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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.

OJSC Live office (ОАО Живой офис) IPO – burning questions

Date: 02 Jul 2013 23:30

OJSC Live Office plans to do an IPO on MICEX on July 3, 2013 (http://corporate.zhivojoffice.ru/ipo)

Live office is a B2B office products supplier in Russia - like Office Depo or Staples in the US.

One of IPO organizers is Finam known for Utinet IPO, though this time research report was written by EASTLAND Capital.

Company’s business model and financials raises several fundamental questions so I would not do a full-valuation and rather focus on these questions.

Overall investment story

It’s growth equity investment at a supposedly turnaround point.

Current trends looks scary:
- EBITDA declines for at least the 2nd year in a row (2011, 2012) and we have not seen reports before 2010!
- EBITDA margin achieved 0.2% in 2012

The company plans to get 129 RUB * 4m shares=516m RUB to invest in working capital and CAPEX. The company is sincere that in 2013 situation will deteriorate and EBIT will go to negative zone. But suddenly in 2014
- Revenue will almost double
- EBITDA margin will increase from 0.5% to 5.9%

Can this happen on a …
- B2B market (=slow switching)
- Very competitive and price-sensitive market
- Market growing a bit faster than inflation: 10% a year

? The answer is hardly.

EBITDA Margin is not expected above 9% with 2-6% as a realistic target

Historical EBITDA for 2010-2012 was never higher than 0.8%. The company forecasts sudden increase to 10.3% in 2014 and 13.2% in 2017. Is it realistic?

Live Office P&L history and forecast


Benchmarks given by EASTLAND Capital says no. Here is EBITDA Margin for all DM benchmarks and one EM benchmark (will discuss later why other from EM are not relevant benchmarks).

EBITDA Margin benchmarks - office suppliers





After 2008 crisis EBITDA Margin none of the benchmark companies went above 9%. It was in 2-9% corridor which suggests that a company like Live Office which is not a market leader should assume to achieve 5-6% maximum.

Looking at historical numbers 2%-6% can be considered as a good outcome of planned CAPEX and marketing investments.

EM benchmarks used are almost all not very relevant

Just looking at the core businesses of the proposed companies becomes clear that all except Officemate PLC could hardly be used as benchmarks due to different dynamics in their industries vs. office products supply industry.

Comparables suggested in the IPO research report


Shanghai Xinhua Media Co. – not very relevant

Shanghai Xinhua Media Co., Ltd. engages in the book publishing, newspaper operation, advertising agency, e-commerce, media investment, and logistics and distribution businesses in China. The company is also involved in the wholesale and retail of books, magazines, electric publics, and stationeries. In addition, it engages in the publishing, printing, and distribution of newspapers, journals, and magazines; wholesale, retail, and leasing of video and audio products; design, production, and issue of advertisements; trading business; property management business; and provision of economic trading consulting services, as well as warehousing and delivery services. The company operates 200 bookstores. Shanghai Xinhua Media Co., Ltd. was formerly known as Hualian Supermarket Holdings Co., Ltd. The company is headquartered in Shanghai, China.

Jarir Marketing Company (Jarir) – not very relevant

The company is offering a wide range of products including school & office stationeries/supplies, education aids & books, PCs & laptops, PCs & laptop accessories, digital electronics & video games and smart phones & PC tablet. According to the given information, the company has strong relationships with worldwide leading brands and companies particularly in PCs segment. Moreover, Jarir has a strong and well-diversified wholesale customer base, which includes oil companies, banks, government and health care.

Gestetner, Sri Lanka – not very relevant

Gestetner of Ceylon is the sole distributor of Gestetner brand B&W and colour photocopying machines in Sri Lanka. In addition the Company is the authorized distributor of the prestigious brand of Fujitsu Laptops and Daito stencil duplicators.

The Company is a leading provider of Total Document Solutions in Sri Lanka making available cutting edge IT based hardware and software solutions. The document life cycle combined with a range of business and professional services are also provided to our customers.

Office Equipment PLC – not very relevant

Office Equipment PLC engages in the import, distribution, and maintenance of office equipment in Sri Lanka. Its products include note counting machines, coin counting machines, time recorders, and currency sorting systems. The company is based in Colombo, Sri Lanka.

Officemate PLC - ok

Officemate Public Company Limited supplies office products through printed and online catalogues in Thailand. Its products comprise writing and correction, office stationery, glue, tape, packing, filing, storage, conference presentation, beverage, canteen, and cleaning products, as well as furniture, ink and toners, computer supplies, papers, books, envelopes, business machines, electronics, and factory products. The company is based in Bangkok, Thailand.

EV/Sales for Officemate PLC was too high for 2012 (4.0x) due to reverse merger and is not representative. So 2013 EV/Sales for EM would be 0.6x vs. 1.16x which will considerably decrease multiples valuation.

Leaving only Officemate PLC as an only comp will considerably decrease multiples valuation in 2012-13.

Investments in working capital didn’t work that efficiently in the past

In 2012 working capital grew 90.7m RUB while revenue grew 35% (203m RUB).

If the company invests ~350m RUB in working capital in 2013-15, would it help to grow the revenue on 3,857m RUB? Probably not, even not close to that.


To conclude, IPO research by EASTLAND Capital has several unjustified assumptions which are critical for valuation. If they are corrected, resulted valuation would probably hardly justify the proposed IPO price, not to mention required equity upside.

Tattelecom – Russian Value Trap with 80% upside

Date: 23 Mar 2013

Tattelecom (JCS Tattelecom, TTLK): fixed line telecom operator in Russia. Fundamentals are appealing:
  • Regional leader with > 50% market share
  • EV/EBITDA 2012E=2.1x
  • Stable dividend yield: 6.6% for 2012, 2.5%-18.7% for 2006-2011
  • 80% upside based on DCF
  • 130-180% upside based on comparables
What is this: strong BUY, ideal LBO candidate or a value trap? Let’s take a look at its fundamental value and how it could be realized.

1. Revenue forecast – below inflation growth from fixed line telephony and broadband internet

Tattelecom is a fixed line telecom provider in Tatarstan – one of Russia’s regions with 3.8m population and 75.9% urban citizens.

Tattelecom on 27 Apr 2012 expanded to mobile market: it became an MVNO using infrastructure of Smarts – mobile operator from Samara. As Tattelecom is just at the beginning of its way to mobile, it’s difficult to estimate mobile influence on revenue, margin and CAPEX. In this analysis

- it’s assumed that the mobile segment will generate average return on capital
- mobile revenue and related CAPEX are not modeled

1.1 Fixed line telephony market – slow ARPU growth with slow subscribers decline

Tattelecom was formed as a fixed line telephony operator and continues in this way: 54% of 2011 revenue came from fixed line telephony. Fixed line telephony is a declining market by number of subscribers. How fast will the decline happen and will it be compensated by ARPU growth?

To analyze that I looked at fixed line telephony data for the biggest telecom operators WW. They usually have dominating market shares in their respective countries and thus changes in their revenue, subscribers and ARPU approximate market behavior.

Fixed line telephony subscribers, APRU and revenue change for top operators WW





Source: Capital IQ

Note: the difference between the speeds of subscriber decline for Business and Residential segments are not very different for benchmarks: 1-2%, so the difference in the mix doesn’t cause material differences between companies.

The best and the only Russian benchmark for regional fixed line telecom services is Rostelecom. Its data shows accelerating decline speeds in number of subscribers.

Rostelecom fixed line telephony: subscribers and ARPU growth



Source: Rostelecom

Rostelecom – fast ARPU growth with fast subscribers decline strategy:
  • High APRU growth policy lead to sharp acceleration in decline speeds which reached 4.5%.
  • As a result Rostelecom made a correction in ARPU growth and decreased it to 3.6% as of Q3 2012
  • This strategy is close to BT in the last 3 years and Telecom Austria in the last 5 years
Tattelecom historically followed “slow ARPU growth with slow subscribers decline” strategy which is close to global benchmarks. I assume Tattelecom will continue using it going forward. More specifically:

Subscribers
  • Fixed line market declined 6% in 2009, 1.5% in 2010, 1.7% in 2011 (based on indirect data). Global benchmarks assume 6% decline
  • I would assume based on historical data that the market will not deteriorate so quickly and will achieve 5% CAGR decline speed in 2017
APRU
  • Global benchmarks assume 1% growth
  • In 2011 and 2012 Tattelecom showed 4.2% and 2.2% growth
  • I would assume 2% for 2012 and 2013 and then 1%

1.2 Fixed broadband internet market – Tatarstan is ~4.5 years behind developed European countries

Broadband internet is rapidly developing in Tatarstan – penetration is only 51%. The question is when this growth will stop.

Fixed broadband penetration in Tatarstan - estimation


To analyse this I looked at the history of key European markets.

Source: World Bank, Eurostat

Based on the above data, I assume that Tatarstan is 4.5 years behind developed European markets and forecast subscriber growth as an average for two relevant years from the benchmark. For example, 2012 growth rate is an average for 2007 and 2008 growth rates.

Fixed Broadband penetration in Tatarstan - forecast



The real rate may be slower: mobile broadband and Smartphone penetrations are higher now than they were in Europe 4.5 years ago which provides considerable competition for fixed broadband.

Additional data point can be found for other regions for residential broadband internet (source: AC&C):
- Russian market grew 15% in Q3 2012 vs. Q3 2011
- Moscow (a saturated one with good organic growth prospects) grew 4% in Q3 2012 vs. Q3 2011

Russia residential broadband subscribers growth

Source: AC&C

Tattelecom fixed broadband ARPU forecasted as a slow 2% decline in 2012-2014 and stabilization to 0% since 2016 as it happened in Moscow.

1.3 Revenue forecast – from 3.7% growth in 2012 to 0.1% in 2017

For both segments I assume based on historical data that Tattelecom’s market share will remain constant.

Tattelecom revenue forecast

2. EBITDA Margin – stable, no reasons to believe in improvements

Tattelecom EBITDA margin (37.6% in 2011) is above average among WW fixed line telecom providers, but is almost the lowest among cable operators in Europe and US. I believe there is a clear potential to grow EBITDA margin:

- Ziggo while run by PE owners achieved 56%
- Rostelecom showed 38.4% in 2010, 39.5% in 2011

At the same time, there are no signs from Tattelecom management that they have abilities, desire and plans to do that.

Tattelecom EBITDA margin is forecasted at the same level as in 2011: 37.6%


Source: Capital IQ

EBITDA Margin of top worldwide cable operators

Source: HSBS, Ziggo, 1 May 2012

3. CAPEX – assumed at 20-22% of revenue

Average CAPEX as % of Revenue was at 23% for 2008-2012 while average data for WW comparable companies suggests 16%. 2012 showed 22% based on RAS accounting.

High CAPEX were probably attributed to the historical fast growth in broadband internet which required a lot of upfront investments. As it was assumed before, active growth in broadband penetration will continue for 2013 and 2014. I forecast CAPEX/Revenue at 22% for 2013 and 2014 (in line with 22% in 2012) and then 20%.


4. DCF Valuation: 80% upside

DCF valuation is done for 01.01.2013.

Tattelecom DCF valuation


Tattelecom DCF valuation sensitivity



Potential upsides for DCF:
+ Slower decline of fixed line telecom subscribers
+ Broadband internet growth faster than expected
- Deterioration in EBITDA margin due to wages inflation and not enough optimization

5. Russian and Global comparables: 130-180% upside

The most relevant comps for Tattelecom are Russian telecom companies as Russian stock market overall has a big “country risk” discount.

By any of the 3 multiples Tattelecom has 130% growth potential, or more than two times cheaper.



For comparison below is a list of global benchmarks (except one outlier with 56x). The median is 5.9x which means that Tattelecom has 180% growth potential.

6. Value realization scenarios: probability is unclear

How could this huge value upside be realized? Realistically, only through change of control in the following scenarios:
  • Acquisition of Rostelecom
  • LBO
  • Privatization on an open auction
But, how is it viable? Owner of Tattelecom Svyazinvestneftehim sold nothing to external companies since 2005. Their strategy is “hold forever” so they probably would not sell in the future and would not care about delivering value for minority shareholders. This raises a question: why is Tattelecom public at all?

7. Conclusion: it’s a convertible bond

In a nutshell we have:

+ DCF upside is 80%. Comps assume 130-180%
? Unclear prospects for value realization

This makes this stock look like a convertible bond: there are no reasons for value decline and there is a small probability for big upside in case of change of control event.

K-cycles or Kondratieff cycles – we are in economic Winter

Date: 29 Jun 2012 23:00

K-cycles is a theory which is remembered during long downsides, when hopes for return of economic growth fail for several years. Now is exactly the same time.

How do k-cycles work?

According to K-cycle theory, economy has long cycles of 50-60 years. Each phase of the cycle is favorable to a set of investments.



Source: http://www.mitonoptimal.com/include/pdf/media/109/WeeklyComment-Week4.pdf

What is the length of the cycle?

Scott A. Albers and Andrew L. Albers on 30 March 2012 published a serious and innovative paper "On the Mathematic Prediction of Economic and Social Crises: Toward a Harmonic Interpretation of the Kondratiev Wave" analyzing US cycles (http://mpra.ub.uni-muenchen.de/37771/1/MPRA_paper_37771.pdf). Key conclusions:

Using a range of 7-year to 18-year “spreads,” we find that this approach provides strong evidence that American economic history is composed of four 14-year quarter-cycles within a 56 year circuit in the real GNP of the United States,1869-2007. These periods correlate closely with analysis by Nickolai Kondratiev and provide a framework for predicting an annual steady state rate of growth for the United States falling between 3.4969% and 3.4995% per year.

So, US cycles are 56 years long and (by the way) the long-term US GNP growth is 3.5%. It's a fact worth to remember.

Good research of global k-cycles could be find in "A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis", Korotayev, Andrey V and Tsirel, Sergey V (http://escholarship.org/uc/item/9jv108xp). Key conclusions:

Our spectral analysis has detected the presence of Kondratieff waves (their period equals approximately 52–53 years) in the world GDP dynamics for the 1870–2007 period.

So, global k-cycle is 52-53 years.

Where are we in the current k-cycle?

This is the most interesting question. All the sources I saw tell that:
  • We are in the middle of Kondratiev's Winter
  • Spring will start approximately in 2020
Good pictures are very rare in the analysis of k-cycles, here are the best examples I saw:



Source: http://www.financialsense.com/sites/default/files/users/u297/pdfs/2010/MacroSlides4Q10.pdf

Source: Masaaki Hirooka, Nonlinear dynamism of innovation and business cycles, 2003

One more opinion from Evan Gilbert, Head of MitonOptimal Asset Consulting, 26 January 2012: Where are we now? We believe that some emerging market economies (China, India, SA and Australia) lie in the Autumn phase – at about two o’clock. While prices of almost all assets rise in this environment, the future is not rosy – winter is coming as debt levels start to build in these apparently benign conditions. Developed markets have been suffering through winter in the last four years and it’s not quite over yet – we see them at around 5 o’clock. We expect them to move into the Spring phase in the next ten years. This is the basis for our increased allocation to equities, and decreased allocation to bonds. Our strategic positioning is fundamentally for Spring, but we are also very conscious of the onset of Winter in emerging markets – that’s what’s going to guide our tactical allocations.

Source: http://www.mitonoptimal.com/include/pdf/media/109/WeeklyComment-Week4.pdf

Application of K-cycles theory

The theory never became widely used due to several problems:

1) Hard to find an indicator which follow at least 2-3 k-cycles (110-165 years)

2) Today any country's' economy experiences a combination of several k-waves.

K-cycle theory is good to explain long waves in one economy – like US or Europe. Before 1990s when the world was not so globalised as it's now it was possible to apply the theory to these economies. I believe it would work well in a totally globalized world. But now we are in the transition period from partly integrated world to a fully global world.

That means any economy experience a combination of k-waves: local one and several from outside, coming mostly from the biggest trading or investment partners. For example, China experiences a superposition or combination of a Chinese k-wave, US k-wave and probably European k-wave. One more complication to the analysis is that as China becomes more oriented on internal demand, Chinese k-wave becomes more important than US and European.

History: Nikolai Kondratiev

Nikolai Kondratiev died in 1938 in the Russian Gulag. Kondratiev was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his first book, The Major Economic Cycles, in 1925. Over the following years he carried out more research during visits to Britain, Germany, Canada and the United States.

In his book and in a series of other publications he outlined what later became known as “Kondratiev Waves”. These were observations of a series of supercycles, long surges, K-Waves or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were at the time calculated to last from 50 to 60 years, or roughly a human lifetime in those days.

Kondratiev applied his theories to capitalist societies, most notably to the US from the time of the American Revolution. His undoing came in 1928 when he published his Study of Business Activity in the Soviet Union that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies. He fell out of favour with Josef Stalin, who saw his treatise as criticism. Kondratiev was arrested and following a series of trials he was banished to the Gulag, where he died.

Source: http://www.safehaven.com/article/23510/kondratiev-is-alive-and-well

Abrau Durso – 48% upside with "Champagne"

Date: 08 Jun 2012

Abrau Durso (JSC Abrau Durso, MICEX:ABRD) started to trade at MICEX-RTS on 11 April 2012 to "test" investor interest. So, let's test our interest.

The intrigue of the stock is that it's very cheap comparable to multiples from other emerging markets… except Russia.

EV/2011E EBITDA = 5.9x



What about DCF valuation?

My target price is 8,167 RUB which is 48% to 08.06.2012 close price at 5,501 RUB.

1. Russian Vine Market and Revenue

We will use the following model: Revenue = Volume * Price

Assumed macro context: slowdown of Russian GDP growth from ~7% in 2001-2007 to ~4% in 2011-2016

1.1 Russian sparkling vine market

In April 2012 presentation the company makes the claim that wine market in Russia will grow fast to catch up with European penetration. I don't support this.

Is there potential fast growth in vine consumption in Russia? No, but there is potential upside

The claims that it would grow with GDP to catch up with developed European countries is questionable:
  • In the last 5 years (since 2006) it grew 6.5% p.a.
  • US has even lower consumption: 8.8 vs. 9.3 in Russia


A lot of researchers assume an upside which is a good upside to have for a stock. This is one of the best papers on the topic: http://www.sostav.ru/articles/2003/02/03/prod030203/

Is there potential fast growth in penetration of sparkling vines to vine market? No

1) Russia already has the 2nd highest penetration among ~50 top countries.
2) Penetration of sparkling vines to wines showed no particular trend since 2006



So, expected growth of Russian sparkling wine market is well defined by its history: 2.2%

1.2 Abrau Durso Market share

Abrau Durso was aggressively gaining market share in 2008, 2010, 2011. Loss of market share in 2009 is well explained with 31% price increase vs. 17% CAGR in 2006-2008 and 14% CAGR in 2009-2011



The company didn't do any acquisition in 2009-2010 of production assets: the only acquisition was the following: "On 22 May 2009 the Group acquired 100% of the trading company LLC Atrium with the aim to create the distribution network within the Group."

I believe that the company will continue market share growth at 13% rate (CAGR 2006-2011): with 2011 market share of 4.9% there is enough space to grow.

1.3 Abrau Durso Price increase

Price increase was the biggest driver of revenue in Abrau Durso business model: prices grew at 18.6% CAGR in 2006-2011.



Part of this price increase was driven by growing penetration of the more expensive Classical champaign: it contributed 2.5% to price CAGR in 2009-2011. This contribution is forecasted to decrease to 1.3% in 2011-2014.



Note: there is an inconsistency in share of classical champaign at page 15 of the presentation and operational report (http://abraudurso.ru/upload/news/OperateReport5th.xls)

Price CAGR decreased from 17% before 2008 crisis to 14% after (-3% change). It's defined by several effects: inflation, duties, currency rates and share of imported vs. local wines. The last one is hard to take into account due to lack of data.

I would expect price growth to experience the same slowdown in the coming years due to increased competition.

Price CAGR forecast 2011-2016: 10% (11% rate before taking into account effect of slower growth of Classical champaign or 10% after)

1.4 Revenue forecast

Volume growth: 2% + 13% = 15%
Price growth: 10%
Revenue growth: 25%

Company's forecast: 34m bottles in 2015, which is 21% CAGR

2. EBITDA

In 2010 Gross Margin showed improvement, but SG&A increased due to G&A expenses growth. In 2011 EBITDA margin increased on 5.3% which is quite big and is potentially caused by preparation to IPO. Unfortunately there is no explanation for this change. Also, 2011 EBITDA margin is already on high levels – 32.6%.

To base projections on 2009-2010 data where all costs splits are provided, it's assumed:
  • 2012 EBITDA at average between 2010 and 2011
  • 2013-2016 EBITDA decreases on 1% p.a.

3. FCF

3.1 Working capital (WC)

The company showed good progress in 2010 vs. 2011 in improving its working capital components. Remy Cointreau shows that turnover of Receivables and Payables can achieve much more attractive levels.



WC projections assume 1% p.a. decrease in Inventories + Receivables turnover as % of revenue and 1% p.a. increase in Trade and other payables turnover as % of COGS.

3.2 CAPEX

2010 CAPEX as % of next year revenue change is 22%. For CAPEX forecast 30% is used.

4. DCF Valuation

IFRS report is available only for 2010, and debt and cash are given at the end for 2010. So all valuation will be done for the end of 2011, including FCFF for 2011 at 0% discount rate.

4.1 Acquisition of CJSC Abrau-Durso

One of the biggest complications of DCF valuation is acquisition of 41.2% of CJSC Abrau Durso on 22.07.2011 (http://www.e-disclosure.ru/portal/event.aspx?EventId=lVzZvlVYn0a0VuIkxKrhKQ-B-B).

"As a result of this transaction the Group’s share in CJSC "Abrau-Durso", JSC "Wine atelier Abrau-Durso", Fund for the revival of traditions of winemaking "Heritage of Abrau-Durso", "Service Abrau-Durso Limited", LLC "Abrau-Durso territory", Vine Yards Abrau-Durso Limited, LLC Abrau-Durso Public Utilities, CJSC Vino ER EF, LLC Center of Wine Tourism Abrau-Durso increased to 100%."

According to the prospect dated 18.11.2011, the company owns 99.999%-100% in all dependent companies. As no major M&A transactions happened since that time non-controlling interest is effectively 0 as of now. How to value this non-controlling interest at the end of 2010? To answer this question let's see how that deal was financed:
  1. According to rumors 41.2% were purchased at 500m RUB (http://foodmonitor.ru/drinks/2009-09-21-10-19-45/5515-2011-09-02-05-43-03.html)
  2. They were financed by 412m RUB loan which appeared in 2011 and can be seen in JSC 2011 report based on Russian accounting standards. It indirectly confirms acquisition price.
It's hard to track the whole deal and the following approach was used: market value of minority interest is 500 m RUB.

4.2 DCF Valuation

5. Conclusion

At current assumptions upside is 48%. Together with comparables valuation (EV/EBITDA 2011E at 5.3x vs. 8.4x in developed and 14.1x in developing markets) this makes the stock very attractive.



Upsides
  • Faster growth of sparkling wine market, market share or prices
  • No decline in EBITDA
  • Improvements in WC turnover
  • (tactical) Release of more information before IPO in 2012/2013 will make the analyzed attractiveness of the stock more clear and will increase investor demand
Risks
  • Tightened legislation, including increased excise taxes
  • Decrease in WC turnover
  • Growth of COGS
It's worth pointing out that 2% faster revenue growth in 2012-2016 (I assumed 15% volume CAGR while the company assumed 21%) and no 1% annual decline in EBITDA means 105% upside.




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20 Jul 2024 17:47