METRO

Beaten down , Eastern European business valued at zero with numerous potential catalysts ahead. BUY

• YTD MEO is -30% vs DAX -5% on back of Russian IPO pulled and current Russia/Ukraine worries
• Stock spiked +7.8% on the initial announcement of the IPO while it has fallen 20% over the past month on geopolitical worries with regards to Russian IPO and currency shifts
• Russian IPO put on hold earlier this year, analysts’ initially valued the Russian Cash & Carry IPO at between EUR 1bn – EUR 1.75bn
• Russian Cash and Carry business only generates revenues of EUR 4.1bn (6% of the group’s sales)
• Recent Cash and Carry asset sale in Vietnam valued at EUR 655m, this will provide funding for growth which eases the need for the cash from the awaited Russian IPO. Funds will be used to move faster forward with the expansion and reducing the debt
• EBITDA from the entire Eastern Europe regions estimated at EUR 735m, subtracting this from the current BBG consensus we see the company trading at a 14% discount relative to the comps
• Including the Eastern European income we see MEO GY trading at a discount of between 60-70% to the comps compared to 40% ahead of the Ukraine situation.
• The retail sector is not usually very affected by political turmoil and the Russian business only imports around 10% of its food. Since sanctions they now import Fruit and vegetables from Turkey as they are not in the EU and therefore sanctions do not apply
• Minimal effect of the sanctions so far
• We believe that fundamentally not much has changed for the group and the Vietnam asset sale will provide the capital needed to reinvest in the business
• We believe that the Eastern European business is currently unjustly priced close to zero and see the stock recovering in the short term to EUR 29 level while we have a medium term price target of EUR 36 expecting the Eastern European business again to be fully priced.

Possible catalysts include:

• An ease to the geopolitical tensions
• Russian IPO back on track (spoke to company this morning if you would like more details)
• The speculated spin off of Media-Saturn following a power struggle with founder
• Potential sale of Galeria Kaufhof. Still seen as non-core and a business that is growing
• The outside possibility of a break-up of the entire group. (extremely unlikey)