Equity Research

PT MATAHARI DEPARTMENT STORE TBK 

Disruption from E-commerce

Flattish 1Q19 Sales From Tighter Competition

LPPF reported a 1Q19’s total sales of Rp3.35 trillion, slightly down by 1.1% YoY from Rp3.39 trillion in 1Q18, on the back of SSSG of -1.7% (vs 4.8% in 1Q18), mainly due to tighter competition particularly with online marketplace that resulted in weaker-than-expected CNY sales, plus the Easter holiday that was moved forward from March in 2018 to April this year (average sales volume down by 7.4% YoY). This was below our expectation, only made up 18.0% to our FY19F sales of Rp18.56 trillion. Meanwhile, its net profit dropped by 42.2% YoY to Rp142.5 billion from Rp246.7 billion in 1Q18, particularly given thehigher than expected opex, hike in finance cost by 241.2% YoY to Rp10.1 billion and other expenses of Rp37 million in 1Q19 while the company earned other income earned of Rp17 billion in 1Q18, as well as lower finance income by 24.3% YoY to Rp7.9 billion in line with lower cash position by 43.2% YTD.

Soft sales = lower operating leverage

1Q19’s GPM declined by 40bps YoY to 35.7% from 36.1% in 1Q18, driven by 1) sales mix, in which the higher-margin DP product sales contribution down by 20bps to total sales to 37.9%, and 2) more promotional discount compared to 1Q19 to attract more traffic to the store. In line with softer sales, the EBIT margin dropped 290bps YoY to 5.5% mostly due to increase in rental cost by 4.4% YoY (ratio to sales from 10% in 1Q18 to 10.6% in 1Q19); salary cost up by 11% YoY due to average increase in minimum wage of 8%coupled with increase in employee number by 6.7% YoY (ratio to sales from 7.7 in 1Q18 to 8.6% in 1Q19), and other opex that increased by 8.8% YoY (ratio to sales from 7.9% in 1Q18 to 8.7%). NPM also fell by 3% YoY to only 4.3% that given the jump in net interest expense by 129.9% YoY, in line with Rp400 billion increase in bank loan and lower cash position by 43.2%. The borrowing facility was withdrawn by the end of 1Q19 in order to pay its suppliersin Apr19, stock preparation for Lebaran that will fell on May19, as well as to prepare the share buyback program. Note that there are no new store rollouts YTD and hence, the total store count remains 159 by the end of 2018.

2Q19: Time to Speed Up!

Given the weak sales in 1Q19, the company should boost its sales in 2Q19 in order to catch up with its FY19F target of flat to low single digit SSSG, as there are Easter holiday and national presidential/legislative election in Apr19 plus its peak season, Lebaran in May. Although there will be a quite massive competitive threat from online marketplace, the company will continue its 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. Regarding the expansion, the company is forecasting 4-6 new stores this year (1 large format Matahari store opened in Apr) and 1 361? stand-alone specialty store opened in Apr.

Another Revision, Lower TP of Rp5,000/ share (from Rp5,750/ share) –BUY

TO reflect lower than expected 1Q19 performance, we made a few adjustments to our projection, particularly on SSSG (from our previous expectation of 0% to -1%) and its profitability margins. Hence, we expect LPPF sales in 2019F/20F to grow by 1.1%/2.5% YoY on the back of conservative -1% and 1% SSSG, respectively, 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. Ournew target price of Rp5,000/ share, however, still offers a 34.8% upside, as we believe the stock has been oversold lately. Our TP implies PER and EV/EBITDA 2019F of 10.8x and 6.6x, respectively, while the stock is currently traded at 8.2x and 4.4x PER and EV/EBITDA 2019F.

PT MITRA ADIPERKASA TBK 

1Q19 Result As Expected

During 1Q19, MAPI recorded a total sales of Rp4.68 trillion (+8.4% YoY), in line with our expectation, which formed 21.2% of our FY19F Rp22.07 trillion, supported by 2% SSSG. However, the SSSG came in slower, in which in 1Q19 the company scored 8% SSSG, all blamed to soft overall macro environment and increasing competition in retail industry, both online and offline. Its net profit slumped by 60.6% YoY to only Rp138.3, particularly due to sale profit of fixed asset gained in 1Q18 amounted to Rp246.5 billion. We maintain our BUY recommendation on the stock with TP of Rp1,300/ share, which implies PER and EV/EBITDA 2019F of 17.6x and 8.2x, respectively.

EBIT Margin Expanded by 30bps

While the GPM stable at 46.9%, the EBIT margin managed to improve by 30bps to 6.1% in 1Q19 from 5.8% thanks to the internal improvements and the impact from restructuring and termination of non-performing brands last year. Furthermore, operating margin of the specialty store and dept store segment continued to accelerate, expanded by 60bps to 7.1% and 120bps to 6.2%, respectively, following the non-performing brand closures that massively occurred in 2017, while F&B’s EBIT margin dropped to 4.8% (from 9% in 1Q18), due to many newly opened Starbucks outlets in 4Q18. The net profit margin slumped by 510bps to only 3% in 1Q19, mostly due to loss on sale of fixed asset of Rp4.8 billion (vs gain of Rp246.5 billion in 1Q18) coupled with forex loss of Rp6.7 billion in line with weaker currency by 3-4% YoY, while the finance cost declined by 18.5% YoY to Rp62.23 trillion, on the back of the derecognition of the original bond of Rp244.36 billion following the execution of convertible bond execution post-MAP Active (MAPA.IJ) IPO by CVC in Jun18.

Positive Sentiments 2Q19 Onwards

As usual, in order to increase traffic and boost the sales in upcoming Ramadhan (May-June) period, the company offers some promotional program into the stores, i.e discount program up to 50%, Lucky Draw and gifts. Note that the Lebaran sales usually contributed c.25-26% to annual sales. We believe that this year the company will continue to grow, on the back of better internal operations in all segment as well as improvement in retail industry in Indonesia, Thailand and Vietnam. We expect the company’s sales to grow by 16.6%/11.5% in FY19/20F, on the back of 7% and 6% SSSG, respectively. This year, the company targets a total of 60k-75k sqm addition to sales area (mostly allocated to specialty stores) and also ready to welcome new brands – which has not been done in the past 3 years since the company has been concentrating on overall business transformation.

Maintain BUY with Unchanged TP of Rp1,300

While the 1Q19 performance still in line with our projection, we maintain our BUY recommendation on the stock with unchanged TP of Rp1,300/ share.This implies a valuation target of PER and EV/EBITDA 17.6x and 8.2x FY19F, respectively. Based on yesterday’s closing price of Rp 905, the stock is trading at 13.0x and 5.5x PER and EV/EBITDA 2019F, respectively. Hencewe believe this is the right time to BUY the stock. Risks might come from: 1) weaker than expected macroeconomics growth, 2) USD/IDR fluctuation, and 3) massive competition from foreign and local brands with similar target market.