date: 24 Feb 2014 23:55

Magnit (MGNT:MICEX, MGNT:LSE) is a ~$24b market cap Russian food retailer with stunning growth and high EV/EBITDA multiple.

Magnit trades on MICEX and has GDRs on LSE which trade with 12.5% premium.

The growth of Magnit is expected to show slight slowdown based on management estimates as of Jan 27, 2014.

EV/EBITDA 2013 = 13.6x for MICEX and 15.2х for LSE – is it cheap or expensive vs. other stocks?

Magnit's valuation


As Magnit’s growth is fast it has limited number of comparables both among food retailers and Russian companies (will be shown below). So how should we think about Magnit’s valuation multiple? Specifically, I would like to answer two questions:
  1. What should be Magnit's valuation based on comparables?
  2. How fast will Magnit’s multiple and share price decrease due of expected growth slowdown?
To answer these questions I expand traditional comparables approach (based on looking only to average multiples for a group of companies) by adding historical or projected growth – an important indicator especially for a fast growing stock like Magnit.

Russian stocks comparables based on EV/EBITDA

Estimates are not very reliable for Russian companies in the dataset (Magnit has 16.1% for Revenue and 14.4% for EBITDA growth), so I use only LTM numbers (vs. NTM).

Magnit has one of the highest valuations on Russian stock market on EV/EBITDA so there is nothing to compare it with. Below are Russian stocks with EV/EBTIDA LTM>10x or EV/EBTIDA NTM>7x (stocks with EBITDA growth > 100% or <-50% were excluded). RBC is not very useful – its high valuations are very influenced by high leverage: Net Debt / EBITDA = 12.4x

Russian stocks with EV/EBTIDA LTM>10x or EV/EBTIDA NTM>7x





Thought, if we analyze these numbers, they tell us: comparable EV/EBITDA LTM multiple is 4-6x for any company with growth > 20%

US food retailers comparables based on EV/EBITDA

In the US NTM estimates are quite good so I will use both LTM and NTM numbers.


Note: two off points were excluded



US food retail EV/EBITDA multiples provide the following comparable valuation:
  • 30% LTM revenue growth: ~22x EV/EBITDA LTM
  • 36% LTM EBITDA growth: ~14x EV/EBITDA LTM
  • 23% NTM revenue growth: ~15x EV/EBITDA NTM
  • 16% NTM EBITDA growth: ~11x EV/EBITDA NTM

EM food retailers comparables based on EV/EBITDA

As the quality of NTM data is not known, I will use only LTM numbers.



EM ex. Russia food retail EV/EBITDA multiples provide the following comparable valuation:
  • 30% LTM revenue growth: ~18x EV/EBITDA LTM
  • EBITDA growth is not a differentiating factor

Conclusions

Comparable EV/EBITDA multiples are in the table below.

Magnit comparable valuation



1. What should be Magnit's valuation based on comparables?

Russian companies are so cheap due to Russia country risk and corporate governance discounts.

Magnit has a very professional CEO and management team which on my opinion put Magnit very close to US standards of corporate governance (as a side idea, this strong corporate governance actually makes me believe that the projected growth will actually happen).

This makes Russian multiples not very relevant.

EM valuations today are
a) driven mostly by speculative foreign capital which invests in EM on a “reminder basis”
b) still very influenced by expectations that the economic growth happened during 2000s commodities super-cycle will repeat

My view is that Magnit's valuation should be quite close to US multiples with additional Russia country risk discount, as US market at the moment
a) has fair value on the basis of different indicators
b) is the best in absorbing information about long term prospects of the economy

If we take a look at Magnit comparable valuation table above, we will see that based on EV/EBITDA LTM multiples EV discount is zero, so Russia country risk discount is also zero. Or, the market appreciate food retailers' growth in the US as much as in EMs.

2. How fast will Magnit’s multiple and share price decrease because of growth slowdown?

If we assume that US NTM multiple curve is fair, what is expected Magnit stock growth in 1 year, dependent to revenue forecast (NTM) at the beginning of 2015?

Magnit EV/EBITDA sensitivity to EBITDA growth



Breakeven point is around growth change of -6%: if 2015 revenue growth forecast change is >-6%, Magnit stock will appreciate, if less, than depreciate. If it’s >-3%, the stock will show > 10% appreciation.

Based on comparables Magnit has 22% upside for MICEX price and 10% for LSE price. If Magnit's revenue growth estimation decreases less than 3% in one year, its comparable valuation would increase 10%+. Again, this is only what comparables tell us and could not be considered as a complete investment recommendation.


Tags: Russia



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