OREANDA-NEWS. August 28, 2009. Magnit has held a conference call with analysts to discuss the company’s 2Q09 IFRS results. The key takeaways are as follows.

- Magnit expects rouble sales to grow no more than 30% YoY in 2009 on the back of monthly average ticket growth slowing down.

- Profitability levels were achieved not only by improving internal processes, but also because of a lack of competition. Management guided for a further improvement in operations.

- Magnit receives some revenues by letting part of its space to third parties. The company does not have space to let in all shopping malls, but where it has it estimates the level of vacancy at 50%.

- In 1H09, the level of centralisation (percent of goods delivered to stores through distribution centres) was 80.5% and Magnit plans to increase this to 82-83% by the end of 2009. We think that this could potentially transfer into a gross margin increase of 0.2-0.3%. The company is targeting 90% centralisation. Hypermarkets are on average 50% centralised and the target is to increase this to 75%.

- Magnit mentioned that the hypermarket EBITDA margin is currently higher than at discounters: lower SG&A costs offset the smaller mark-up, but the net margin is lower on higher interest payments.

- In 1H09, the company raised wages in line with inflation in certain staff categories. We estimate the overall effect for the year will be 7-8% in nominal terms, down from previous expectations of 15%.

- Magnit mentioned that it has managed to improve the use of staff costs by cutting 2,000 personnel in the existing store base and relocating them to a new opening.

- The company plans to open 3-4 hypermarkets by the end of 2009, bringing total hypermarket openings to 9. In 2010 Magnit envisages opening 14-16 hypermarkets.

- The company’s capex for 1H09 was USD 191mn (RUB 6.2bn), or 44% of the capital investments for 2009, which we estimate at USD 520mn (RUB 17bn). We note that the second half of the year is usually more capital intensive.

- As of 1 July 2009, the company’s total debt had reached USD 489mn, up from USD 406mn as of 1 January. We estimate that Magnit will need about RUB 2.5bn in external financing through the end of 2009, but note that it had undrawn credit lines totalling USD 303mn as of the end of 1H09.

In our view, it is possible to extrapolate the full year numbers from the 2Q09 figures: we expect 3Q09 to be either flat or marginally better, while 4Q09 would most likely show higher profitability levels. We think that long term profitability will be driven by the i) level of competition; ii) company investing further in improving logistics; and iii) share of formats in sales (hypermarkets versus discounters).

In light of the 2Q09 results and management comments during the conference call, we think that there might be upside risks to our full year forecasts.