Mitra Adiperkasa Trapped In Groundhog Day

Year 2015 has been very challenging for Mitra Adiperkasa (MAPI)
We downgrade MAPI to SELL with TP of IDR3,000 (from 5,000, 14% downside), implying 41x/20x FY16F/17F PE. While MAPI has done its best to reduce its excess inventory and replacing its interest bearing debt with a zero coupon bond in 6M15, we believe it is overvalued considering its higher inventory days and high effective tax rate in 9M15, which would impact MAPI’s financials the following two years.

Private label brand for sport active division
Based on our recent conversation with the company, MAPI began to produce private label brands for its sports active division; we agree that this strategy will be beneficial for MAPI in the longer run as we have observed consistent strong performance from Matahari Department Store (LPPF IJ, BUY, TP: IDR19,250) with its well-accepted private label brands.

However, operating margin from specialty stores will still be under pressure. Although we saw 110 bps QoQ improvement for MAPI’s gross margin in 3Q15, we noticed that its 9M15 inventory days inched higher again to 172 days from 163 days in 6M15. As such, we expect MAPI will keep discounting again to reduce the inventory days to 158 as in FY11. As such, MAPI seems currently trapped in … Groundhog Day.

Hurt by higher effective tax rate
In place of an interest bearing bank loan, MAPI now has an IDR1.5trn zero coupon bond, which was transacted in 2Q15 along with the agreement between MAPI and CVC Capital Partners related to its sports active division. The non-tax deductible c.IDR108bn zero coupon bond amortization would result in a higher effective tax rate for MAPI.

Downgrade to SELL
Considering the weak economy, we revise down our expansion plan forecast next year to 27,000 sqm (from 39,000 sqm) and use higher effective tax rate of 42.5% (from 35% previously). As such, we cut by 54%/42% our FY16F/FY17F net income. Our SELL TP IDR3,000 is based on a DCF valuation with a 9.8% WACC, market risk premium of 5%, and a terminal growth of 5%.

Operating margin from specialty stores will be under pressure in 4Q15 as inventory days in 9M15 increased again. Although we saw 110 bps QoQ improvement for MAPI’s consolidated gross margin in 3Q15, we noticed that its 9M15 inventory days inched higher again to 172 days from 163 days in 6M15.

Changes in our forecast assumptions
To better reflect the current MAPI’s financials and Indonesia’s economy circumstances, we decided to make the following changes in our FY16F/FY17F forecast assumptions.