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1 FOCUS RESEARCH 3 JUNE 2014 INITIATING COVERAGE BUY STOCK INFORMATION STOCK INFORMATION STOCK INFORMATION Bloomberg Code LPPF IJ Sector Retail Current Price Rp 14,325 Target Price Rp 16,700 Upside/ Downside 16.6% Share Out (bn shares) 2.92 Market Cap (Rp bn) 41, w range (lowhigh) Rp 10,20015, w average daily Rp 12,381 PRICE CHART Feb 2010= LPPF IDX Feb10 Aug10 Feb11 Aug11 Feb12 Aug12 Feb13 Aug13 Feb14 Source: Bloomberg SHAREHOLDER S INFORMATION Asia Color Company Ltd 25,6 % PT Multipolar Tbk 20,5 % Others 53,9 % DEPARTMENT STORES NETWORK PT MATAHARI DEPARTMENT STORE TBK Largest Department Store Chain in Indonesia First established in 1958, Matahari opened Indonesia s first ever modern department store in 1972 and has been expanding the store base rapidly over the past 56 years. Focusing on the quicklygrowing middle income segment, Matahari is optimistic to keep their business attractive by their wellknown private labels and higher margins compared to that of peers. Today, the company is the largest department store chain in Indonesia owning a total of 125 department stores in 61 cities and continues to expand its store network expansion in years ahead. Resilient Through Tough Times Despite macroeconomic challenges such as an increase in minimum wage, Rupiah depreciation, weakening commodity prices, reduction in fuel subsidy, high inflation rates and intense competition within the industry, LPPF succeeding in maintaining revenue. For 2013, gross sales grew by 20.2% YoY attaining to Rp6.8 tn; gross profit equalled Rp4.4tn; and net income increased impressively by 49.2% YoY to Rp1.1tn. Their strong sales were backed by a strong 12.1% SSSG, high consumer demand in the middle income segment, as well as a strong marketing strategy. Next: More Expansion During the first quarter of 2014, LPPF booked total revenue of Rp1.48 tn (a growth of 17.7% YoY from Rp1.26 tn in 1Q13) on the back of 9.3% SSSG. Compared with the year before, the company suffered higher rental cost and salary expense in 1Q14 consequences of significant increases in salary cost per employee (+7.7% YoY) and shop rental cost per sqm (+9.2% YoY) from This year, LPPF will continue its expansion with forecasts of an additional 69,00083,000 sqm from 1012 new stores and 10,00018,000 sqm in the expansion of existing stores. Refinancing Plan Recently, LPPF announced that they are refinancing their existing debt with a new loan facility to be drawn down in June 2014 with more favourable terms: a lower interest rate (JIBOR+3.00% vs. current JIBOR+4.75%) and no prepayment penalties. This new facility consisting of Rp1.65 tn of term loan and Rp230 bn of revolving credit facility will be used to repay existing indebtedness and to fund working capital and capex. In addition to improving their net profit margin, this is a smart move for the company to improve their flexibility through the removal of excess cash sweeps and other mandatory prepayments. BUY recommendation Fair Value Rp 16,700 per share For 2014F, we project that the company s revenue will grow by 17.2% YoY attaining to Rp7.92 tn, while its net profit will increase by 26.6% (to Rp 1.46tn). Based on our DCF10 year method, we generated a fair value of Rp 16,700 per share. At today s closing price, LPPF was trading at 28.7x PER 2014F and 21.2x EV/EBITDA 2014F signifying that our fair value offers a 16.6% upside potential. Hence, we initiate coverage of LPPF with a BUY recommendation. Financial Summary (Rp billion) 2012A 2013A 2014F 2015F 2016F Revenue 5,617 6,754 7,919 9,927 12,413 EBITDA 1,761 2,022 2,258 2,871 3,670 Net profit 771 1,150 1,456 1,968 2,607 EPS (Rp) PER (x) BVPS (Rp) (662) (268) ,172 PBV (x) (4.1) (41.1) EV/EBITDA (x) Dividend yield (%) 0.0% 0.0% 1.1% 1.4% 1.9% RoE (%) (33.3) (84.8) (513.9) Febby Stephanie febby.stephanie@lautandhana.com (+62-21) ext Please see important disclosures at the end of this report

2 PT MATAHARI DEPARTMENT STORE TBK 3 JUNE 2014 Resilient Through Tough Times Despite macroeconomic challenges such as an increase in minimum wage, Rupiah depreciation, weakening commodity prices, reduction in fuel subsidy, high inflation rates and intense competition within the industry, LPPF succeeding in maintaining revenue. For 2013, gross sales grew by 20.2% YoY attaining to Rp6.8 tn; gross profit equalled Rp4.4tn; and net income increased impressively by 49.2% YoY to Rp1.1tn. Their strong sales were backed by a strong 12.1% SSSG, high consumer demand in the middle income segment, as well as a strong marketing strategy. Matahari has proven capable of maintaining its strong market demand seen from its strong and stable double digit SSSG over the years (11.2% in 2010; 13.5% in 2011; 11.1% in 2012 and 12.1% in 2013). We project that in FY14FFY16F, the company will continue its strong sales, driven by a conservative 12% SSSG in 2014F 2016F. This will also be supported by new stores in the coming years: 1012 in 2014F, 20 in 2015F, and 15 in 2016F. The general election will give positive impact for this year s sales, due to the large amount of campaign money circulated in the low to middle class segment Rp tn Sales Performance 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% SSSG (%) % 0.0% 2010A 2011A 2012A 2013A 2014F 2015F 2016F Sales Operating income Net Income Same store sales (SSSG) Matahari sells its private label products and consignment products that meet with the company s pricing and consumer targets. Based on historical data of total gross sales, the ratio of consignment sales to direct purchases was around 70:30. Consignment business is more preferable due to lower operating costs as well as zero inventory risk and capex. In the future, however, the company is willing to increase their direct purchase sales portion especially considering its high brand awareness and higher gross margin than consignment products. Product Mix 71.9% 70.8% 68.3% 67.2% 67.2% 67.2% 28.1% 29.2% 31.7% 32.8% 32.8% 32.8% 2011A 2012A 2013A 2014F 2015F 2016F Direct Purchase (DP) Consignment sales (CV) Soft First Quarter During 1Q14, LPPF booked total revenue of Rp1.48 tn (a growth of 17.7% YoY from Rp1.26 tn in 1Q13) on the back of 9.3% SSSG. Compared with the year before, the company suffered higher rental cost and salary expense in 1Q14 consequences of significant increases in salary cost per employee (+7.7% YoY) and shop rental cost per sqm (+9.2% YoY). LPPF managed, however, to increase net profit from Rp82.2 tn in 1Q13 to Rp123.3 tn in 1Q14 (50% YoY) and improve their net profit margin from 6.5% to 8.3%, largely thanks to the decision to accelerate debt payments to ease finance costs. We have learned that total debt has been decreasing gradually: starting from Rp2.96tn as of 31 Dec 12, Rp1.60tn as of 31 Dec'13; and finally to Rp1.50tn by the end of 1Q14. 2

3 3 JUNE 2014 PT MATAHARI DEPARTMENT STORE TBK Interim Financial Result 1Q13 1Q14 YoY 4Q13 QoQ P/L (In Rp bn) Revenue 1, , % 1, % Cost of revenue % % Gross profit % 1, % Operating expense % % Operating profit % % Net Profit % % Profitability Gross margin 63.3% 62.5% 65.5% EBIT margin 17.9% 16.4% 24.7% Net margin 6.5% 8.3% 15.2% LPPF Quarterly Performance The first quarter is historically the lowest performance of the year. The company s harvest season usually falls on the Lebaran celebration and the backtoschool season. During three consecutive years (2011 to 2013), both seasons occurred due in third quarter. 1Q14 performance was in line with our expectations, by booking 18.7% of our FY14 projection of Rp7.9 tn % 18.6% 18.4% 22.0% 21.2% 35.0% 36.1% 24.4% 24.3% % 20.9% 36.7% 23.6% % 26.3% 22.7% 27.6% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 1Q 2Q 3Q 4Q Next: More Expansion This year, LPPF will continue its expansion by adding 69,00083,000 sqm from 1012 new stores along with an additional 10,00018,000 sqm from existing store expansions, which totals to 79,000101,000 sqm of new space. Two of the new outlets will be in The St. Moritz Jakarta (9,687 sqm) and Borneo City Mall (5,000 sqm). Existing space will expand by 10,300 sqm in 2Q14, while remaining additions will take place in Q3 and Q4. For 2014F, we are cautious about the gradual rise in electricity tariffs that will start from May to December They will increase by as much as 38.9% to 64.7% for various industries and public companies which can potentially raise rental fees and utilities costs. Although the management is confident that the increase can be passed through to customers through pricing adjustments, we need to see upcoming results to confirm the management s confidence. Additionally, the overlapping period of Lebaran and backtoschool season, will shorten the harvest period, providing another challenge for the company this year. 3

4 PT MATAHARI DEPARTMENT STORE TBK 3 JUNE 2014 Loan In 2013, the company provided mandatory and voluntary loan prepayments. By the end of 2013, Matahari s total debt declined by more than 46% YoY, from Rp3.5tn in 2012 to only Rp1.6tn. In Jan14, they made another additional debt prepayment of Rp100bn; they plan more voluntary prepayments this year. We project that by the end of this year, the company s loan balance will fall to around Rp800bn (48% YoY). Rp tn Ratio 1.0 (1.0) 0.5 (2.0) 2010A 2011A 2012A 2013A 2014F 2015F 2016F (3.0) Total debt Interest expense DER Debt/Asset Refinancing Plan Recently, LPPF announced that they are refinancing their existing debt with a new loan facility to be drawn down in June 2014 with more favourable terms: a lower interest rate (JIBOR+3.00% vs. current JIBOR+4.75%) and no prepayment penalties. This new facility consisting of Rp1.65 tn of term loan and Rp230 bn of revolving credit facility will be used to repay existing indebtedness and to fund working capital and capital expenditures. In addition to improving their net profit margin, this is a smart move for the company to improve their flexibility through the removal of excess cash sweeps and other mandatory prepayments. Balance Sheet In Rp billion 2012A 2013A 2014F 2015F 2016F Cash and cash equivalent , , ,917.4 Equity (1,931.5) (781.4) , ,420.4 Total interest bearing debt 2, , DER (x) (1.5) (2.0) 3.9 Net debt to equity (x) (1.0) (1.1) Net cash Net cash Net cash 4

5 3 JUNE 2014 PT MATAHARI DEPARTMENT STORE TBK BRIEF PROFILE Pioneer of Modern Department Store in Indonesia PT Matahari Department Store Tbk (Matahari) is Indonesia s largest department store retailer of fashion apparel, beauty products and home products. In 1958, they started as a single children s fashion store in Pasar Baru. Then, in 1972, Matahari opened the country s first ever modern department store and continued to expand the store base rapidly over the past 55 years. In 2009, Matahari became a separate entity from PT Matahari Putra Prima Tbk (MPPA), and was renamed as PT Matahari Department Store Tbk (Matahari). Asia Color Company Limited (a subsidiary of CVC Capital Partners Asia Pacific III L.P. and CVC Capital Partners Asia Pacific III Parallel Fund A, L.P.; together CVC Asia Fund III ) became the majority shareholder of PT Matahari Department Store Tbk in April Focusing on the quicklygrowing middle income segment, Matahari is optimistic to keep their business attractive by their wellknown brands (Nevada, Cole, SuperT, Little M, St. Yves, etc.) and their higher margins relative to peers which ranged between 30% for consignment products and 40% for direct purchase goods. The recent regulation of Trade Ministry no 70/2013 has restricted private label sales to a maximum of 15% of total stock keeping units; however, the management has confirmed with Aprindo (Association of Indonesian Retailers) that the company s owned brands are not particularly considered private label, avoiding any violations. Owned brand portfolio Today, the company is the largest department store chain in Indonesia, owning 125 department stores with a total of 807.7k sqm of store area throughout 61 cities in Indonesia. For 2014F2016F, Matahari plans to open 81 new stores, of which a majority of expansion will take place outside the Java area. Store comparisons among competitors MDS RALS MAP Yogya Metro Centro Greater Jakarta Rest of Java (ex Greater Jakarta) Sumatra Kalimantan & others TOTAL , as of 31 Dec 2013 Store pipeline 5

6 PT MATAHARI DEPARTMENT STORE TBK 3 JUNE 2014 FINANCIAL HIGHLIGHTS OF PT MATAHARI DEPARTMENT STORE, TBK In Rp Billion BALANCE SHEET 2012A 2013A 2014F 2015F 2016F INCOME STATEMENT 2012A 2013A 2014F 2015F 2016F ASSETS Revenue 5,617 6,754 7,919 9,927 12,413 Cash & cash equivalents 1, ,236 1,904 3,917 Accounts receivable COGS (1,911) (2,391) (2,885) (3,592) (4,484) Inventories net ,229 Current assets others Gross profit 3,706 4,363 5,034 6,334 7,929 Total Current Assets 1,744 1,703 2,308 3,247 5,576 Operating expenses (2,122) (2,548) (2,953) (3,658) (4,475) Plant, Property, Equipment Long Term Rent Operating profit 1,584 1,815 2,081 2,676 3,454 Non Current Assets Others EBITDA 1,761 2,022 2,258 2,871 3,670 Total Non Current Assets 1,186 1,234 1,422 1,670 1,946 TOTAL ASSETS 2,930 2,937 3,729 4,917 7,522 Finance income Finance cost (452) (309) (165) (75) LIABILITIES & EQUITY Other income (expenses) Accounts Payable 1,140 1,359 1,660 2,067 2,580 Tax payable Total other income/(expenses) (425) (291) (140) (52) 22 Other current liabilities Current maturities Bank Loan Income before tax 1,159 1,524 1,941 2,624 3,476 Total Current Liabilities 2,183 1,890 2,385 2,945 3,633 Tax expense (388) (373) (485) (485) (656) Bank Loan 2,475 1, Other non current liabilities Net profit before minority interest 771 1,150 1,456 1,968 2,607 Total Non Current Liabilities 2,678 1,828 1, Minority Interest Capital Stock & Paidin Capital 582 (3,185) (3,185) (3,185) (3,185) Minority interest Others (3,767) Retained earnings 1,254 2,404 3,400 4,786 6,606 Net profit 771 1,150 1,456 1,968 2,607 Total Equity (1,932) (781) 215 1,601 3,420 TOTAL LIABILITIES & EQUITY 2,930 2,937 3,729 4,917 7,522 EPS (Rp) CASH FLOW STATEMENT 2012A 2013A 2014F 2015F 2016F KEY FINANCIAL RATIOS 2012A 2013A 2014F 2015F 2016F Net profit 771 1,150 1,456 1,968 2,607 Growth (%) Depreciation & Amortization Sales Change in WC Gross profit Others 32 (97) 58 (5) (32) Operating Profit Net Operating Cash Flow 1,106 1,285 1,901 2,340 3,038 EBITDA Change in fixed assets net (247) (240) (254) (282) (313) Others (259) (15) (110) (161) (179) Profitability (%) Net Profit Net Investing Cash Flow (506) (255) (364) (443) (492) Gross margin Operating margin Change in borrowings net (570) (1,363) (761) (835) EBITDA margin Change in equity (3,767) Net Profit margin Change in other liabilities 51 3, ROA Dividend payment (460) (582) (787) ROE (33.28) (84.81) (513.87) Adjustment (0) (0) Net Financing Cash Flow (518) (1,258) (1,073) (1,229) (532) Solvency (x) Current ratio Change in cash 81 (228) ,014 Quick ratio DER (1.53) (2.04) 3.89 Cash at the beginning period 919 1, ,236 1,904 EBITDA coverage #DIV/0! Cash at the ending period 1, ,236 1,904 3,917 Net debt to equity (1.01) (1.05) Net cash Net cash Net cash Notes: The definitions of Lautandhana Research for Investment Ratings: BUY : +15% and above, over the next 12 months NEUTRAL : 15% to +15%, over the next 12 months SELL : 15% and worse, over the next 12 months 6

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