Russian retail IPO offers crowded bet on misery

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DASHA AFANASIEVA VIA REUTERS BREAKINGVIEWS

Russian retail IPO offers crowded bet on misery

A stagnant economy, sanctions and low oil prices are the standard risk factors that Russian companies hoping to go public tend to flag to investors. But for Fix Price, they are part of the allure. The company, which could be worth $9 billion, is a bet on the country’s stagnant incomes. The only worry is fending off new entrants.

Goldman Sachs-backed Fix Price has 4,200 stores in Russia as well as Belarus, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia and Georgia, flogging household items like dustpans or toothpaste at pre-set prices. The challenge of the model is to find enough suppliers willing to sell at those levels and getting products on shelves that punters want or need.

The format is proving popular in other countries, with both European Action and B&M growing rapidly. Poland’s Dino Polska, probably the closest listed competitor, is valued at 27 billion zloty ($7 billion) including debt, or around 21 times this year’s forecast EBITDA. Assume Fix Price can grow its top line this year by 30%, and make the same 19% margin as 2020. That would imply a valuation as high as $14 billion including cash on the same multiple. Investors will want a discount, given it’s a new listing and to compensate them for the risks of doing business in former Soviet states. A 34% haircut would bring the equity value close to the $9 billion being touted by people familiar with the offer.

The question is how long Chief Executive Dmitry Kirsanov will be able to sustain last year’s 33% top line growth rate. The pressure on Russians’ real incomes, which fell 3.5% last year, could help as cashstrapped consumers are more likely to prioritise price over expensive brands.

And, even though Fix Price is 14 years old, it still has scope to expand. Euromonitor reckons there’s room for up to 11,700 discount stores

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across Russia, nearly three times the Goldman-backed group’s footprint. In Poland there are almost 35 Dino stores per million people compared to fewer than 28 stores per million people in Russia.

The problem for Kirsanov is that major supermarkets are catching on: X5 Retail and Magnit, the country’s top two supermarkets, are launching their own discount chains, bringing greater scale and financial muscle. To persuade investors they are getting a bargain, Kirsanov will need to show he can win the discount war.