Matahari Putra Prima Leaner Inventory Days At The Expense Of Margins

We see an improvement in Matahari’s inventory days at end-2015 while its balance sheet remains strong. Maintain BUY as the company focuses on the middle-income segment and we see lessening margin pressure from its inventory clearance in 2Q16. However, we revise down our TP to IDR2,000 TP (22% upside) as we cut FY16F-17F net income by 38%/41% respectively to reflect lower marketing income and margins amid its ongoing clearance sales.

Balance sheet remains healthy
Despite margin pressure from its inventory clearance in 4Q15, Matahari’s balance sheet remains healthy with net gearing of 0.1x in FY15 and we expect net cash in FY16.

Remain BUY with reduced TP
We remain BUY on Matahari with our TP revised down to IDR2,000 (from IDR2,900, 22% upside), as we cut FY16F-17F net income by 38%/43% respectively to reflect lower marketing income and margins. Our TP is based on DCF valuation with WACC of 13.5% and 3% TG.

-6.5% same-store sales growth (SSSG) in 4Q15
We were caught off guard by the -6.5% SSSG in 4Q15 (FY15: -1.9% SSSG) and a 60bps QoQ decline in gross margin, driven by its aggressive inventory clearance during the quarter. As Matahari purchased less from its suppliers in 4Q15, marketing income also plunged. This resulted in 4Q15 EBIT margin declining 450bps QoQ to -1.5%. Key downside risk to our call is continued aggressive inventory clearance in 1Q16, which might result in another unprofitable quarter.

Healthier inventory days
Matahari’s inventory days shot up to 96 days in 9M15 (vs FY14’s 75 days) as it was too optimistic about its initial plan to open 10-12 hypermarket (hypermart) stores in the beginning of FY15 by ordering inventory in advance for the new stores. As it only managed to deliver seven new hypermart stores in FY15, its inventory days lengthened to 96 days in 9M15.

Aggressive inventory clearance resulted in -6.5% SSSG in 4Q15
We were caught off guard by the -6.5% SSSG in 4Q15 (-1.9% SSSG in FY15) (Figures 3 & 4) and a 60bps QoQ decline in gross margin, driven by its aggressive inventory clearance during the quarter. As Matahari purchased less from its suppliers in 4Q15, marketing income also dropped significantly, resulting in 4Q15 EBIT margin declining 450bps QoQ to -1.5%.

Revising our FY16F and FY17F earnings
As Matahari would continue its clearance sales until 1H16, we cut 2016F-2017F earnings by 38%/41% respectively, resulting in a reduced TP of IDR2,000 (from IDR2,900). Our new DCF-based TP implies 38x/36x 2016F/2017F P/Es, with 13.5% WACC and 3% TG.