Research Notes

On May 8, 2007 Dixy Group, which owns food retail chains Dixy, Megamart and Minimart and ranks among Russia's Top 5 retail chains in terms of turnover in 2006, opened the order book as part of its initial public offering (IPO).

The target price for Dixy Group's shares, which we calculated excluding its SPO, of $21.30 is in line with the target range determined by the company. Thus, we recommend investors to pick up Dixy Group's shares not below $21.30 a share.

Dixy Group's placement volume is up to 25 mln shares held by the company's major shareholders or 50% of the charter capital. However, shortly after the offering the selling shareholders intend to buy back via closed subscription 10 mln additionally issued shares at the placement price. Thus, Dixy Group's charter capital after the SPO will amount to 60 mln shares and free float should consequently be equal to more than 41.6%.

The company intends to use IPO proceeds to further roll out its retail chain, repay its current debts and also execute the chain's rebranding scheduled for 2008-2009.

Dixy Group achieved a 42% y-o-y spike in 2006 sales to $1,009 mln. However, Dixy Group is not marked by strong net margin which equaled 0.9% in 2006, i.e. much lower than the average for Russian retailers.

As of April 30, 2007 the total number of the company's stores reached 333, with Dixy sales outlets accounting for a large portion (their number increased to 327 by late April 2007 from 211 in 2005).

Under the conditions of dynamic expansion of the retailing sector in Russia the diversity of Dixy Group's store formats, which enables it to achieve strong revenue growth along with its flexible approach towards network expansion using less stringent requirements for floorspace, will contribute to increasing investor interest in the company's equities.

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Sergey Filchenkov

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