Matahari Department, the Best Store Chain Keeps Delivering

What keeps Matahari’s solid performance distinct from that of its competitors is the strength of its private brands, such as the award-winning Nevada. As such, we have noticed larger sales contributions from its direct purchase items vis-à-vis consignment items. We also have witnessed that its focus on utilities expense reduction resulted in operating 1Q16 margins expansion. Maintain BUY with a higher IDR19,900 TP (from IDR19,250, 11% upside), implying 28x FY16F-17F P/Es.

Female customers are a key focus for sales growth
As women’s apparels still contribute c.9% of Matahari Department Store’s (Matahari) total sales only (vs c.18% from men’s, and c.40% from children’s and youth’s apparels), the firm is aiming to strengthen its merchandise targeted at female customers.

Store expansion plan in 2016
We keep our forecast of seven new Matahari stores in 2016. Management is targeting for three new stores before the Lebaran festivities as, historically, the company achieved c.50% of its full-year earnings during quarters where the festival is celebrated.

Stronger 1Q16 same-store sales growth (SSSG)
As Matahari focuses on the resilient and rebounding middle income segment’s purchasing power, and has strong focus on cost efficiencies (eg utilities expenses), we believe it is the best department store chain to gain from the stronger economy in the coming quarters. The downside risk is if a slowing economy occurs in these quarters. This can result in lower-than-expected SSSG and/or fewer new store openings.

Maintain BUY
As the 10-year government bond yield has dropped to the current 7.6% level (from the 9.5% high in mid-Sep 2015), we reduce our risk-free rate to 8% (from 8.25%) while maintaining our forecasts. This results in a higher DCF-based IDR19,900 TP (from IDR19,250). Our DCF methodology assumes 12.5% WACC and 3% TG.

Stronger, rebounding quarterly SSSG
Matahari is focused on the resilient and rebounding middle income segment’s purchasing power (as evidenced by its rebounding quarterly SSSG) and has strong focus on cost efficiencies (eg utilities expense). Thus, we believe the company is the best department store chain (and most well prepared) for a stronger domestic economy in the coming quarters.

Growing sales contribution from direct purchase items
Matahari’s direct purchase items have higher gross margins (ie 40-42%) when compared to that of its consignment items (30-32%). We have observed that its direct purchase items have continued to make up a bigger portion of total sales since 2011. We also expect this segment to keep contributing more in the coming years.

Revising our DCF valuation with a lower risk-free rate of 8%
As the local economy has improved and the associated risks subside – this is evidenced by the 10-year government bond yield dropping to the current 7.6% level (from the 9.5% high in mid-Sep 2015) – we have reduced our risk-free rate to 8% (from 8.25% previously) while maintaining our forecasts. This has resulted in a higher DCF-based IDR19,900. Our DCF methodology assumes 12.5% WACC and 3% TG.

Company Profile
Matahari Department Store (Matahari) s Indonesia’s largest department store operator, with 142 outlets, as at 1Q16, targeting the fast-growing and resilient Indonesian middle-income segment. It won Marketing Magazine’s Top 2014 Brand award for the department store category and has been successful in pushing its well-accepted private label brands, such as Nevada.