(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

LONDON  - 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 cash-strapped 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 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.

 

CONTEXT NEWS

- Russian discount retailer Fix Price said on Feb. 15 it was considering an initial public offering in Moscow and London, where it would list its global depositary receipts.

- The company, which has more than 4,200 stores in Russia, as well as Belarus, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia and Georgia, had revenue of 190 billion roubles ($2.6 billion) in 2020 and adjusted EBITDA of 37 billion roubles. It sells everyday products like toiletries and cleaning products at fixed price points all under 250 roubles ($3.4).

- Two sources familiar with the deal told Breakingviews that the company may be valued at $8 billion-$9 billion in the IPO.

- The selling shareholders are the company’s founders Artem Khachatryan and Sergey Lomakin; investment company Marathon Group and Goldman Sachs subsidiary GLQ International. In addition, some GDRs would be sold on behalf of some senior managers and other minority shareholders. The founding shareholders will retain a significant interest in the company after the IPO.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Neil Unmack and Karen Kwok)

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