MS lower Metro to Equal-weight given the share price breached their PT this week and they struggle to identify any near-term catalysts.
*No change to FY14-FY16 earnings estimates: While we believe Media Markt’s and Kaufhof’s medium- to long-term prospects are improving, this will likely not be enough to generate meaningful earnings traction at Group level given the slow pace of change at the Cash &
Carry and Real business models and recent negative macro and FX developments.
*The potential IPO of C&C operations in Russia could be an important step… Earlier this year, we
argued that listing the Russian operations could be beneficial, given that (1) Metro’s operations there are posting a high ROIC and have attractive growth prospects – we believe the Russian division could ultimately double or triple in size – hence, acceleration of the division’s expansion has strategic merit; (2) it would allow the Russian operations to become even more
“local”; and (3) deleveraging of the Group balance sheet would help speed up the turnaround of its C&C operations in Western Europe – a strategic move not dissimilar to the one conducted by Carrefour over the past 18 months.
* … and our bull case incorporates further portfolio optimization: We estimate that a potential listing of C&C Russia could add approximately €2 to €3 to Metro’s share price. With our price target on par with the current share price we think the market may already be discounting some possibility of this taking place next year. Signs of a recovery in Media Markt’s margins or
further portfolio rationalization could drive the shares closer to our bull case.