Equity Research

PT MATAHARI DEPARTMENT STORE TBK 

Tumbled by One-off Loss

In Line Sales, while the bottomline tumbled by one-off loss

During FY18, LPPF booked a total gross sales of Rp17,92 trillion (+2.0% YoY), in line with our FY18F of Rp18.33 trillion (made up 97.7% of our projection), on the back of 3.5% SSSG (missed the company’s previous guideline of 4-6%, but in line with our projection of 3.5%). Geographical-wise, the outside Java area (mostly commodity-based regions i.e Sumatra and Kalimantan) delivered the strongest SSSG of 4.1%, in line with the overall recovery in commodity prices during the year. On the bottomline, the company suffered a 42.5% YoY decline in net profit from Rp1.91 trillion to Rp1.1 trillion, mostly due to one-off, non-cash loss from investment in PT Global Ecommerce Indonesia (operator of mataharimall.com – which was terminated in the end of Nov18) as much as Rp769.78 billion. Aside the investment loss, however, LPPF’s net profit was actually slightly declined by only 2.1% YoY to Rp1.87 trillion. On quarterly basis, as the company usually enjoyed peak season in 4Q, the gross sales solidly grew by 31.1% QoQ to Rp4.26 trillion (contributed 24.1% to total sales) on the back of 0.9% SSSG, with Greater Jakarta area delivered the strongest SSSG of 1.2%.

Margin Remains Stable

In terms of profitability, the company managed to maintain its GPM at35.6% (vs 35.6% in FY17), while the EBIT margin before impairment (the one-off loss) declined by 50bps from 13.5% to 13.0% due to higher marketing cost (+14.2% YoY) in order to boost sales, particularly thehigher-margin direct purchase (DP)products – which resulted in greater DP contribution from 37.2% in FY17 to 37.4%, but partially compensated by lower rental cost (from 13.8% to sales in FY17 to 13.7% to sales in FY18) following the store closures. Note that during the year the company has opened 7 new stores, permanently close down 3 stores due to fire and lease expiry; making the total store count to 159 by the end of 2018.

 Unexciting Guidance

This year, LPPF guided a very conservative target of flat to low single digit SSSG (0-3%) and 4-6 new stores along with the anticipation of 2-3 underperforming store closures. The current 4-year high inventory level of 130 days (due to rollout of new merchandising and CNY preparation in 1Q19)is alsoexpected to normalize to 120-125 days, as the company initiate few strategies to boost sales i.e. continue to run big data, new merchandising both in home products and active wear, as well as strengthening its logistics network to support sales growth. This year, the company allocates capex of Rp 400-500 billion as regular capex and addition of Rp200 billion to further development of logistics. The company also plans to open 361 Degrees stand-alone specialty stores at well-known malls in major cities from 2019 onwards in order to enhance brand awareness. Regarding the e-commerce segment, as mataharistore.com has been rebranded to matahari.com in 2Q18, the sales grew by 80.8% YoY in FY18 following the increase of 31.7% in number of transaction.

Share Buyback Program& Change in Dividend Policy

On Oct18 the EGM has approved the share buyback program to retire up to Rp1.25 trillion (c.7% stake) to reduce equity on its balance sheet and regain shareholders’ trust on the stock. The corporate action has been started in Nov18 and valid until Apr20. To date, the company has bought back 67 million shares (2.3% stake), with the average share price of Rp4,825 or equal to Rp324 billion. On the other hand, the management will change the DPR policy to 50% from 70% for the past 3 years. The higher cash retention from the lower payout ratio will be used to support the Company’s growth strategies to develop its assortments, expand both its large format stores, as well as smaller formats and specialty stores.

Temporary Price Drop, but Lower TP of Rp5,750/ shareat Shadier Outlook – Maintain BUY

Webelieve the current share price has been undervalued, while we expect LPPF sales in 2019F/20F to grow by 3.5%/2.6% YoY on the back of conservative 0% and 1% SSSG, respectively, lower than our previous expectation of 4% due to shadier outlook in department store concept amid wilder competition in fashion retail industry both in store or on the web, but we are optimistic on company’s next initiatives to reformat both the store size and assortments as well as expand more to specialty store concept. Hence we generate a new target price of Rp5,750/ share, from previous target price of Rp8,000, which offers a 34.3% upside, as we believe the stock has been oversold. Our TP implies PER and EV/EBITDA 2019F of 9.1x and 5.7x, respectively, while the stock is currently traded at 6.8x and 3.7x PER and EV/EBITDA 2019F.