Indo Premier MPPA (BUY TP Rp 1780)

Transaction of LPPF divestment
MDS institutionalization’s process from MPPA to LPPF in 2009, as a separate entity, has attracted CVC Capital Partners to take over MDS from MPPA. Through a joint venture, Meadow Asia Company Ltd (MAC) will acquire 90.76% of MDS at Rp 2,705.33 per share or equivalent to Rp 7.16 trillion. MAC was established by strategic alliance between MPPA and CVC, in which MPPA owned a 20% an in-directly ownership and 80% by CVC. The company’s management viewed the bid as profitable and decided to let go MDS business unit.

Sale of MDS: short and longer term benefits
It is clear that the sales figure and profitability (mainly for gross, operating and EBITDA margins) will shrink post the divestment. However, we see 3 advantages for MPPA business in the long run. First, divestment will boost MPPA net margin through additional interest income for MPPA lending to MI, income from in-direct 20% ownership of LPPF, and the relatively non-existent interest expense. Second, the stronger balance sheet will give flexibility in the future should there be aggressive expansion from MPPA side. Third, immediate Rp 0.9 trillion cash to accelerate the expansion of Hypermart, its current core business, from average 6-8 stores per year previously to 10-15 stores per year. On top of that, investors will enjoy commitment from MPPA to set aside Rp 1 trillion from the divestment for use of dividends. In our view, the divestment is sensible, as it provides immediate advantages as well as stronger longer term prospects.

Maintain BUY, Fair Value Rp 1,780; lucrative transaction
We have factor 4 issues of LPPF divestment into our financial model and this resulted in a new fair value at Rp 1,780 per share (vs. previously of Rp 980 per share). At yesterday’s closing price of Rp 1,170 per share, MPPA was traded at 34% discount to our DCF-based fair value, which also implied significant discount in terms of PER valuation. Retain our BUY recommendation.