Matahari Putra Prima Company Focus

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1 September 1, 2014 Matahari Putra Prima Company Focus Sebastian Tobing Paula Ruth Re-rating Upside Potential Expect re-rating to continue We expect MPPA to re-rate further as market seeks companies with stable outlook. MPPA currently trades at 1.0x PEG vs. UNVR 2.9x, ICBP 1.3x, AMRT 1.1x, PGAS 3.3x, and TLKM 1.8x. Note that MPPA is actually more liquid with USD9.3mn average trading per day in past 90 days compared to UNVR USD4.1mn, ICBP USD2.7mn, AMRT USD47K, PGAS USD8.3mn, although less liquid than TLKM. Changes to estimates We reduce 2014/15 core EPS by -5.4/-6.1% due to a mix of lower number of stores but higher SSSG and higher operating margin. We now expect MPPA to have 129 Hypermart stores at end of 2015 instead of 150 stores. MPPA in 1H has posted encouraging SSSG numbers of 9.2% and core profit growth of 115.4%YoY, though. 1H14 operating margin also expand to 3.0%, up from 1H13 1.8%. Note that our long-term operating margin assumption of 4.6% (in 2024) is lower than Walmart s current operating margin of 5.9% and Dairy Farm (SEA company) operating margin of 4.7%. Valuation: DCF-based target price of Rp3,700 (20% upside) We have rolled out our valuation to 2015E. Our target price of Rp3,700 is DCF-based assuming WACC of 10.2% and long-term growth rate of 5%. Current price implies 2015PE of 31.6x. 2014E-16E core EPS CAGR is 32.1%. Companies Data Year end Dec E 2015E 2016E Sales (Rp bn) 10,868 11,913 14,136 17,390 21,882 Net Profit (Rp bn) EPS (Rp bn) Core Profit (Rp bn) Core EPS (Rp) Core EPS Growth (%) -47.6% 599.5% 31.3% 35.6% 28.7% DPS (Rp) BVPS (Rp) Core P/E (x) Div Yield (%) 6.0% 6.0% 0.7% 0.9% 1.2% MPPA opened its first hypermart in It divested its deparment store business in 2010 to focus wholly on hypermarket business. BUY Company Update Share Price Sector Rp3,700 Rp3,080 Retail Price Target Rp3,700 (20%) Stock Data Reuters Code MPPA.JK Bloomberg Code MPPA.IJ Issued Shares (m) 5,378 Mkt Cap (Rpbn) 15,973 Average Daily Trading USD 9.3mn Value 52-Wk range Rp3,500 / Rp1,720 Major Shareholders PT. Multipolar Tbk. 50.3% Other 31.7% Public 18.0% Consensus Core EPS 14F 15F Consensus (Rp) TRIM vs. Cons. (%) Stock Price 4,000 3,500 3,000 2,500 2,000 1,500 1, Volume Price - - Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug ,000, ,000, ,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000,000 PT Trimegah Securities Tbk - COMPANY FOCUS 1

2 Revision to Hypermart s Expansion Target for 2014E MPPA has decreased its targeted number of Hypermart stores to 10 stores (+10.1% increase to existing stores last year), which is -50% from previous target of 20 stores (+20.2% increase to existing stores last year). According to the company, the decrease in 2014E targeted number of stores was done due to company s focus on new store concept development named Generation 7 th or G7. The new concept plans to be implemented first by renovating one of the existing Hypermart (Lippo Karawaci Utara) by the end of MPPA plans to have 12 Hypermart stores renovated per year (FY stores; FY stores). According to the company, historically, renovation could increase the store sales of ~10-15%. We decrease our 2014E/15E/17E number of stores to 10/20/26 stores, from previously 21/30/20 stores, making expected total of Hypermart stores by 2020E/21E to reach 240/260 stores, considers that the revised number of stores is lower than 2011/12/13 new stores of 12/17/19 stores and the company s 2020E target to have total of 260 Hypermart stores. Locations for all of the 2014E remaining 8 stores were already secured (fit out in progress). MPPA also still continues its focus to opening more stores in outer Java. Over 60% of new stores in 2014E would be in outer islands. Based on the changes in the number of stores assumption, we revise down the 2015E core EPS by -12.1%. Regarding 2H14 targeted 8 new stores, 5 new stores (50% of FY target; 62.5% of 2H14 target) are planned to be located at malls. Thus, our 2H14 assumption for number of Hypermart stores has risk from possibility of delay on malls construction which is outside MPPA s control. Out of the 8 planned new stores, 7 locations (70% of FY target; 87.5% of 2H14 target) are non-lippo properties. During 1H14, MPPA opened 2 Hypermart (20% of FY target; -33.3% of 1H13 new stores) inside malls developed by LPKR in Jakarta and Manado. It also opened 1 Foodmart (+3.4% of total up to 2013) and 1 Boston Health & Beauty (+1.2 % to total up to 2013) in 1H14. Our previous assumption on new Hypermart s sales contribution implied an average of 6 full months of operation. Considering the realization of 1H14 (2 store in May and June 2014), we lower the assumption to around average of 3 full-months of operation for the new stores. Figure 1. MFB Retail Gross Revenue 14,000 12,000 10,000 (Rp bn) 8,000 6,000 4,000 2,000 6,490 7,622 8,782 10,810 12, Source: MPPA PT Trimegah Securities Tbk - COMPANY FOCUS 2

3 The company guides 6-7% of SSSG for 2014E in case fuel price hike happened before Nov-Dec FY2013 SSSG was 4.5% (42% lower than FY2012) with possible causes from limitation of fresh fruits, beef, and electronics, sales cannibalization, and fuel increase last year. MPPA achieved 1H14 SSSG of 9.2% (vs. 1H13 4.4%; 1Q %YoY). The company mentioned that, historically since 2011, MPPA s 1Q SSSG are higher than 2Q. The 1H14 SSSG was mostly driven by price increase of ~6%YoY. Volume growth in 1H14 was ~3%YoY (vs. ~2%YoY in 1H13). We slightly increase our 2014E SSSG assumption to 6.8% (previously 6.0%) and decrease 2015E SSSG assumption to 5.3% (previously 6.0%) following our expectation on 2015E GDP growth and expectation on higher inflation (lower consumer purchasing power) from fuel price increase. Changes in SSSG assumption leads to slight increase of +0.1% to 2015E core EPS assumption. Our SSSG assumption has risk due to negative impact from economic outlook changes. Figure 2. MPPA s SSSG and 1H14 vs. 1H H13 1H14 Source: MPPA Figure 3. MPPA s Revenue Drivers and Estimates E 2015E 2016E 2017E 2018E 2019E 2020E Revenue drivers Number of stores New stores built in the year Estimated Avg. Net Revenue per store Revenue per existing store Revenue per new store Total net revenue 11,913 14,136 17,390 21,882 27,372 33,041 38,708 44,937 Department store 11,826 14,043 17,291 21,777 27,259 32,922 38,581 44,802 Others (consigment) Net Revenue growth 18.7% 23.0% 25.8% 25.1% 20.7% 17.2% 16.1% Source: MPPA, TRIM Research PT Trimegah Securities Tbk - COMPANY FOCUS 3

4 We lower our targeted revenue growth for 2014/15E to 18.7/23.0% from previously 26.5/30.4% resulting from changes in assumptions discussed above, which revised down 2015E core EPS by -11.9%. During , the core business of MPPA (Matahari Food Business or MFB Retail) had gross sales growth of 18.0% CAGR. MPPA posted 1H14 revenue of Rp6.4tr (+18.0%YoY; 45.5% of our new FY target). Pursue higher operating margin MPPA managed to rise its 1H14 gross margin to 16.9% (1H13 of 15.6%; FY %; FY % for MFB retail) which mostly driven from its strong negotiation with supplier. The company was also able to decrease its shrinkage margin from around 1.7% in FY2013 to 1.5% of sales in 1H14. Our new assumption on 2014E-26E gross margin is 16.9% (same with 1H14). 1H14 operating expenses ratio was 13.9% of sales, almost the same with 1H13 (FY %). Looking into more detail, 1H14 salaries & employees benefit (5.9% of sales) and electricity & energy (2.6% of sales) rose +26.4%YoY and +30.3%YoY respectively, higher than revenue growth of +18.0%YoY. At same store level, the company said that same store already had 6% less headcount in Jun 2014, compared to 2013 for same stores. 1H14 selling expense was lower by -19.1%YoY (2.0% of sales, down from 1H13 3.0% of sales). According to MPPA, the lower selling expense was achieved due to efficiency, e.g. less marketing activities. The company was also able to lower its 1H14 rental expense (-3.0%YoY). The company indicates additional expense savings in 2H14 from efficiency in payroll, electrical saving, marketing expense, and pre-opening expenses (less new stores planned in 2014E compared to last year), with most savings is expected to come from payroll. To support stores during Lebaran this year, MPPA did not hire additional temporary workers of ~2000 additional temporary workers (~75% for same stores) as it has able to increase the productivity of its back office workers to help stores during Lebaran. Furthermore, MPPA also aims to lower its head office margin to around 2.3% in 2014E (FY2013 of 2.5%). For 2015E, MPPA plans for further operational efficiency especially in store s payroll and electrical savings. Figure 4. Operating margin of other modern trade companies Ticker Name Country FY 2011 FY 2012 FY 2013 Note (Listed In) Operating Margin MPPA IJ MATAHARI PUTRA PRIMA Indonesia 0.8% 1.1% 3.3% HERO IJ HERO SUPERMARKET Indonesia 4.8% 4.6% 1.2% AMRT IJ SUMBER ALFARIA TRIJAYA Indonesia 2.6% 2.5% 2.6% FY still includes non core business RANC IJ SUPRA BOGA LESTARI TBK Indonesia N/A 4.2% 4.2% RANC IPO in 2012 SEM MK 7-ELEVEN MALAYSIA HOLDINGS Malaysia 3.4% 4.2% 4.9% DFI SP DAIRY FARM INTL HLDGS LTD Singapore 5.6% 4.6% 4.7% BIGC TB BIG C SUPERCENTER PCL Thailand 7.6% 7.6% 7.5% WMT US WAL-MART STORES INC US 6.1% 5.9% 5.9% TSCO LN TESCO PLC UK 5.8% 5.9% 4.2% Source: Bloomberg PT Trimegah Securities Tbk - COMPANY FOCUS 4

5 Figure 5. MFB Retail EBITDA (Rp bn) Source: MPPA Driven by the gross margin growth and expense control, MPPA achieved 1H14 operating margin of 3.0% in 1H14 (vs. 1.8% in 1H13). We expect 2014E/15E operating margin to be 3.9/4.1% then slightly increase each year to 4.7% in 2026E driven by economies of scale as number of stores growing. Our previous estimates for 2014/15E operating margin is 3.8/3.9% and increasing slightly each year to 4.5% in 2025E. Based on changes in operating margin assumption, we revised up the 2015E core EPS by +5.4%. Working capital management The company s average days of inventory in 1H14 was 99 days (+14.8%YoY) affected by high level of inventory to support Lebaran (almost a month after 1H14) and due to 7 (of total 19 in FY2013) new stores were opened in December last year. Based on MPPA s performance during FY2013, which is the year MPPA business mainly represents the food retail business after restructuring non-core business, we expects 2014E-26E of days ( %YoY to FY2013) in case the remaining new stores opened in still in the immature period, which is the period when the new store s sales is not yet normal but operating expenses already incurred and inventory already stocked in the store to be fully operational, in the remaining year. Our previous assumption for inventory days is around days during 2014E-2026E. To improve logistic to stores, especially outside Java, MPPA plans to relocate its DC (at Surabaya) which supports stores for East Indonesia, closer to the port complete with facilities for fresh and dry goods, compared to currently only handles dry goods. The relocation project is still in progress of negotiation of lease agreement. We assume days of payable of 73 days for 2014E-25E (FY days), higher than previous estimates of days. Hence, our expectation for cash cycle was around days for 2014E-26E (+14.1%-22.9% to FY2013), higher than previous expectation of 9-11 days, which only change forecasted 2015E core EPS around - 0.6% E Core EPS CAGR Slightly Lower MPPA booked 1H14 other income of Rp86bn (-61%YoY) from lease refunds and transfer as part of the remaining restructuring progress of its non-core business. The company said that this Rp86bn is a one time gain and no additional one time gain is expected in the remainder 2014E. We includes the Rp86bn of other income and estimated Rp47bn of other expense (same with FY2013), resulting to net other income of Rp38bn (vs. our old estimate of Rp4bn) into our 2014E net income of Rp414bn, slightly up (+1%) compared to previous estimate. PT Trimegah Securities Tbk - COMPANY FOCUS 5

6 Figure 6. Changes in Assumptions and Forecast Old Old New New New vs. Old (%) New vs. Old (%) 2014E 2015E 2014E 2015E 2014E 2015E Number of Hypermart stores % -14.0% (In Rp bn) Revenue per store % 2.8% Total Revenue 15,071 19,656 14,136 17, % -11.5% EBITDA 798 1, , % -1.5% Operating Profit % -7.0% Pretax Profit % -6.0% Net Profit % -6.0% Core Net Profit % -6.1% Core EPS % -6.1% Gross Margin 15.9% 15.9% 16.9% 16.9% Operating Margin 3.8% 3.9% 3.9% 4.1% Source: TRIM Research Core profit for 1H14 was Rp155bn (+115.4%YoY) with core margin of 2.4% (vs. 1.3%) of sales. Changes in the company s recent expansion target (number of stores), higher operating margin, and other assumptions lead to change in 2014/15E core EPS of 5.4/-6.1%. New estimated 2014E-16E core EPS growth is 32.1% CAGR, slightly lower than previous estimates of 33.6% CAGR, but for 2014E-17E, the new core EPS growth is 30.4% CAGR, slightly increase than previously 29.9% CAGR. Valuation and Price Target We maintain Buy on MPPA as we are optimistic on: 1) MPPA s ability to expand its margin indicated by the 1H14 core profit which were more than doubled to 1H13, with core margin of 2.4% (vs. 1H13 1.3%); 2) the company s commitment to continue its expansion with focus to outer Java. We expect 2014E-16E revenue growth of 24.4% CAGR GDP growth of outer Java was 10.1% vs. Java 11.0% CAGR (source: Statistics Indonesia/BPS). 1H14 EBITDA contribution from MPPA s outside Java stores was 55.1% (FY %) vs. Java 48.4% (FY %). Hence, with relatively less competition in outside Java, we expect the penetration to outer Java to drive sales growth and also profitability; 3) opening more stores in the future should gives MPPA higher bargaining power upon its supplier, which we expect would support MPPA s ability to increase the gross margin or, at least, maintain it during the rising price period. During 1H14, MPPA managed to increase its gross margin, while passing on ~6% of ASP increase to the customers, mainly because of the company s strong negotiation to suppliers. We raised our DCF-based price target by 18% from Rp3,000 to Rp3,700 as a result of : 1) lower number of new stores and average months of operational ( 20% to TP), 2) higher expected operating margin (+7% to TP), 3) lower beta (+30% to TP), and 4) Rolling over to end-2015 DCF (+7% to TP). MPPA currently trades at 2015PE of 31.6x vs. 2014E-16E core earning CAGR of 32.1%, implying PEG of 1.0x. We argue that other consumer/retail companies especially those less affected by macroeconomic volatility tend to trade at higher PEG than 1x, i.e. UNVR (PEG 2.9x), ICBP (PEG 1.3x), and AMRT (PEG 1.1x). PT Trimegah Securities Tbk - COMPANY FOCUS 6

7 Figure 7. WACC and DCF Calculations Risk free rate 7.5% Market premium 5.0% Beta 0.86 Debt rate 11.6% Debt proportion 30.0% Tax rate 25.0% Equity cost of capital 10.8% Debt cost of capital 8.7% WACC 10.2% LT growth rate 5.0% Description 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E EBIT (1- tax) ,068 1,266 1,487 1,732 1,988 2,251 2,540 2,859 3,211 Depreciation and Amortisation ,004 1,010 1,016 1,021 Changes in non-cash Working Capital (190) (263) (230) (249) (278) (292) (305) (307) (331) (363) (395) Capex (1,755) (1,826) (1,404) (1,404) (1,404) (1,404) (1,053) (1,053) (1,053) (1,053) (1,053) FCFF (720) (518) ,026 1,627 1,895 2,166 2,459 2,783 51,386 Discounted FCFF (653) (427) ,092 Total discounted FCFF 19,646 Net cash (debt) 237 NAV 19,882 # of shares 5,378 NAV / share 3,697 Target price after rounding 3,700 Source: TRIM Research PT Trimegah Securities Tbk - COMPANY FOCUS 7

8 Income Statement (Rpbn) Balance Sheet (Rpbn) Year end Dec F 2015F 2016F Year end Dec F 2015F 2016F Revenue 10,868 11,913 14,136 17,390 21,882 Growth (%) 22% 10% 19% 23% 26% Gross Profit 1,898 1,889 2,389 2,939 3,698 Opr. Profit EBITDA ,074 1,443 Growth (%) 18% 61% 30% 41% 34% Net Int Inc/(Exp) (46) (3) (46) (27) (26) Gain/(loss) Forex Other Inc/(Exp) Pre-tax Profit Tax (59) (140) (130) (165) (212) Minority Int Extra. Items Reported Net Profit Core Net Profit growth (%) -48% 599% 31% 36% 29% Dividend per share growth (%) 3000% 0% -88% 36% 29% Dividend payout ratio Cash and equivalents 1,362 1, Other curr asset 3,723 2,865 3,406 4,145 5,212 Net fixed asset 775 1,087 1,299 1,660 2,195 Other asset 2,365 1,325 2,324 2,397 3,307 Total asset 8,225 6,580 7,569 8,800 11,217 ST debt Other curr liab 2,181 2,325 2,759 3,394 4,271 LT debt 1, Other LT Liab ,199 1,952 2,974 Minority interest Total Liabilities 4,379 3,285 4,320 5,708 7,607 Shareholders Equity 3,846 3,295 2,709 3,092 3,610 Net (debt)/ cash 453 (590) (178) (237) (141) Total cap employed 5,509 3,542 4,448 5,044 6,584 Net Working capital 2,369 1, ,082 Debt 1, Cash Flow (Rpbn) Key Ratio Analysis Year end Dec F 2015F 2016F Year end Dec F 2015F 2016F Core Net Profit Depr / Amort Chg in Working Cap Interim Results (345) (489) (170) (104) (190) Others 362 1, CF's from oprs 334 1, ,016 Capex (382) (299) (702) (1,404) (1,755) Others 3,196 1, CF's from investing 2,814 1,659 (702) (1,404) (1,755) Net change in debt 50 (1,817) Others (3,240) (1,002) (1,000) (115) (156) CF's from financing (3,190) (2,818) (550) Net cash flow (41) (59) (826) 59 (96) Cash at BoY 2,957 1,425 1, Cash at EoY 2,916 1, Free Cashflow (265) (292) (241) (605) (720) Year end Dec Sales Gross Profit Opr. Profit Net profit Core profit 2Q13 3Q13 4Q13 1Q14 2Q14 2,807 3,263 3, Gross Margins (%) 15.4% 15.7% 16.3% 16.9% 16.8% Opr. Margins (%) 2.0% 4.3% 4.7% 2.6% 3.3% Net Margins (%) 5.7% 3.0% 3.9% 1.6% 4.6% Core Margins (%) 1.3% 3.3% 3.5% 1.9% 2.9% Profitability Gross Margin (%) 17.5% 15.9% 16.9% 16.9% 16.9% Opr Margin (%) 1.1% 3.3% 3.9% 4.1% 4.2% EBITDA Margin (%) 3.4% 4.9% 5.4% 6.2% 6.6% Core Net Margin (%) 0.4% 2.5% 2.7% 3.0% 3.1% ROAE (%) 0.9% 8.2% 12.9% 18.1% 20.0% ROAA (%) 0.5% 4.0% 5.4% 6.4% 6.7% Stability Current ratio (x) Net Debt to Equity (x) (0.3) (0.2) (0.1) (0.1) (0.0) Net Debt to EBITDA (x) (3.0) (1.1) (0.2) (0.2) (0.1) Interest Coverage (x) Efficiency A/P (days) A/R (days) Inventory (days) Capital History Date 18-Dec-92 7,150 PT Trimegah Securities Tbk - COMPANY FOCUS 8

9 PT Trimegah Securities Tbk Gedung Artha Graha 18 th Floor Jl. Jend. Sudirman Kav Jakarta 12190, Indonesia t f DISCLAIMER This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities. While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication, Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in future participate in an offering of the company s equity securities.