Matahari Putra Prima Faster And More Profitable

We reinitiate coverage of PT Matahari Putra Prima (MPPA) with a BUY rating and a DCF-derived TP of IDR4,650 (implying a 37.8x FY15F P/E). We like MPPA due to its: i) margin expansion and higher asset turnover; ii) expected higher customer traffic from store reformatting to its quality new G7 format; iii) focused, targeted marketing; iv) bigger contribution from its private label brands; and v) established customer loyalty program.

Margin expansion and higher asset turnover
Higher margins from rapid store expansion outside Java, focused asset light strategy and an efficient logistic platform are MPPA’s definite competitive advantages that its competitors cannot replicate easily.

Higher customer traffic from store regeneration
In addition to new store expansion, MPPA will focus on the regeneration of its existing stores. The plan is to renovate ten existing Hypermart stores per year to adopt elements of its latest G7 store format, which management expects to result in a higher basket size and increased customer traffic.

Focused, targeted marketing
The company has been able to leverage its in-house promotional activities by charging its suppliers for ad spend on its weekly catalogue, resulting in increasing positive marketing income since FY11. For example, it recorded a positive marketing income of IDR524 bn, equivalent to 3.7% of its total sales in FY14.

Bigger contribution from private label brands
Indonesian consumers’ perception on private label brands is getting better. As such, Hypermart plans to increase its private label brand contribution from the current 4% of total sales to 10% in the future.

Established customer loyalty program
The company benefits from its growing customer loyalty program through the use of Hypermart Card (Hicard), which already exceeds 3.2 million members. This membership card contributes 60% of Hypermart’s total sales.

Reinitiating coverage with a BUY and a TP of IDR4,650 (a 12% upside). Our DCF-based TP is derived using a WACC of 11.0 % and TG of 5%, which will imply a 37.8x FY15 P/E.

Risks
Delays and/or fewer new store openings, changing regulation on retailers in Indonesia, and competition from minimarkets.

Investment Thesis
Margin expansion & higher asset turnover
MPPA is still in Quadrant 2. However, after a closer look, it has been moving toward Quadrant 3 on the back of higher EBIT margin and higher asset turnover, as evidenced in Figure 2. This superior achievement is gained from its competitive advantages as described next.

Competitive advantages
MPPA has been able to increase its Distribution Center (DC) throughput such that the DC supports MPPA in rapidly opening stores outside Java. So far this year the company has opened two Hypermart stores at Singkawang Grand Mall and at Borneo City Mall, both at West Kalimantan. Both are also the 10th and 11th Hypermart stores in Kalimantan.

MPPA operates on an asset light strategy in that its stores are 100% leased
In FY14, MPPA leased its stores c.40% from Lippo Group, which has extensive experience in building and running malls throughout Indonesia. The more economical rental outside Java helped bring down the rental expense (as % of total sales).

At a closer look, MPPA is the only hypermarket chain operator that has dedicated and centralized DCs in Indonesia. It currently has two Dry-Goods DCs in: i) Balaraja (serving the western Indonesian region) and ii) Surabaya (serving the eastern Indonesian region). It also has one Fresh Food DC in Cibitung. The Balaraja DC is run on three continuous shifts (ie 11pm-7am, 7am-3pm, 3pm-11pm).

In FY14, around 60% of Hypermarket goods were sourced from its DCs (with the aim to increase to 65% in the near future) and the remaining were delivered by vendors straight to the stores. Its Balaraja DC is very well-managed as it has a shrinkage level of only 0.2%.

Higher customer traffic from store regeneration
In addition to new store expansion, MPPA is going to focus on regeneration of its existing stores. The plan is to renovate ten existing Hypermart stores per year to adopt elements of its latest G7 store format, which will result in higher basket size and increased customer traffic. MPPA also already converted a few Foodmarts into Hypermarts.

Last year, MPPA opened its first Foodmart Gourmet store format in Cilandak Town Square. Foodmart Gourmet stores will be converted to Foodmart Primo this year, focusing on the upper middle class. As such, its peers in the upper segment are the likes of FoodHall and Ranch Market. MPPA will open 4-6 Foodmart Primo this coming April/May.

Focused, targeted marketing
In FY14, the company reduced its heavy reliance on substantial promotions across the board to targeted promotions for key items to attract foot traffic. The company has also been able to leverage its in-house promotional activities by charging its suppliers for ad spend on its weekly catalogue, resulting in increasing positive marketing income since FY11. It recorded a positive marketing income of IDR524bn marketing expense, equivalent to 3.9% of sales.

The 2014 Nielsen Global Private Label Survey revealed that more than 60% Indonesian consumers surveyed, which is more than the global average and its South-East Asian peers, think that private labels can be considered a good alternative to name brands and that private label brands’ quality is as good as that of name brands.

As such, Hypermart plans to increase its private label brand contribution from the current 4% to 10% in the future. Value Plus is one of its leading private brands.

Excellent customer loyalty program
The company benefits from its growing customer loyalty program through use of the Hicard, which already exceeds 3.2 million members with an average of IDR350,000 per transaction per day. Customer spending through its loyalty membership card contributes 60% of total Hypermart sales. The card rewards its members with higher discounts (5%-15%), including 5% every day discount on Value Plus, a private label brand from Hypermart.

Business Overview
Matahari Putra Prima (MPPA) is the largest hypermarket operator in Indonesia with 107 stores and a market share of 35.5% as of Dec 2014. MPPA also operates supermarkets under the Foodmart brand (58 outlets) and a specialty store chain under the Boston Health and Beauty brand (102 outlets) as of Dec 2014.

Three different store formats
MPPA continuously reflects the demands of the market by offering a lifestyle approach to shopping for families, providing a wide range of tastes, in fresh fruits, fresh vegetables, baby products, electronics and household appliances, among many others.

Product mix
Hypermart’s product mix is dominated by grocery products (61% of FY14 total sales) with the rest of FY14 sales coming from Non-Food (25%) and Fresh Food (14%). Consignment sales are only c.5%, mainly for electronics and apparel products. MPPA also plans to increase its private label products’ current contribution from 4% to 10% in the future.

Faster expansion outside Java
MPPA has managed to increase its market share every year since 2007 as MPPA keeps expanding outside Java profitably and faster than its competitors by employing an asset light strategy (ie all stores are leased). Its compact format, at an average store size of c.6,080 square meters, enables MPPA to have first-mover advantage in cities outside Java. So far this year the company has opened two Hypermart stores in Kalimantan.

Reasonable working capital days & healthy balance sheet
As shown in Figure 25, the inventory days have been increasing since FY12. However, there are good explanations for the increase. In FY13, MPPA opened 80% of its new stores in the month of Dec 2013. Similarly, in FY14, MPPA opened most of its new stores in 4Q due to the uncertainty with the presidential election in July last year and 60% of its new stores in FY14 were located outside Java. Going forward, with a more normal business operation and more traffic generated by the new G7 format, we expect that the MPPA will be able to turn its inventory faster as it did in FY13.

Store opening plan
Going forward, we forecast 12 Hypermarts, 5 Foodmarts, and 8 Boston stores every year. So far this year the company has opened two Hypermart stores, one at Singkawang Grand Mall and another at Borneo City Mall, both at West Kalimantan. Both are the 10th and 11th Hypermart stores in the Kalimantan island.

In identifying locations for new stores, MPPA focuses on a number of criteria, including disposable income per capita, population density and economic productivity. The guiding principle is to establish new stores in cities of more than 150,000 people and in all provincial capitals. New store performance is rated against the company’s historical expectations. Store management is focused on minimizing the ramp-up period to be cash positive in the first year of operations.

Shareholding Structure

In Jan 2013, PT Multipolar Tbk (MLPL), the company’s major shareholder, through its wholly owned subsidiary, Prime Star Investment Pte. Ltd. issued Exchangeable Rights (ER) in principle value of USD300m that are fully subscribed by Anderson Investments Pte. Ltd., a subsidiary of Temasek Holdings (Private) Limited. The ER are exchangeable in full and not in part for such number of shares representing 26.1% of MPPA shares, effectively at IDR2,050/share.
Key Risks

MPPA leases all of its stores
As such, its expansion depends on the availability of store building or mall in the target area. Any delay or lower new store opening will result in lower-than-expected revenues.

The Indonesian government has been quite vigilant in issuing/modifying regulations to protect traditional retailers from being crushed by the larger and more efficient modern retailers. Since MPPA works with the local suppliers and 90% of its supplies are provided locally, MPPA is, in effect, exempted from the numerous regulations on modern stores.

The recent growth of minimarkets poses a threat to Hypermart. Thus, the company counters with smaller stores and express check-out counters.