Mirae Asset Sekuritas Indonesia Company Update
Matahari Department Store (LPPF IJ) – 2Q18 review: More store closures jitter investors by Christine Natasya (natasya)
Aug 1, 2018
Matahari Department Store (LPPF IJ) – 2Q18 review: More store closures jitter investors
Matahari Department Store (LPPF) delivered net profit of IDR1.09tr (+345% QoQ, +0.4% YoY) in 2Q18, bringing cumulative 1H18 net profit to IDR1.34tr (69%/65% run rates against our 2018 forecast and the full-year consensus, respectively), which we deem to be in line. However, we are slightly worried about the company’s current sales growth sustainability, given store closures (which could dampen sales growth), ability to expand, as well as competition from Indonesia’s growing e-commerce businesses. Indeed, we think the outstanding YoY growth of LPPF’s matahari.com appears to be cannibalizing the company’s offline sales performance. On top of that, competition from other e-commerce players (Lazada, Tokopedia, Shopee, etc.) is a concern, as they offer a greater variety of products. Nevertheless, LPPF’s valuation seems attractive, already trading at -2 standard deviations. LPPF’s management is considering whether to buy back shares but has not come to a decision yet. We downgrade our recommendation on LPPF to Trading Buy (from Buy).
More store closures this year and reduced capex budget
During the conference call, the CEO of LPPF said that the company is planning to close two or three stores in 2H18, which, according to the company, will have a minimal effect on revenue (contributed only around IDR60bn in 2017). In addition, given the challenge of finding places where additional regional stores can be operated productively, the company failed to open two stores that had been anticipated to open in 1H18, due to location concerns. The company is only forecasting one to two new stores by the end of the year. While we think the closure of underperforming stores is a reasonable strategy, we are concerned about the company’s ability to expand, both currently (due to slow mall development) and over the longer term (due to higher competition and e-commerce threat). For 2018, LPPF reduced its capex budget to IDR350-450bn (vs. IDR400-500bn previously).
Online business is on track to double sales from last year
In 2Q18, LPPF’s online sales grew 32% QoQ, driven by a 46% QoQ increase in average basket size. Matahari..com’s overall 1H18 sales are up 91% YoY, with the company on track to meet its goal of doubling overall online sales in 2018. Notably, the company rebranded Mataharistore.com to Matahari.com, and a new app is set to be launched by the end of 2018.
Revising our assumptions and lowering our target price
We lower our target price to IDR9,300 and downgrade our rating on the company to Trading Buy, as we cut our new store and same-store sales growth (SSSG) assumptions for 2019F (see Tables 4 & 5). We also revise our risk-free rate assumption to 7.5% (from 6.5%) due to rising 10-year government bond yields. An upside risk would be better-than-expected SSSG and sales growth in the coming quarters.