Mansek MAPI: Promise of a positive free cash flow

MAPI reiterated its promise not to spend its cash from operation for capex. Since 2007 until 2009, MAPI barely had positive cash flow post capex due to heavy expansion in brand acquisition and outlets. MAPI plans to reduce its net gearing from 74.4% in 1H10 to 20% in 5 years. As most of the needed brands have been acquired, combined with strong footprints in mid- to-upscale malls, MAPI plans to focus more on ROE. Harvey Nichols, upscale department stores which operates at loss, will see their fate decided this month. We have upgraded the earning on strong 1H10 performances, and our TP. Our new TP of Rp1,055 is based on PER discount to its peers as MAPI’s ROE is still the lowest.

Better-than-expected 1H10 result. MAPI posted Rp100bn net income, 52.3% of our FY10 net income estimate. Although MAPI revenues were distributed more or less equal between 1H and 2H, margin was not, since 1H saw a significant price discount to attract customers post year-end festivities. In the 2007-2009 period, 1H/FY operating profit ratio was 35.5%, opening possibility for better performance in 2H. Despite flattish performance in revenue on qoq basis! , margin significantly improved in 2Q10. 2Q10 gross margin was 51.4%, with operating margin of 12.1%, higher than 1Q10 gross margin of 48.3% and operating margin of 5.0%.

Specialty retailing, pillar of MAPI’s profit. From Rp133bn operating profit in 2Q10, Rp111bn was contributed from specialty stores. Sports which has 341 stores out of 587 stores (as of May 2010), we believe was the biggest earner. MAPI served low pricing to high pricing segment with different brands, which put it as the market leader in sports shoes and apparels.

Promise of de-leveraging and capex restraint. MAPI net gearing was 74.4% in 1H10 and it gradually plans to lower it to 20% in 5 years. Repayment of Yen 1.5bn debt (Rp158bn as of June 30, 2010) will be the priority. The company estimates to generate EBITDA of around Rp700-725bn, capex will be allocated at Rp200-250bn. With interest payment of Rp120-130bn, tax at Rp70bn and net working capital of Rp100bn, MAPI will have a positive cash flow of Rp175bn.

MAPI deserves a re-rating. MAPI FY11F Bloomberg consensus ROE is 14.2% (RALS : 17.2%, ACES : 19.6%). However MAPI consensus PER11F is 6.1x, far below RALS (11.3x) and ACES 14.4x for the same period. With 1H10 RALS results below consensus, and ACES within expectation, and MAPI outperformed, MAPI deserved a rerating at least to consensus 8.0x FY11F which translates into Rp1,055/share.