OREANDA-NEWS. September 20, 2011. Dixy has released a strong set of 1H11 IFRS financials this morning (20 Sep). The company’s EBITDA margin is now in line with the sector average (which has decreased while Dixy’s profitability has improved)) while its organic growth still looks moderate. Our key concern is the company’s leverage, which has increased to a 2011E annualised debt/EBITDA ratio of 3.8x, which may hamper Dixy’s network expansion in 2012. The company will have to refinance RUB5bn of debt in the next nine months and given that there have been no public debt raising deals in Russia over the past month (with the exception of those bought by underwriters), we believe this refinancing might be a challenging task.

The Victoria acquisition has improved Dixy’s P&L, however, there is a risk that Dixy will have to slow its expansion given that the recently acquired chain’s integration will require expenditure. Dixy will also need to focus on slashing Victoria’s operating costs which amount to 28.7% of total revenue and are the highest in the sector.

Bottom line

The results look strong, but the increased leverage negates the positive spin and may compromise the company’s growth, in our view. Dixy has outperformed listed local retailers over the past three months while its high leverage (which we believe the company itself views as problematic in light of its failure to address its repayment schedule for the next six months at today’s conference call) as well as moderate discount vs EM and local peers suggest downside risk in the name.