Sep 24, 2017 09:11:39

Matahari Department Store – Moving From Growth To Dividend Play

We upgrade Matahari to BUY (from Neutral) with a revised DCF-derived TP of IDR10,950 (from IDR16,000, 9% upside). At current levels, we believe the downside is limited and that it offers decent risk-reward trade-offs, moving from growth to dividend play. We are projecting profit growth of 4-7% (2012- 2015: 23-49%) and dividend yields of 4-5% during 2017-2019. The dividend yield and upside to our revised TP give a total potential return of 13-14%, while the stock is trading at much lower valuations vs its peers. Our lowerend valuation for the stock is IDR9,850, derived from a dividend discount model, assuming a 100% payout ratio in 2020F from 70% during 2017F- 2019F. We trim our 2017F-2019F profits by 3-8% to factor in lower SSSG on weakness across the industry.

  • Well managed. Matahari Department Store (Matahari) is one of the wellmanaged retailers in Indonesia. We like its past 5-year track record, and efforts to increase store productivity consistently since 2010. It now plans to utilise big data analytics to continue raising productivity and better serve its customers. So far, the plan has shown good progress as loyal members’ contribution has increased to about half of total sales, from around two-fifths last year.
  • From growth to dividend play. Financial deleveraging was Matahari’s biggest source of profit growth during 2013-2015. At that time, revenue and EBIT registered CAGR of 14%, but profit posted a much stronger CAGR of 32%. Without financial deleveraging, it would have only posted low to midteen earnings growth. As Matahari had completed its debt repayment in 4Q15, we expect slower single-digit profit growth during 2017F-2019F. Nevertheless, with the extra cash flow, we expect Matahari to offer dividend yield of 4-5%.
  • Merits of investment in e-commerce business, Matahari-mall. Post financial deleveraging, Matahari has extra cash flow that can be allocated for more dividends or investments. We believe an allocation for investment signals management’s confidence in the industry’s prospects, and the converse for dividend allocations. The bulk of lucrative opportunities in the retail sector can be found in the online channel, which has mouth-watering long-term promise but hazy economic returns in the foreseeable future. Given the cash flow muscle, we think Matahari can afford to venture into investments such as Matahari-mall, to strengthen its longer-term strategic position.
    On the flipside, we understand that related-party transactions are not ideal, especially when one of the businesses is still struggling. Yet, we do see some merits for its investment in MatahariMall.com.
  • Potential total return is ahead of our JCI upside. At current levels, Matahari offers a total potential return of 13-14%, which is above our expected JCI return of 6% (based on index target of 6,150). Our lower-end valuation for the stock is IDR9,850, derived from our 10-year dividend discount model, and assuming a 100% payout ratio in 2020F from 70% during 2017F-2019F. Upgrade to BUY given the limited downside from current levels and relatively attractive potential total return of the stock.
    Downside risk includes weaker-than-expected SSSG. (Stifanus Sulistyo)