Mitra Adiperkasa (BUY, TP IDR2,925), FY10 Results Review, Mainly in Line - OSK Nusadana

· As envisaged. Net profits surged 22.6% y-o-y to IDR201bn in FY10, backed by a 15% y-o-y growth in revenue to IDR4.7trn. Gross margin expanded by 40bps to 50.4%, driven by MAPI’s policy of directing its new store expansion to the higher yielding segments. Some 59% of the 40,595 new retail outlets added this year are specialty stores and F&B outlets. As such, almost 70% of MAPI’s revenue was contributed from these two segments, where gross margin can reach as high as 40%-45% from specialty stores and 60%-65% from F&B outlets, compared to 28% from department stores.

· Strategic efforts pay off. FY10 operating margin also expanded strongly to 9.5% from 7.5% previously, helped by: i) the company’s astute move to collaborative its marketing strategies with local banks, which cut down its advertising cost by 10bps to 1.2% of sales; ii) cost savings from letting go of two underperforming brands this year (Harvey Nichols and Armani); and iii) having more stores enables the company to meet its principal’s quota, which allowed it to source for more goods and materials locally, and hence saving on freight costs in the F&B division (for stores like Starbucks or Burger King). This will continue to bolster MAPI’s cash flow from operating activities at IDR770bn for FY10, doubling from IDR270bn in FY09.

· Expansion driven margin. This year, MAPI will add around 40,000sq m in retail outlets. Its capex for FY11f is estimated at IDR350-400bn as the expansion plan does not include a new department store. A third of the new stores will be outside Java and will be financed by internal funds. If required, the company can raise more loans considering its current net gearing of 0.5x compared with at 0.7x in FY09 after bringing down its interest bearing debts to IDR955bn by 14.7% y-o-y.

· Maintain BUY, TP IDR2,925. We remain positive on company’s future outlook, as it taps into the middle segment of the market, which comprises more than 50% of Indonesia’s population. Maintain BUY, with our target price of Rp2,925, which puts the counter at 17.1x-12.9x 2011f-12f PE.