Mitra Adiperkasa Not Smooth Sailing Yet

It has not been smooth sailing for Mitra Adiperkasa in 2015 so far. Maintain NEUTRAL, with a lower TP of IDR5,000 (5% upside). Its specialty stores’ quarterly SSSG was level in 2Q15. With the IDR weakening against the USD, we are concerned over its ability to continue passing on higher costs by lifting prices to keep its gross profit margin stable, going forward. On a positive note, its department stores’ and F&B divisions’ operating margins were stable in 2Q15.

Flat SSSG in 2Q15
We expected better same-store sales growth (SSSG) for Mitra Adiperkasa’s specialty stores in 2Q15, as it still held clearance sales during the quarter. However, the SSSG remained flat at 5% in 2Q15. Moreover, its specialty store segment’s operating margin in 2Q15 declined 270 bps QoQ to 1.9%, and dragged down the company’s total 6M15 operating margin to 3.1% (1Q15: 4.0%). The specialty store segment contributed c.64% of its 6M15 total sales.

Weak IDR/USD rate
As the rupiah is still weakening against the USD, we are concerned over its ability to keep passing on higher costs to its customers by raising prices to keep GPM stable going forward, as it imports a significant portion of its goods. As the Government also decided to increase import tariffs for imported fashion goods in late July, some of Mitra Adiperkasa’s product sales in its brands targeted towards the middle-income segment, like Cotton On, might be affected.

Department store and food and beverage (F&B) divisions in better shape
Mitra Adiperkasa’s department stores booked an operating margin that was higher by 30 bps QoQ, at 1.1% in 2Q15. Likewise, the operating margin of its F&B division was stable, at 5.5% in 6M15.

Still NEUTRAL
We remain NEUTRAL on the stock but trim our TP to IDR5,000 (from IDR5,750) to account for its lower overall gross margin for 6M15, and lower our SSSG for the specialty stores to 5% . Our DCF-based TP assumes a WACC of 9.9% and terminal growth of 5%.

Key risks: i) the IDR still weakening against the USD, ii) middle-income customers of Mitra Adiperkasa’s fashion brands switching to less expensive alternatives.

Flat SSSG in 2Q15
We expected Mitra Adiperkasa’s specialty stores to book better SSSG in 2Q15, as they were still holding clearance sales during the quarter. Its specialty store segment recorded only 5% SSSG QoQ in 2Q15. The segment’s operating margin also declined 270 bps QoQ to 1.9% for the same period, dragging the company’s 6M15 total operating margin to 3.1% (vs 4.0% in 1Q15) as specialty stores contributed c.64% of total sales in 6M15.

Department store and F&B divisions in better shape
Mitra Adiperkasa’s department store segment booked a 2Q15 operating margin of 1.1% (+30 bps QoQ). Likewise, its F&B division’s operating margin was stable at 5.5% in 6M15. As Figure 4 depicts, its main issue is the declining operating margin of its specialty store division. We will turn more positive on its prospects once this decline is arrested.

Revising our forecasts
We revise down our FY15F/FY16F earnings to IDR167.5bn/IDR259.7bn (-40.6%/-46.9%) respectively to reflect the expected SSSG of its specialty stores dropping to 5.0%/7.5% from 13%/13% for the corresponding periods respectively. We also trim our consolidated gross margin assumptions to 45.1%/45.1% from 45.9%/45.9% for FY15/FY16.

Valuation
We assume a risk-free rate of 7.5%, a market risk premium of 5.0%, equity beta of 1.0 and TG rate of 5.0%, which results in an implied WACC of 9.95%.