Analysts cheer Russia's X5 retailer's e-grocery IPO plans

Analysts cheer Russia's X5 retailer's e-grocery IPO plans
Russia's X5 Retail Group plan to IPO its e-grocer division that should raise hundreds of millions of dollars for the company
By Vadim Dumes in Paris November 27, 2020

The analysts met with enthusiasm plans by Russia's largest food retailer X5 Retail Group to IPO its e-grocery and express delivery assets in the medium term.

As reported by bne IntelliNews, Russia e-commerce is booming. X5’s management said this week that the retailer could IPO its delivery and e-grocery assets in the next two to three years. X5 had a strong headstart on digital innovation in the Russian retail segment and used its advantage to emerge as the largest e-grocer amid the coronavirus (COVID-19) lockdown.

The digital overhaul of the company is detailed in a bne IntelliNews exclusive interview with Vladimir Salakhutdinov, the head of strategy at the company.

Upside in valuation

The company's comments on a possible IPO should give a boost to sentiment, Sberbank CIB writes on November 27, and is only the latest of Russia’s e-commerce companies to tap international capital markets.

X5 is hoping to tap into the current enthusiasm for Russian tech stocks. Sberbank notes that X5 is currently valued at Enterprise Value/Ebitda multiples, and the online businesses are still to break even next year on Ebitda level, which leaves the market assigning no value to the segment.

"If the online businesses were valued separately on an Enterprise Value/Gross Merchandise Value basis, there would be massive upside for the stock," Sberbank CIB notes, seeing X5 as the top pick in the sector.

Indeed, VTB Capital (Hold recommendation for X5) wrote on November 27 that its 12-month target price of $40 does not assign any value to X5’s online operations and so the analysts see upside risks from an IPO or private placement of the online assets.

The stock is flat year to date and now trades on 2021 forecasted Enterprise Value/Ebitda of 6.3x, which VTBC sees as fair.

Ozon leading the way

X5 "seems to have been inspired by Ozon’s successful placement, and the retailer is looking at various options to monetise its rapidly growing online businesses," Sova Capital commented on November 27.

Most recently, the IPO of Russian Ozon e-commerce platform on NASDAQ boosted its market capitalisation by 40% to over $8bn after the placement.

The shares of Russia’s internet giant Yandex have also returned just under 50% year to date coming back from a -40% return in March in the worst of the crisis and one of a handful of Russian stocks to make any gains this year at all. The leading RTS index has been down c.25% for most of autumn, although it has recovered somewhat in the last two months as a relief rally appears to be getting underway, and was down 16% as of November 27.

Encouraged by the enthusiasm of Russian tech stocks, X5 is now considering an IPO of its express-delivery aggregator Okolo, Perekrestok Vprok platform, 5Post e-grocery logistics service.

"Perekrestok Vprok looks to be the most obvious and relatively mature candidate for a spin-off. Burgeoning growth in the underpenetrated e-grocery market and the near-term prospects of positive Ebitda should arouse investor interest," Sova analysts believe, seeing the news as positive for shareholders.

Based on Perekrestok Vprok’s 2020 revenue of about RUB14bn and estimated 2021 revenue of about RUB22bn, as well as Ozon’s IPO valuation, this business alone could be priced at around RUB60-62bn as of now (8% of X5’s current market capitalisation), Sova estimates.

Perekrestok Vprok prime for IPO

Sova Capital believes that Perekrestok Vprok could be of great interest to investors for a number of reasons, such as explosive growth, and a huge structural opportunity in an underpenetrated market. The asset also has near-term prospects of positive Ebitda, as X5 repeatedly mentioned that Perekrestok Vprok is expected to turn Ebitda-positive in 2021.

However, on the other hand, Sova notes that the bulk of the success of X5’s online businesses is attributable to synergies within the retail group.

"Despite Perekrestok Vprok having its own logistics infrastructure and IT platform, we believe it still leverages X5’s purchasing power, brand recognition, customer loyalty and some business and IT solutions, among other things," the analysts write.

As such, a potential spin-off of this business could raise certain questions from a corporate governance perspective that have yet to be clarified, they warn, while still affirming a Buy recommendation on X5 shares.

Express delivery promising niche

VTB Capital (VTBC) on November 27 also reminds that Perekrestok Vprok will reach gross merchandise value (GMV) of RUB100bn in three years, compared with RUB12.7bn of e-grocery turnover in 9M20.

But the analysts note that express-delivery is also a promising niche for X5, which is based on deliveries from convenience stores, with a roll-out from this year and a 29% contribution to 3Q20 online sales. X5 anticipates that express-delivery will reach Ebitda breakeven in 2023.

VTBC sees the theme of e-grocery being tangibly enhanced across the public universe with an additional focus on the online platform of Yandex (Yandex.Lavka) and Sbermarket and JV (Sbermarket and Samokat).

E-grocery in Russia is estimated at RUB145bn in 2020, by InfoLine. It is forecasted to grow to RUB605bn by 2023 while increasing its contribution to total food retail from less than 1% to 3% (versus 3.5% across developed markets).

"Express-delivery is in our view the most rapidly growing niche and is in great demand in cities with a population of over 1mn," VTBC analysts argue. It was pioneered by Samokat, later followed by Yandex.Lavka.

X5 is developing the service from 2020 and now covers more than 500 outlets in 10 cities with a blended ticket of RUB1,500-1,700 and over 16,000 orders daily. X5 Retail Group leads in online food sales in Russia, with 9M20 turnover of RUB12.7bn, VTBC reminds. Out of that stock-up, shopping contributes 76%, and express-delivery 24%, of the total.