REPORT: Lenta IPO organizers expect retailer to accelerate sales growth in 2014
MOSCOW. Feb 7 (Interfax) - Analysts at the banks organizing the IPO of Lenta expect the Russian retailer to accelerate sales growth in 2014, while its competitors will see growth slow against the backdrop of a high base, the general slowdown of the economy and retail sales, growing competition and uncertainty in consumer sentiment.
Analysts at Deutsche Bank forecast that Lenta's revenue will grow 37.1% in 2014, the bank said in a report. Analysts at VTB Capital, however, are projecting more modest growth, but also above 30%.
Lenta released its IFRS financial results for 2013 at the beginning of this week and simultaneously announced plans for an IPO on the London Stock Exchange and in Moscow.
The retailer's revenue grew 31.3% to 144.266 billion rubles in 2013, with growth accelerating to 35% in the second half from 26.7% in the first half. For the year, Lenta was the fastest growing retailer in Russia (compared to public companies in the sector). Analysts believe the company still has potential to accelerate growth this year.
Lenta sales forecast, Deutsche Bank:
| Sales, mln RUB | Growth, % | Retail space, '000 m2 | Growth, % | |
| 2012 | 109 910 | 22,4 | 375 | 31 |
| 2013 | 144 266 | 31,3 | 508 | 35 |
| 2014 | 197 819 | 37,1 | 669 | 32 |
| 2015 | 259 487 | 31,2 | 859 | 28 |
| 2016 | 338 588 | 30,5 | 1 074 | 25 |
Lenta sales forecast, VTB Capital (mln RUB):
| Total sales | Hypermarket sales | Supermarket sales | |
| 2012 | 109 910 | 109 887 | - |
| 2013 | 144 266 | 143 290 | 930 |
| 2014 | 191 547 | 186 587 | 4 960 |
| 2015 | 248 402 | 237 425 | 10 977 |
| 2016 | 315 616 | 296 405 | 19 210 |
| 2017 | 388 432 | 358 915 | 29 517 |
| 2018 | 469 479 | 428 479 | 41 000 |
VTB Capital analysts therefore expect more modest growth of 32.8% for Lenta sales in 2014, but their forecast also anticipates faster growth than in 2013. The analysts believe sales growth will begin to slow in 2015, to 29.7% and then to 27%, 23% and 20.9% in 2016-2018.
Lenta's compound annual growth rate (CAGR) will be 27% in 2014-2018, including 24% for its hypermarkets and 116% at supermarkets, analysts reckon.
Leading Russian retailer Magnit saw sales growth slow to 29.22% (to 579.5 billion rubles) in 2013 from 33.6% in 2012, and expects growth to slow further to 22-24% this year.
O'Key, which like Lenta earns most of its revenue from sales at hypermarkets, increased sales by 18.7% (to 137.7 billion rubles) in 2013, slightly less than management forecasts of 19-22% growth and down from 25.7% growth in 2012. O'Key expects sales to grow 15-19% in 2014.
Dixy saw sales grow 22.7% (to 180.5 billion rubles) last year, which was also lower than the retailer's own forecast of 23.5%. This company expects sales growth to slow to 15-20% in 2014.
X5 Retail Group increased sales by 8.7% to 532.7 billion rubles in 2013. Growth was slightly stronger than the company's own forecast of 8.1%. X5 has not yet released a sales growth forecast for 2014.
Lenta's like-for-like (LfL) sales grew 10% in 2013, driven by "competitive pricing, creative promotions and improving offer," the company said earlier. Lenta was also the industry leader by this figure, as LfL sales grew 5.22% at Magnit last year, 8% at O'Key, 3.9% at Dixy and just 0.7% at X5. Furthermore, LfL customer traffic fell at all public retailers except O'Key.
At Lenta, LfL traffic grew 1.8% in 2013, though in the first quarter the company saw a slump in traffic as LfL traffic at its hypermarkets dropped 1% for the first time since 2010, Deutsche Bank said, citing company data.
In terms of LfL sales growth, Lenta performed best in the third quarter, when this figure rose 13.2%. Growth measured 8.9% in the first quarter, 6.4% in the second and 11.1% in the fourth. An important factor in LfL sales growth in the fourth quarter, the company said, was "robust consumer demand in the wider Russian market."
Deutsche Bank forecasts that Lenta's LfL sales will grow 10% in 2014.
Lenta said that "2013 was a year of acceleration" for the company, driven by LfL sales growth and chain expansion. Growth accelerated considerably from 22.4% in 2012. Nonetheless, it was slightly below the company's forecast for 2013, made at the beginning of last year - in a presentation for a debut bond offering in February the company said it planned to increase sales to 146.219 billion rubles in 2013.
In 2014, according to this forecast, the company's sales will grow 34.5% to 196.602 billion rubles, which is lower than the Deutsche Bank forecast but higher than VTB Capital's.
The company planned to grow sales 21.8% to 239.399 billion rubles in 2015 and 20.8% to 289.264 billion rubles in 2016.
In the February presentation Lenta also said it planned to open 18 new stores annually starting in 2013. However, last year it exceeded this target, opening 21 hypermarkets, as well as its first ten supermarkets, a format with which Lenta began expanding in Moscow in the spring of 2013.
Lenta's retail space grew by 35% last year, which was also an industry-leading figure. Retail space increased by 18.13% at Magnit, 12.9% at X5, 14.3% at O'Key and 21% at Dixy.
In 2014, Dixy plans to open at least 24 new hypermarkets and 15 supermarkets. Deutsche Bank analysts reckon the company's retail space will expand by 31% this year. They reckon this figure will slow to 28% next year, 25% in 2016 and 17% in 2017. However, they expect Lenta to accelerate expansion of its hypermarket chain after 2014 and open 25 hypermarkets in 2015, and 28 each in 2016 and 2017.
VTB Capital expects Lenta to open 25 hypermarkets annually in 2015-2018 and be the most aggressive player in Russia's hypermarket sector.
Lenta operated 77 hypermarkets, ten supermarkets and four distribution centers, capable of serving 120 hypermarkets, at the end of 2013. The company plans to open two new distribution centers, in Togliatti and Rostov, this year, and another in the Ural region in 2015 or later. As a result, Lenta's network of distribution centers will be able to serve more than 200 stores.
The company plans to increase the level of centralization to 60% from 35% at present. For comparison, this figure is currently 68% for Magnit's chain of hypermarkets, Deutsche Bank said.
Lenta plans to double its retail space over the next three years, the company said earlier. Its strategy is to become the largest or second largest operator of hypermarkets in every region where it has a presence.
Due to its aggressive expansion, the company will show a positive free cash flow only in 2017, Deutsche Bank forecasts. Average capital expenditures on opening one company-owned hypermarket amounted to 974 million rubles in 2013, while capex on one distribution center is estimated at 1 billion-1.3 billion rubles.
Forecast for Lenta capital expenditures, mln RUB:
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Deutsche Bank | 22 496 | 25 600 | 28 701 | 33 624 | 34 443 | - |
| VTB Capital | 22 394 | 26 003 | 26 463 | 26 897 | 28 901 | 29 862 |
In order to achieve its impressive, industry-leading sales growth, Lenta is prepared to sacrifice its gross margin, which was 21.8% last year, well below Magnit's 28.5%. Other retailers have not yet released results for last year. In 2012, Lenta also lagged behind its competitors in terms of gross margin, which was 20.6%, compared to 26.53% at Magnit, 23.6% at X5, 23.5% at O'Key and 29.2% at Dixy.
Lenta's management has stressed that the company is more focused on volume rather than on profitability, assuming that a lower markup (and gross margin) will boost growth of traffic and sales, which will have a positive impact on the EBITDA margin, VTB Capital said in its report.
Deutsche Bank analysts expect Lenta to slightly improve its gross margin in 2014 to 21.9% by improving purchasing terms. The figure will remain at the same level in 2014-2016, since it could come under pressure from investment in prices amid growing competition from local and national chains.
Forecast for Lenta gross margin, %:
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Deutsche Bank | 21.8 | 21.9 | 21.9 | 21.9 | 21.7 | - |
| VTB Capital | 21.8 | 21.9 | 21.8 | 21.7 | 21.7 | 21.7 |
Lenta announced its plans at the beginning of the week to hold an IPO on the London and Moscow stock exchanges.
It is assumed that shareholders will sell their stake in the IPO: TPG has a 49.8% stake in Lenta capital, the EBRD has 21.5%, and VTB Capital 11.7%.
Deutsche Bank, one of the organizers of the IPO, has said that 20%-25% of share are planned to be sold in the IPO. Other organizers are Credit Suisse, J.P. Morgan, VTB Capital and UBS.
The selling stockholders will be subject to a 180-day lock-up period, management and directors to a 365-day period.
There is an over-allotment option for book-runners of up to 15% of overall IPO volume.
The planned size of the IPO has not been announced. Financial market sources have told Interfax that the size of Lenta's IPO could be $1 billion-$1.5 billion, and the IPO could take place in February or the beginning of March.