Matahari Department Store in a growing market

Matahari Department Store: Unrivalled Dominance (LPPF, Buy, Rp13,200, TP: Rp15,600)

With US$4bn market cap, LPPF is one of a few companies that still offers a remarkable 38% EPS CAGR and combined 14% free-cash flow yield in FY13F-15F. We use DCF in valuing LPPF with 10.1% WACC and 4.5% terminal growth. Our TP implies 28.5x FY14F PE or 0.7-0.8x PEG versus current 24.1x FY14F PE. Premium is justified by its sizeable market cap (US$4bn) and superior financial and operational performance (see Exhibit below: 38% EPS growth, >14% EBIT margin, >25% ROA) Stripping out the non-tax deductible interest expenses, LPPF trades at 22.6x FY14F PE.

LPPF is currently Indonesia’s largest department store with >32% market share and 118 nationwide stores. In a growing market, LPPF as the biggest player still outpaced the industry by growing 3.1x faster, with market share rose from 24% in 2006 to 32% in 2011. We expect LPPF to continue growing fast as it aggressively opens 13-15 stores p.a. over the next three years, while the industry is also still underpenetrated particularly outside Jakarta. LPPF benefits from its strong positioning in the fast-growing Indonesian middle class (53% of total population).

LPPF has the highest ROA among peers, given its most profitable and least-capital intensive business model. LPPF also has unrivaled working capital management with 25 days negative cash conversion cycle, which means that its operational needs are more than self-funded. Strong cash generation enables LPPF to meet its expansion plans and accelerated debt repayment, while servicing a 40% dividend payout starting FY14F.

Accelerated debt repayment would make LPPF debt-free by FY15F. This gives substantial 38.4% EPS CAGR in FY12-15F, as the non-tax deductible interest expenses gradually diminish.  By 4Q13, we also expect LPPF to earn the 5ppt tax reduction assuming that it maintains the current >40% free-float.

for Indonesia Market Summaries 28 May 2013