Matahari Department Store, Well Positioned For Indonesian Economy Recovery

Due to the currently weak Indonesian economy, Matahari Department Store (MDS)’ 6M15 net income is below our and consensus forecast after considering seasonality. However, we still like MDS as it is a well-run company with the right middle income segment focus. Considering its expansion plan of opening 12 new stores is on track and the strength of its private label brands, we reiterate our BUY call for MDS with a lower TP of IDR18,900 (11% upside) based on DCF valuation.

Considering seasonality, 6M15 net income is below our and consensus’ FY15 forecast
MDS’ 6M15 net income of IDR647.8 bn is 32.9% and 34.3% of our and consensus earnings estimates. Including the two weeks of sales during Lebaran festivity in July that is not included in 6M15 result, we estimate that MDS achieved c.9% lower earnings this year during the Lebaran due to the weak Indonesian economy.

Store expansion is still on track
MDS managed to open new 8 stores in 6M15 and the management is confident that it can open 4 more new stores this year, which is in-line with our assumption of 12 new stores. Should the Indonesian economy recover, MDS is the best positioned department stores in Indonesia focusing on the growing middle income segment.

Lower Same Stores Sales Growth (SSSG)
Despite its decent 12.2% SSSG in 6M15, the management has guided for a lower 7%-9% SSSG for FY15F. As such, we reduced our FY15F SSSG assumption to 7% from 10%.

Still a BUY with a lower TP. We maintain our BUY call on MDS with a lower TP of IDR18,900 from IDR22,000 previously. Our TP is derived using a WACC of 12.5% and TG of 5%, implying a 30.8x/26.0x FY15F/FY16F PE.

Strength of MDS’ Private Label Brands
As a percentage of gross sales, MDS’ direct purchase products have been increasing (versus its consignment products) since FY11, demonstrating strength of MDS’ private label brands, and is at 36.2% in 6M15 (versus 34.9% in 6M14). MDS’ private label brands contribute c.80% of direct purchase products.

Lower Same Stores Sales Growth (SSSG)
Despite its decent 12.2% SSSG in 6M15, the management has guided for a lower 7%-9% SSSG for FY15F to anticipate weakness post Lebaran in the coming quarters. As such, we reduced our FY15F SSSG assumption to 7% and 9% in FY15F and FY16F, respectively, from previous assumption of 10% SSSG in FY15F and FY16F.

Revising our forecast
We cut our FY15F/FY16F earnings to IDR1,791.9 bn/2,118.8 bn (-8.9%/-12.5%) to reflect lower SSSG as explained on the previous page and lower growth of consignment sales. We now use 5% (revised from 15%) and 10% (revised from 15%) sales growth of consignment sales in FY15F and FY16F, respectively.

Valuation
We assume a risk free rate of 7.5%, a market risk premium of 5.0%, equity beta of 1.0, terminal growth rate of 5.0%, which result in an implied WACC of 12.4%.