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Food sector has outperformed... Food retailers in Russia, Turkey and Poland outperformed their respective market indices in the last quarter of 2012, and most of them showed above-consensus 3Q12 results. Over the past 3M (to 16 January), the universe we cover in this report added 17%, on average, with O'Key, Dixy, Bizim Toptan and Magnit GDRs the strongest performers (and X5 the weakest, down 13% on a 3M-basis).
...but we maintain our positive long-term outlook. We remain positive on food retail sector fundamentals across CEEMEA, favouring the Russian market due to its stronger consumer/macro fundamentals and sector consolidation opportunities, and Turkey for its M&A potential. In a volatile macro environment, we believe the defensive nature of the food retail sector should continue to attract investors.
Key trends by geography in 1Q13. We warn that in 1Q13 Russian and Polish retailers may experience margin pressure from operating cost inflation (mainly fuel, utilities and rent), LfL pressure from slowing consumer expenditure (in Russia due to additional requirements on banks when issuing new consumer loans, which should cool consumer spending; in Poland because of continuing tough macro trends), while regulatory changes should benefit retailers in Russia. We do not expect positive reporting surprises from retailers in Russia or in Poland in 1Q13, except for Magnit, and the sector seems at ribnesk of some profit-taking. However, scarcity value will continue to play a role, which could support the share prices of Magnit, Jeronimo Martins and BIM, in our view. In Turkey, growing competition is becoming one of the key market determinants, and we expect all eyes to be on retailers' margins when they report next. We see higher risk to BIM's already-tight margins, given the stock's premium valuation.
Top picks for 1Q13. After a strong start to the year, most stocks on which we have a long-term positive view based on fundamentals are currently trading on high multiples that leave little room to disappoint the market. Our top picks for the quarter across the geographies covered in this report are Dixy and Bizim Toptan on a valuation basis, despite their strong recent performance. We also remain positive on Magnit and Migros. Short-term volatility is possible in Magnit given its recent stock outperformance, and any weakness should be considered as a buying opportunity, in our view. We remain long-term bulls on Magnit. Eurocash might also perform well if it is included in the WIG20 Index (announcement due on 10 February, rebalancing on 16 March), but we think most of this expectation must already be in the price.
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