Companies -> Epicentr-K

Business description

Epicentr is the absolute leader of the Ukrainian DIY retail market, one of the largest players in the retail market as a whole, as well as one of the largest agricultural holdings in the country.

Epicengter logo

At the beginning of 2021 the group operates 75 construction materials super- and hypermarkets (64 under the Epicentr-K brand, 11 under the Novaya Liniya brand) with a total sales area of more than 1.5 million m2 and total sales revenue in 2019 at the level of UAH 58 billion (including income of the New Line, but excluding income from grain exports through Epicentr-K).

The owners of the company - Alexander and Galina Gerega - began trading in construction materials a long time ago - back in 1996, when their first store was opened. The first large DIY supermarket was opened in 2003 and had a total area of 17 thousand m2. After that, a rapid expansion of the company began: in 2006 the chain already consisted of 6 hypermarkets, in 2007 - 14, 2008 - 22:

Epicentr number of stores
* - including Novaya Liniya

Together with Novaya Liniya (whose shareholders at that time included such companies as Dragon Capital and East Capital), Epicentr became one of the leaders in the DIY market of Ukraine.

At the same time, the market itself was developing at a very good pace (and indeed 2006-2007 were the years of a construction boom in Ukraine). Both companies were, in fact, its pioneers, so initially the competition was between them - Epicentr competed with Novaya Liniya mainly for the best hypermarket locations. European retailers - Praktiker and OBI - also entered the Ukrainian market, but for a number of reasons (probably corruption in Ukraine was an important factor), they were much less aggressive in their development.

With so little competition and good demand for its products, Epicentr was doing well: in 2008, its network already consisted of 22 hypermarkets, while Novaya Liniya numbered 13. Business was quite profitable - gross profit margin at the level of 30% vs. less than 20% in food retail where competition was much more severe. Also it was important that such an aggressive development did not lead to a significant increase in the company's debt burden.

In addition to this, Epicentr successfully negotiated with its suppliers - not just about a significant delay in payment (by 120-180 days, which significantly exceeds the delay in other segments of Ukrainian retail), but even about “payment after the sale of goods”, which allowed the company to have a wide range of products in its super- and hypermarkets.

All these factors allowed the company to continue active development. Decisions in Epicentr have been made quite quickly, since the owners themselves managed the company, while the main shareholders of Novaya Liniya were investment funds. Also the company effectively worked with local authorities regarding obtaining all construction permits (Galina Gerega herself in 2012-2014 years was the secretary of the Kyiv city council). At the same time, due to economies of scale, the company's position in negotiations with suppliers even improved.

Another characteristic feature of Epicentr was amazing speed of construction of new stores (on average, this period was less than 120 days (and in some cases less than 90 days)).

Epicentr became a dominant player in the market and began to compete with other players already on their territory, opening stores (with a wider assortment / lower prices) relatively close to competitors' hypermarkets. Competitors did not have so many options - to close their hypermarkets or sell them to Epicentr. Novaya Liniya chose the second option in 2013, while Praktiker and OBI decided to leave the Ukrainian market. The only foreign chain which remained in the DIY segment in Ukraine was Leroy Merlin.

2014 and 2015 turned out to be quite difficult for Epicentr. First, the company lost five stores in the territory of Donbass uncontrolled by Ukraine (some stores were completely destroyed), four more stores remained in Crimea. Secondly, the devaluation of the hryvnia led to a significant revaluation of the company's loan portfolio (debt portfolio of Epicentr was nominated in dollars). On positive side was the fact that debt burden of Epicentr in general was not very large, given the scale of the group's business, while good market positions allowed Epicentr to change its pricing strategy without looking at competitors.

In its further development, Epicentr changed its focus, starting to open relatively small stores in cities with a population of less than 200 thousand people (previously, the focus was mainly on large cities). Thus, over the past four years, the company has opened 17 stores, increasing its trade area by 300 thousand square meters. Also Epicentr started to open concept stores inside shopping centers (shop-in-shop departments, for example, multi-brand sportswear stores Intersport, galleries of household goods and decor named Deco, E.Pic children's goods stores). At the same time, some of these stores were opened not in Epicentr hypermarkets, but on rented premises (eight Intersport stores, three Deco galleries and one E.Pic store).

Also in Y2020 Epicentr began rebranding Novaya Liniya stores (after the change of ownership in 2013, the stores continued to operate under the old brand). So far, only three stores have been rebranded, but the company plans to unite all stores under a single brand. Among the priorities of the group is the construction of warehouses - in the next two years Epicentr is going to build two warehouses with a total area of 100,000 sq. m. As for plans for the further development of its retail network, Epicentr is now focused on opening small markets with an area of 4000-6000 sq. m in smaller towns, and also the company is considering development of its own pharmacy network and grocery retail.

With the chain's current operating cash flow of over $200M per year and low leverage, the group certainly has room for new experimentations.


Finally, let’s focus on the development of an agricultural holding, which has grown into one of the largest in the country over the past five years.

Epicentr began its activities in the agricultural market of Ukraine in 2015 and at the beginning has been quite aggressive in its growth. The first notable event was the acquisition of the Vinnitsa Agrarian-Industrial Group (with a land bank of about 40 thousand hectares) in Y2016. The following year, Epicentr acquired agricultural assets of the international trader Glencore, as well as Obolon-Agro, increasing the land bank to 110 thousand hectares:

Epicentr Agro land bank

Finally, having bought out part of the assets of the Svarog group in 2020, by the end of 2020 Epicentr concentrated under its management 160 thousand hectares of land, 14 elevators with a total storage capacity of 1.5 million tons and a seed plant.

The company's land bank is located in regions that are relatively favorable in terms of weather conditions - Vinnitsa, Khmelnytsky, Cherkasy, Ternopil and Kyiv regions, in 2018 and 2019 the yield of the main grains and oilseeds was much higher than the average for Ukraine (about 10.5 t / ha for corn and 6.4t / ha for wheat). In 2020 the yield of Epicentr-Agro crops decreased (in line with the country as a whole), amounting to about 5.5 t / ha for wheat, 7-8 t / ha for corn (5.4 t / ha in Ukraine), while the corn yield in Western cluster (Ternopil and Khmelnytsky regions) was 9-10t / ha. According to our estimates, even with a decrease in yield, the profitability of Epicentr-Agro in the current season remains very good.

Financial information

The main companies of the group are the following legal entities. Epicentr-K is the main operating company of the group (operator of hypermarkets under the Epicentr brand), as well as the owner of a part of retail facilities. The group also includes the Epicentr-N company, which is also one of the main asset holders. The Novaya Liniya chain is operated by a company with the same name (which also owns part of the chain's stores). The agricultural sector is represented by the main companies Agoroholding-2012, VAGP, Interagroinvest, Khmelnitsk-Agro, as well as smaller agricultural companies.

Below we present key financials of Epicentr-K, the main operating company of the group:
UAH mln 2016 2017 2018 2019 2020
Net Sales (VAT excl) 28 150 33 750 41 450 45 650 50 382
EBITDA 3 525 4 045 4 355 5 600 6 752
EBITDA margin, % 12.5% 12.0% 10.5% 12.3% 13.4%
Net profit 2 450 2 850 3 050 3 750 3 171
Inventory Period, days 150-160
Payables Period, days 150-160

Comments to key financials:

  • The company's financial model is fairly simple. Operating activity (i.e. inventories) is financed by deferred payments from suppliers. The sources of financing of fixed assets (hypermarket buildings, trade equipment) are own funds (reinvested profit) and bank loans. At the same time, the group's debt burden has never been high. According to our estimates, today the ratio of debt to sales is only 5-10%, debt to EBITDA is 0.5-1.0x.
  • The dynamics of revenue of the Epicentr * network, starting from 2007, is presented in the following graph:

    Epicentr-K net revenues dynamics
    * - including Novaya Liniya stores and excluding grain exports through Epicentr-K

  • Since 2016, part of Epicentr-Agro grains export was carried out through Epicentr-K, in Y2018 it reached UAH 4.8 billion. According to our estimates, Epicentr-K not only exported grain produced by Epicentr-Agro, but also purchased and exported grain from third parties, which was most likely done to increase the VAT credit (to cover VAT obligations generated by the retail business - this scheme was used by many players of retail market, including Fozzy Group and OKKO (by the way the latter, as a result, formed a strong agro-direction)).
  • Excluding grain export operations, the total revenue of Epicentr and Novaya Liniya chains in Y2019 amounted to UAH 48.5 billion, which was 16% higher than in 2018. The main reason is the increase in retail space and assortment.
  • The profitability of DIY supermarket chain has remained relatively stable in recent years - EBITDA margin is at the level of 10-12%, so the annual cash flow generated by the chain already exceeds $ 200M, which opens up wide opportunities for new investments.
  • This cash flow is the source of financing of investments in the agricultural sector (according to various estimates, over the past five years, they amounted to $ 300-400M).
  • The agricultural holding Epicentr-Agro itself, with a declared yield and (as far as we understand) a fairly high cost of growing grain and oilseeds, generates a good profit. According to recent estimates, in 2019 EBITDA per hectare of the group was $ 220-250.
  • A decrease in yields in 2020 (by 20-30% compared to 2019) is partially offset by a significant increase in prices for grains and oilseeds (“partially” - because most Ukrainian agricultural holdings sold a significant part of their products under forward contracts, the price of which was significantly lower than the price at the end of Y2020). The outlook for 2021 is very good - with the average expected yield, current forward price and cost price, the expected EBITDA per hectare for corn (the main crop for Epicentr-Agro) is about $ 800. This means that the expected EBITDA of the agricultural holding is about $ 100M.
  • So, as of Y2021 beginning, financial standing of Epicentr group is good, current investments payback (for example expansion of silo capacities at Epicentr-Agro or interest to food retail where competition is much more severe vs. DIY) is quite questionable, but the company certainly has quite a good margin of safety to withstand some issues on this side.


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