Matahari Putra Prima A Closer Look At The Best Supermarket Operator

The supermarket sector has seen a challenging year so far, but our analysis shows that, as at 9M15, Matahari Putra is the only player in the high margin-high volume strategy position. Maintain BUY with a lower IDR2,900 TP (from IDR4,100, 30% upside) to account for lower store openings. With all 10 of its high-volume Hypermart stores back in operation as at October, it stands to benefit the most once the local economy recovers.

Indonesian supermarket landscape
Our analysis reveals that Matahari Putra Prima (Matahari Putra) is the only supermarket in the most ideal strategy position, ie the high margin-high volume quadrant (Figure 1). Although its EBIT margins declined 60bps YoY, the company’s 9M15 asset turnover increased to 2.4x (FY14: 2.2x). This means that Matahari Putra has become more efficient.

Short-term bitter pill, longer-term benefits
Management’s decision to refurbish its 10 high-volume Hypermart stores resulted in the company not achieving our and consensus’ 9M15 estimates. Combined with the weak economy and the timing difference of the Lebaran festivities this year, 9M15 same-stores sales growth (SSSG) was -0.3%.

Better inventory days
Matahari Putra managed to decrease its inventory days to 95 in 9M15 (6M15: 100). Inventory days had jumped as earlier this year it had planned to open 12 Hypermart stores and, hence, ordered more inventory. Now, amidst the still weak economy, the company is opening two more stores, which takes its total of new Hypermart stores for 2015 to seven. Matahari Putra said it would consume its existing inventory before ordering more.

Economy still weak in 4Q15
As at mid-October, all 10 refurbished high-volume Hypermart stores are already back in operation. However, Matahari Putra said the economy was still weak as at November. Thus, we have decided to revise down our FY16F/FY17F earnings by 21.1%/21.5% respectively to account for the still weak economy.

Maintain BUY with a lower IDR2,900 TP (from IDR4,100), which implies 32x/28x FY16F/FY17F P/Es. Our TP is based on DCF valuation, with WACC of 12.6%, TG of 5%, and beta of 1.0.

Indonesia’s supermarket landscape
Our analysis reveals that Matahari Putra is the only supermarket operator in the most ideal strategy position, ie the high margin-high volume quadrant (Figure 1). Although the company’s EBIT margins declined 60bps YoY, its 9M15 asset turnover increased to 2.4x vs FY14’s 2.2x. This means that Matahari Putra has become more efficient.

Short-term bitter pill, longer-term benefits
Management’s decision to refurbish Matahari Putra’s 10 high-volume Hypermart stores resulted in the company not achieving our and consensus’ 9M15 estimates. Combined with the weak economy and timing difference of the Lebaran festivities this year, 9M15 SSSG stood at -0.3%. We believe, assuming that those 10 high-volume stores had not been refurbished this year, 9M15 SSSG would still have been a decent positive number. However, management wanted to take a longer term view and decided to refurbish those stores, considering the weak domestic economy.

Better inventory days
Matahari Putra managed to decrease its inventory days to 95 in 9M15 from 100 days in 6M15. The company’s inventory days had, indeed, jumped considerably when compared to 75 days in FY14. The company now plans to consume its existing inventory first before placing new orders.

Still weak economy in 4Q15
As at mid October, all the 10 refurbished high-volume Hypermart stores have already re-started operations. This can be seen in Figure 3. However, Matahari Putra has said that the local economy remains weak as at November. Thus, we decided to revise down our FY16 and FY17 earnings estimates by 21.1% and 21.5% respectively to account for the still weak economic conditions.