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Seeking Alpha: Ozon Holdings: A Gem Of The Russian E-Commerce Industry

Summary

  • Ozon Holdings is an e-commerce platform operating in Russia that offers the broadest multi-category product selections.

  • The company is scaling up very fast and, in Q4, posted over 140% y/y growth in GMV (from 127% in Q3).

  • Russia has one of the lowest e-commerce penetrations around 6% in line with LatAm) but it relies on an 83% internet penetration with 113 mln users (first in Europe).

  • Ozon has recently launched a loan and a credit service dedicated to its marketplace participants (Ozon platform and Ozon.Card) in the effort to support further users' adoption of its services and high order frequency.

  • The valuation seems compelling as the stock is trading at 3.6x Ev/Sales 2022e. We estimate an equity value in the region of $15,6bn, which delivers $75.2 per share with a potential upside of around 34.

Investment Idea

Ozon Holdings (OZON) is a leading e-commerce platform operating in Russia that offers the broadest multi-category product selections. Even though the country has a relatively low e-commerce penetration, COVID has skyrocketed the number of users and the future for the industry is brighter than ever.
We estimate an equity value in the region of $15,6bn, which delivers $75.2 per share with a potential upside of around 34% (potential dilution still has to be taken into consideration).

Takeaways from OZON's recent results

Q4 GMV posted >140% y/y growth. GMV momentum shows a sequential acceleration (127% in 3Q20) thanks mainly to a 137% y/y increase in the number of orders to 29.6 mln as the GMV per order is rather stable.

Operating cash flow in 4Q20 implies a breakeven in FY2020. On top of the revenue growth, the main driver was a better working capital management.

In 4Q20, Ozon has launched a loan (OZON.Invest Platform) and credit service (OZON.Card) dedicated to its marketplace participants in the effort to support users' adoption of its services further. It is worth noting that the card gives the right to receive a 5% cashback on all purchases made via the Ozon platform and Ozon.Card. OZON aims to incentivize high order frequency (it seems that cardholders make more than 1.6x more transactions).

The opportunity in the Russian market

Russia has one of the lowest e-commerce penetrations, which stands at around 6%, almost in line with the LatAm penetration rate. The main difference is that Russia relies on 83% internet penetration with 113 mln users (first in Europe), which is very high and should support a sharp increase in e-commerce once shopping habits are more and more shifted toward e-commerce. OZON is well placed to reap the benefits of this trend.

Clearly, like for all other e-commerce platforms, COVID-19 has been a great flywheel that has boosted the penetration of e-commerce across the globe. OZON has reaped the benefits of this trend. Like its competitors, it is trying to expand the range of products offered (it already relies on the widest assortment of products available in Russia), its own logistic network, and payment systems.

We have analyzed a similar trend at MercadoLibre (MELI), which is hugely investing in advertising, developing the logistic network across LatAm, and increasing the penetration of its credit facilities MercadoPago MercadoCredito app to facilitate sellers and clients.

Valuation Approach

For the time being, Ozon still has a negative EBITDA and FCF, but, like its peers, it is trying to scale up very fast in order to get sufficient economies of scale and become profitable soon. In our estimates, EBITDA is expected to be positive in 2023.

Our valuation assumptions are the following:

1. 2021-24 CAGR in revenues at 39.3% based on consensus and 2025-30 CAGR at 25% based on our estimates. Overall, 2021-30 CAGR is 26.8%.

2. 60% EBITDA to FCF conversion, which is in line with other e-commerce platforms we have analyzed and slightly above the FCF conversion implied in consensus data.

3. A discount rate at 9% plus 2% additional risk premium to take into account exchange rate risk also in light of the current tense geopolitical situation. Our discount rate is thus 11%. Ozon recently offered USD 750 mln convertible bonds (conversion share price at USD 86,6 per share) with maturity in 2026. The interest rate is 1.875% which is not representative of the cost of funding as it carries the conversion option. Stripping for the equity component, we believe OZON has the capacity to raise debt at around 8%.

4. A perpetual growth rate of 3.5%, which, in our view, is even conservative given the high growth nature of the business and the e-commerce perspectives in Russia.

Based on these assumptions, we estimate an equity value in the region of $15,6bn, which delivers $75.2 per share with a potential upside of around 34%. Please note that we have not incorporated the potential dilution from the convertible bond in the number of shares.


Source: Moat Investing

Sensitivity analysis

The sensitivity analysis is highly important as it shows how value drivers impact our valuation. Here the value drivers are:

  1. CAGR in revenues
  2. EBITDA to FCFF conversion
  3. Discount rate
  4. Perpetual growth rate

In the tables below, we have tested our target price by changing:
  1. The discount rate and the perpetual growth rate
  2. The FCF conversion and the perpetual growth rate
  3. The FCF conversion and the discount rate

Our valuation ranges between $63 and $89 per share.


Source: Moat Investing

Relative valuation vs. MELI

We have compared OZON and MELI's multiples in the current market cap (MELI price USD1.480 and OZON price USD56).

It is interesting to note that OZON seems to trade at huge EV/Sales and EV/EBITDA discount vs. MELI, which is not justified by the higher than expected sales growth in MELI. The 2021-30 CAGR in revenues equally matched for the two players: MELI has an expected 2021-30 CAGR at 28%, while OZON stands at almost 27%.

The picture changes definitely when we compare the two companies on an EV/FCFF basis. Here MELI trades at a discount to OZON and reflects MELI's peculiarity to have non-cash expenses and non-operational income in its CF statement. MELI FCF is higher than its EBITDA.

Overall, we have to also say that OZON is experiencing domestic competition in its core market (Yandex and Wildberries), which probably puts its expected growth more at risk. MELI commands better leadership in its core market.

Furthermore, MELI is well ahead in its growth strategy, and it is already profitable. That's why we believe it trades at a premium vs. OZON.


Source: Moat Investing

Risks to our valuation case

The main risks to our investment case lie in:

  1. A more challenging-than-expected competition, which would slow down growth, affect projected margins and delay the expected breakeven.
  2. The overall macro context and the geopolitical risks are other factors of potential concerns as they can imply lower consumer spending and potential local currency devaluation.

Original article: https://seekingalpha.com/article/4415941-ozon-holdings-gem-of-russian-e-commerce-industry