Bankers have been eyeing up Belarus’ leading supermarket chain and say that the current political crisis in the country is a golden buying opportunity to get into one of the best growth stories the republic has to offer.

As reported by bne IntelliNews in “The long march of Belarusian retail”, despite Belarus' self-appointed President Alexander Lukashenko’s neo-Soviet economic model, the country has been growing over the last two decades and a middle class has emerged that is going shopping.

Eurotorg (aka Euroopt) was set up in 1993 as a modern retail chain and drew on the Russian experience, where organised retail has been one of the biggest success stories of the Putin-era.

The company already turns over about $2bn a year and reported strong results for 2019. Eurotorg CEO Andrei Zubkou, commenting on the company’s results, said: “2019 was another year of business growth as we continued to do what we do best – growing our grocery retail operations. We focused on implementing our asset-light growth strategy in convenience-format stores, maintaining price leadership and developing our online services. As a result, Eurotorg not only strengthened its market leadership in Belarusian grocery retail, but also significantly grew revenue."

Revenue increased by 10.3% y/y and reached BYN4.9bn, or in dollar terms was up by 7.4% y/y to $2.4bn. Net retail sales increased by 9.8% y/y and reached BYN4.5bn (or up 6.9% y/y to $2.2bn), mainly driven by new store openings: 108 net stores added in 2019. Retail sales growth was also driven by the consolidation of Eurotorg’s e-commerce operations. The company leverage remains moderate with net debt/EBITDA ratio of 3.0x as of 31 December 2019, and it also delivered positive free cash flow of BYN364mn.

The company is due to report its 1H20 results next week and more progress is expected, although sales in the second quarter of this year are obviously going to be hurt by the coronacrisis.

As one of Belarus’ most attractive privately owned companies in October 2017 it launched Belarus’ first ever corporate eurobond issue, raising $340mn with a bond that matures in 2022 and pays a coupon of 8.75%.

The company then followed up a year later in October 2018 and attempted to launch a $300mn IPO on the London Stock Exchange (LSE), the country’s first ever public listing. While there was some interest, the offer was withdrawn a month later due to insufficient interest from investors.

While its appeal to London-based investors has been capped, the company is a lot more familiar to Russian investors, and it issued a RUB5bn five-year bond on the Russian securities market in June last year and then followed up with a RUB3.5bn ($52.7mn) syndicated loan facility agreement with a consortium of Russian banks in August.

Eurotorg’s bonds make it the only privately owned tradable security in the country and analysts say the current crisis has created a golden investment opportunity.

“The ongoing political crisis in Belarus has pressured the country’s tradable debt, and also affected its sole corporate eurobond, issued by Eurotorg,” said Stanislav Bozhenko, a fixed income analyst with VTB Capital (VTBC) in a note. ”EUROTG 22’s indicative quotes have declined around 5pp since July to 96.9% of par, implying a yield to maturity (YTM) of almost 11%, making it the highest yield return in our coverage space for a B-rated issuer.”

Bozhenko takes no position on the outcome of the current standoff between the protesters and Lukashenko, but says it doesn't matter, as Eurotorg’s business should be unaffected by the victory of either party. Running a supermarket chain is an almost entirely apolitical business, as underscored by the success of Russia’s leading chains.

“This note contains no predictions for the future of Belarus’s politics; however, it does detail our view that Eurotorg’s business profile is sustainable regardless the political course the country takes, and that the current price weakness is therefore a good opportunity to jump in,” says Bozhenko. “We also believe that the company could use the volatility to continue repurchases of its eurobond on the open market given its healthy liquidity and comfortable debt maturity shift.”

After struggling with debt in recent years, Eurotorg’s credit fundamentals have improved a great deal thanks to its dominant position on the Belarusian food retail market, where it accounts for 19% of sales in 2019. Eurotorg operated 879 grocery stores at the end of 1H20 and it ranks as the largest private company in Belarus by number of employees.

The company has been actively restructuring its debt and its borrowing in Belarus rubles has been almost entire replaced with debt denominated in Russian rubles, which have risen from 3% of total debt to 42% during over 2019. Eurotorg’s net leverage ratio was at a reasonable x3 as of 2019 financial year.

The company’s biggest risk – and indicative for much of the heavily dollarised Belarusian economy – is its exposure to fluctuations in the exchange rate.

There is a big mismatch between Eurotorg’s debt, 57% of which was $-denominated in 2019, and its revenue stream, which it earns in Belarusian rubles (BYN). Since the start of the current crisis following the presidential elections on August 9, the BYN has lost about 11% of its value to the dollar as the population, anticipating yet another economic crisis, scramble to change their savings into hard currency.

The company’s shift toward RUB-denominated debt in the last year will cushion the blow from any devaluation at home, but the company has also been hurt by the falling value of the ruble in the last month too.

But with cash in the bank Eurotorg has begun to actively buy up its Eurobond debt and has already reportedly repurchased $99mn of the outstanding $340mn debt, which has supported the price of the bonds.

“We keep a stable credit view on Eurotorg, as do both S&P and Fitch. Although the company’s medium-term deleveraging progress is likely to be limited by FX, its 1H20 trading update reflected a healthy 7.7% y/y increase in its net retail sales in BYN terms and 1.9% like-for-like (LFL) sales growth y/y, proving food retail sustainability during the challenging economic period,” says Bozhenko.