Our machine-like (productivity-wise) analyst Swati writes another report on retail sector: Matahari (MPPA IJ). The company has done a great job in creating footprints, boasting 85 Dept Stores and 120 Food Stores in more than 50 cities in Indonesia. And it will continue to expand aggressively. Contribution from outside Java is around 37% and still growing.
The stock is not cheap at 24x 2010 PER with ROAE lingering around 7-8% for the past seven years. It is a combination of low profitability per sqm (US$28/sqm at hypermart, which makes up almost 59% if sales) and series of cash call in the market.
To fund its aggressive expansion campaign, Matahari has done four rights issues, in addition to bond issuance. The rights issue in 2007 involved an 80% dilution pre-warrant.
Key points from the report:
MPPA’s profitability has lagged growth as net margins are low at 1-2%.
While top line grew by 9.5% in last three years, earnings grew by -6.3% pa.
ROE has declined for four consecutive years and is one of the lowest in the industry.
Valuations too look stretched at 24x 2010 consensuses PE.
Dept store business to spin off, transferring asset/liabilities to a listed company called Pacific Utama. Not entirely clear to us how this will unlock value.
Competition to heat up further: The Lotte Group is coming, with recent acquisition of 19 Makro stores.
Longer payback period: every US$ invested by MPPA into its stores (department/hypermarts) has a payback of 12 years compared to 6 years at RALS and 3 years at ACES.
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