Mitra Adiperkasa (Initiating coverage with Outperform) - Time to go shopping - MACQUARIE

We initiate coverage of MAPI with an Outperform recommendation and Rp5,000 valuation/price target (representing 24.0x FY11E PER and 17.4x FY12E PER). We believe MAPI provides investors with compelling leverage to Indonesia's structural consumption/emerging middle class growth thematic, at a price we believe remains attractive (18.9x FY11E PER). With average daily trading liquidity now at US$1.0m (with a US$314m free-float market cap), the stock is also becoming increasingly investable for medium-sized institutions.

Leverage to Indonesia's emerging middle class
MAPI is an emerging retailer and distributor of branded consumer products, operating a total of 65 different retail concepts, many of which are licensed from leading international brand owners (including Sogo, Starbucks, Reebok, and Zara). The company's stores are mostly located in Indonesia's upmarket malls, where MAPI has leases over an average of c30% of these malls' total lettable area – a footprint we believe gives the company a powerful strategic advantage.
We believe the growth outlook for the business remains bright. Since FY95A, MAPI has grown its store base at a 23% CAGR from 40 to 854 outlets (as at FY10A), and a further 200–300 store openings (23–35%) are planned for FY11E (including in three new cities in Sulawesi, Kalimantan, and Papua). Meanwhile, sales growth has averaged 18.6% over the past five years, and is targeted at 20–25% pa moving forward. We highlight that MAPI's sales per capita outside of Jakarta are still less than US$1 (compared to US$15–40 in Jakarta), illustrating the extent of the leverage MAPI has to a steady broadening in Indonesian middle class (currently estimated at only 30m people, or one eighth of Indonesia's total).

Margins look set to rise; consensus looks too light
In addition to the robust top-line growth outlook, we believe MAPI is well placed to deliver EBIT margin expansion over the medium term from current relatively-low levels of 9.5% in FY10A (we are forecasting a 70bp improvement in FY11E). As a result, our FY11E EPS estimates are 14.5% above consensus (which is factoring in flat margins in FY11E), which we believe is too conservative. We also see scope for further margin improvement moving beyond FY11E.
Key to this trend will be the likely slowdown in the addition of new start-up brands to MAPI's portfolio, which typically have a depressing impact on short term profitability (with new brands often taking up to three years to break even). In addition, the recent discontinuance of the unprofitable Harvey Nichols brand (which single-handedly reduced FY10A EBIT margins by c85bp) will materially boost FY11E YoY margins. Finally, we also expect MAPI's effective tax rate to decline from an estimated c28% in FY11E towards c23% over the medium term.

Principal risk needs to be borne in mind
We see the largest risk to MAPI as being a loss of principal relationships over time – especially if Indonesia were to eventually lift the regulation prohibiting foreigners from operating specialty stores (this excludes department stores, which represent c20% of FY11E earnings). However, we believe this risk is heavily mitigated by MAPI's powerful leasehold property position; the large switching costs of relationship termination; and MAPI's brand diversification. MAPI has now also developed 12 of its own proprietary retail concepts.