Mitra Adiperkasa (MAPI IJ) – good numbers but where does the money go? - CLSA

essica Irene is looking at Mitra Adi (MAPI IJ) FY10 results. Overall a strong number with EBIT coming in 9% above consensus and bottom line in line. Inventory days also fell to 167 days from 204 days the previous year. Jessica maintains her BUY call and TP of Rp3,300.

MAPI generated Rp725bn operating cashflow last year but shows only Rp24bn net increase in cash. Where does the money go?

· Acquiring Kripy Kreme franchise in Jakarta for Rp74bn (US$8.5mn)
· Purchasing a land plot in Jakarta CBD area, paying Rp118bn (US$13.5mn)
· Debt repayment
· Rp275bn for store expansion

While we like debt repayment and store expansion, we are not keen on Krispy Kreme’s pricey “arm length” acquisition. Paying 10x EBITDA for a struggling business – overshadowed by a local operator JCo – is clearly dilutive when MAPI only trades at 6x EBITDA. We also find it hard to understand that purchasing land to build a new HQ should be a priority for MAPI.

Will this event raise old question of CG practices in this company?

Key points from report:
· FY10 results were strong, with EBIT coming in 9% above consensus (Rp308bn). Net Profit grew by 23% to come in 3% below consensus (Rp201bn)
· Net gearing fell to 50% from its peak of 98% in 2008, and 72% in 2009
· Rp725bn of operating cashflow (FY09=Rp98bn), but only increased cash by Rp24bn. [Store expansion (Rp275bn), debt repayment (Rp165bn) & land purchase (Rp118bn)]
· Krispy Kreme acquisition seems expensive. Bought all 10 stores of Krispy Kreme for Rp74bn (US$8.5m), 10x EBITDA (MAPI trades at 6x EBITDA).
· Aims to have 1,000 sports outlets by 2013. I.e., adding 600 outlets in 3 years, more than doubling sport sales in same period.
· Expect profit to increase at Cagr of 40% over the next two years. TP Rp3,300 gives 21% upside. Maintain BUY.