SUMBER_ALFARIA_TRIJAYA_(AMRT.IJ)：UPGRADE_TO_N(V)：ALFAMART_SWALLOWS_MIDI-2013-01-25.ppt

,company report,consumer & retail food & staples retailing equity indonesia,abc global research,sumber alfaria trijaya (amrt ij),neutral (v),upgrade to n(v): alfamart swallows midi,target price (idr) share price (idr) potential return (%),5,735 5,250 9.2, alfamart ups its stake in sister company, midi, to 54.575% from 12.75%, consolidating it into its financial accounts,note: potential return equals the percentage difference between the current share price and, the transaction is at best fairly valued, while the benefits are,the target price dec hsbc eps hsbc pe,2011 a 2012 e 105.10 160.49 50.0 32.7,2013 e 221.95 23.7,uncertain upgrade to n(v) (from uw(v) and raise target price to,performance absolute (%) relative (%),1m 7.1 3.1,3m -0.9 -2.9,12m 32.1 19.2,idr5,735 (from idr4,450), owing largely to the cost of equity for indonesia being lowered by our strategist,note: (v) = volatile (please see disclosure appendix) alfamart ups stake in sister company midi: alfamart announced on 18 january 2013 that it is purchasing 1.205bn shares in midi utama (midi ij) worth idr964.4bn at idr800 per share (closing price on 17 january 2013), which is equivalent to 41.825% of midis stake, from djoko susanto, the majority owner of both alfamart and midi. the acquisition gives alfamart a 54.575% controlling stake in midi, which will result in the consolidation of both companies financial accounts. the midi share purchase will result in a cash payment from alfamart to djoko susanto with none of the minority shareholders,25 january 2013 permada darmono* analyst the hongkong and shanghai banking corporation limited (singapore branch) +65 66580613 .sg view hsbc global research at: *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of the hongkong and shanghai report: banking corporation limited, singapore branch mica (p) 038/04/2012 mica (p) 063/04/2012 mica (p) 110/01/2013 disclaimer & disclosures this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it,benefiting. at 47.2x 2012e midis earnings, we think the valuation was high, especially compared with the sector average of 26.2x. at best, this was a fairly priced transaction assuming that midis share price is its fair value. growth expectations too high: the acquisition marginally raises our earnings forecasts by 3% for 2013e and 4% for 2014e. we maintain our thesis that the market is pricing in an overly optimistic growth scenario for alfamart. we raise our dcf-based target price to idr5,735, largely owing to a decline in the cost of equity for indonesian stocks from 11% to 10%, as calculated by our global equity strategists. hsbc versus consensus: we believe that alfamart is fairly valued, trading at a 23.7x 2013e pe, in line with the sector average, despite our eps estimates being 12% above consensus for 2013e and 2014e. we think other analysts are valuing alfamart using multiples that overlook the risk of decelerating growth. upside risks: better-than-expected growth, synergies from acquisition and negligible competition. downside risks: earnings miss, price wars and stronger-than-expected competition, adverse regulatory developments, deterioration in supplier relationships and supply chain disruptions. index jakarta se comp enterprise value (idrb) 19,911 index level 4,419 free float (%) 25 ric amrt.jk market cap (usdm) 2,060 bloomberg amrt ij market cap (idrb) 19,819 source: hsbc source: hsbc,sumber alfaria trijaya (amrt ij) food & staples retailing 25 january 2013 financials & valuation financial statements,key forecast drivers,abc,year to,12/2011a,12/2012e,12/2013e,12/2014e,year to,12/2011a,12/2012e,12/2013e,12/2014e,profit & loss summary (idrb),jakarta revenue,9,376,11,252,13,277,15,269,revenue ebitda depreciation & amortisation operating profit/ebit,18,227 965 -468 497,23,490 1,156 -493 663,35,615 1,702 -748 954,43,816 2,088 -920 1,168,other java revenue sumatra revenue midi utama total,7,691 1,160 0 18,227,10,383 1,856 0 23,490,13,498 2,969 5,872 35,615,16,872 4,453 7,222 43,816,net interest,-87,-66,-66,-66,pbt hsbc pbt,410 410,672 672,978 978,1,234 1,234,dcf analysis,taxation net profit,-49 361,-121 551,-196 762,-247 954,hsbc assumptions,dcf, comprising,hsbc net profit cash flow summary (idrb),361,551,762,954,risk-free rate (%) equity premium (%),3.00 7.00,fcf cagr 2013e-22e (%) terminal growth rate (%) wacc (%),7.7 5.0 9.9,cash flow from operations capex,931 -492,1,091 -466,1,637 -466,2,023 -466,cash flow from investment dividends change in net debt fcf equity balance sheet summary (idrb) intangible fixed assets tangible fixed assets current assets cash & others,-788 -120 -2 429 0 2,209 2,582 585,-747 -177 -167 543 0 2,295 3,371 852,-747 -271 1,060 1,015 0 4,626 4,229 508,-747 -375 -902 1,350 0 4,436 5,944 1,410,sensitivity and target price range (idr) cost of capital vs terminal growth rate 8.0% 9.0% 9.9% 11.0% 12.0%,4.0% 7,372 5,847 4,915 4,100 3,552,5.0% 9,176 6,943 5,559 4,502 3,831,6.0% 12,785 8,504 6,523 5,066 4,203,total assets,5,015,5,891,9,079,10,605,operating liabilities gross debt,2,553 1,001,3,160 1,101,4,700 1,817,5,742 1,817,valuation data,net debt shareholders funds invested capital,416 1,460 1,652,249 1,740 1,654,1,309 2,364 3,647,407 2,849 3,229,year to ev/sales ev/ebitda,12/2011a 1.1 20.8,12/2012e 0.8 17.2,12/2013e 0.6 12.4,12/2014e 0.5 9.7,ev/ic,12.2,12.0,5.8,6.3,ratio, growth and per share analysis,pe* p/nav,50.0 12.3,32.7 10.4,23.7 7.6,18.9 6.3,year to y-o-y % change,12/2011a,12/2012e,12/2013e,12/2014e,fcf yield (%) 2.2 dividend yield (%) 1.0 note: * = based on hsbc eps (fully diluted),2.8 1.5,5.1 2.1,6.8 2.6,revenue ebitda operating profit,29.6 46.5 59.9,28.9 19.8 33.3,51.6 47.2 44.0,23.0 22.7 22.4,price relative,pbt hsbc eps,41.3 41.0,63.8 52.7,45.6 38.3,26.1 25.3,6150 5650,6150 5650,ratios (%),5150,5150,revenue/ic (x) roic roe roa ebitda margin operating profit margin ebitda/net interest (x) net debt/equity net debt/ebitda (x) cf from operations/net debt,12.3 29.5 28.3 9.5 5.3 2.7 11.1 28.5 0.4 223.7,14.2 32.9 34.4 11.2 4.9 2.8 17.5 14.3 0.2 438.2,13.4 28.8 37.1 11.2 4.8 2.7 25.8 51.1 0.8 125.0,12.7 27.2 36.6 10.6 4.8 2.7 31.6 13.4 0.2 497.1,4650 4150 3650 3150 2650 2150 jan-11 jul-11 sumber alfaria trijaya source: hsbc,jan-12 jul-12 rel to jakarta s e composite,4650 4150 3650 3150 2650 2150 jan-13,per share data (idr),note: price at close of 23 jan 2013,eps reported (fully diluted) hsbc eps (fully diluted) dps nav,105.10 105.10 51.70 425.58,160.49 160.49 78.95 507.12,221.95 221.95 109.18 688.92,278.03 278.03 136.77 830.18,2,3,sumber alfaria trijaya (amrt ij) food & staples retailing 25 january 2013 faster expansion through consolidation alfamart consolidates sister company, midi, through the purchase of a 41.825% stake from djoko susanto acquisition raises our 2013e and 2014e earnings estimates by 3% and 4%, respectively upgrade to n (v) (from uw(v)and raise target price to idr5,735 (from idr4,450),abc,alfamart raises stake in midi on 18 january 2013, alfamart announced that it was increasing its stake in midi utama (midi ij) to 54.575%, from 12.75% previously, through the purchase of 1.205bn shares in midi utama (midi) for idr964.44bn in cash. the shares were acquired from pt. amanda cipta persada (amanda), which is 99.99% owned by djoko susanto (the majority owner and founder of,alfamart) and family, for idr800 per share, midis closing share price on 17 january 2013. midi was established in 2007 by djoko susanto and operates minimarkets under the brands alfamidi, alfaexpress and lawson. as at december 2011, midi operated 323 alfamidi, 176 alfaexpress and 10 lawson stores along with three distribution centres. it planned to open 130 alfamidi and 100 lawson stores in 2012.,figure 1: alfamart shareholding of midi pre-acquisition pt. sigmantara alfindo (djoko susanto & family),99.999% pt. amanda cipta persada 41.825% pt. midi utama (midi) source: company data,12.75%,55.923% pt. sumber alfaria trijaya (alfamart),lawson,caf+retail,4,000m,hybrid,sumber alfaria trijaya (amrt ij) food & staples retailing 25 january 2013 however, alfamart advised that midi only had around 600 stores at the end of 2012. the alfamidi brand is positioned as a community minimarket located in residential areas offering affordably priced, everyday items. alfaexpress focuses on fast service for customers, while lawson is a franchise convenience store from japan. figure 2: different format comparison alfamart alfamidi alfaexpress,while we acknowledge the possibility of cost savings through synergies, such as streamlining distribution centres, closing overlapping stores, integrating procurement and unifying functional divisions, there is no disclosure from the companies on how much synergy can potentially be extracted. as such, our pro-forma numbers do not yet assume any cost savings as a result of the acquisition. acquisition appears expensive with majority owner benefiting,abc,avg selling area (sqm),90,200-400,35-100,n/a,the acquisition of midi was transacted at idr800,sales mix sku capex/new,70% food; 30% non- food 4,000 700-850m,20% food serves fast serves fast and 80% food & drinks food & drinks non-food 7,000 2,500 n/a 2,000- 2,000- 2,000-,per share, ie, the closing price of the stock on 17 january 2013, the day before the announcement of the acquisition. this price equates to 47.2x 2012e,store (idr) 3,000m 4,000m unique modern retail located in express selling point at affordable residential checkout and,pe compared with alfamarts 32.7x 2012e pe and the sector market-cap-weighted average 26.2x pe.,prices areas and serves fast offers fresh food & drinks food source: company, hsbc estimates,model; provides seating area inside and outside the stores,measured by ev/ebitda, the transaction was valued at 11.4x 2012e ev/ebitda versus alfamarts 17.2x and a sector market-cap- weighted average of 14.9x.,as at the end of 2012, alfamart had 7,064 stores. with the increase of its stake in midi leading to consolidation of reporting, alfamart will gain around 600 stores or approximately 8.5% of its existing store base. according to the company, the rationale for the increase in stake is as follows: to gain synergy from logistics as well as other functional divisions such as marketing, human resources and it. to expand its sales channels to sell groceries and offer payment points for motorcycle instalments, utilities, train tickets and other services. to expand its brand offerings to include alfamidi, alfaexpress and lawson; and to expand its channels of distribution.,we use 2012e pe and ev/ebitda to evaluate the transaction as consensus forecasts for midi are unavailable. from a pe standpoint, the acquisition looks expensive to us with midis pe multiple trading at a 44% premium to alfamarts and an 80% premium to the market-cap-weighted sector average while from an ev/ebitda perspective, the transaction appears more reasonable. we estimate (using the limited information we have) that midi would generate earnings after tax of around idr62bn in 2013e, equivalent to idr21 per share. at idr800 per share, alfamart is paying around 37.3x 2013e pe for midi. the best gauge of whether an acquisition represents good value for shareholders is typically to use dcf and incorporate all synergies and operating improvements brought about by the acquisition. however, we feel there is insufficient disclosure regarding the transaction and from,midi to build into our dcf assumptions. 4,alfamart,presidentchain,sminvestments,acehardware,siammakro,hero,dairyfarm,mapi,bigc,philippine7,ramayana,puregold,modern,jollibee,cpall,urc,midi,1000,sumber alfaria trijaya (amrt ij) food & staples retailing 25 january 2013 it is worth noting the only parties that will immediately benefit from the transaction are djoko susanto and family. alfamart will pay idr964.4bn (cusd100m) for djokos stake in midi owned by amanda. as at 30 september 2012, alfamart only had idr434.3bn in cash. thus, it will have to finance the remainder in order to pay out the required amount. indeed, alfamarts director and corporate secretary, fernia kristanto, stated that part of the acquisition will be financed through an idr900bn credit obtained from bank central asia. figure 3: acquisition of midi (idr bn) 1200,this transaction will clearly raise the risk for passive minority shareholders of alfamart owing to the increased leverage on alfamarts balance sheet without them being compensated for the extra risk. at idr800 per share, midis market cap is valued at idr1,767.11bn with around 600 stores. this works out to a valuation of idr2.9bn per store compared with the average alfamart capex per new store of idr0.70-0.85bn. as such, alfamart is paying around three times its usual capex per store to acquire the 600 operating stores from midi. that said, alfamarts acquisition of midi probably makes sense from an operational efficiency standpoint as it opens up the opportunity to streamline operations, reduce cannibalisation and,abc,800 600 400 200,434.3,530,964.4,improve the combined groups strategic direction. at best, we believe this was a fairly valued transaction with the market price assumed to be the correct valuation for midi.,0,cash,credit finance,acquisition,source: company data figure 4: midi and comparables 2012e pe multiples,90.00 80.00 70.00,84.30,60.00 50.00 40.00 30.00 20.00,26.13,41.59,31.75,31.80,24.86,37.91,51.88,47.24,44.56,20.08,32.70,weighted average of 26.2x 34.25 29.07 25.63 22.06,30.71,10.00 0.00 source: thomson one, hsbc estimates 5,idr bn,jakarta,revenue,sumber alfaria trijaya (amrt ij) food & staples retailing 25 january 2013 fairness opinion alfamart engaged the services of an independent appraiser to evaluate the transaction, jennywati, kusnanto & partners.,figure 5: changes to income statement forecast _ 2013e _ _ 2014e_ old new chg old new chg 13,277 13,277 0% 15,269 15,269 0%,abc,other java,13,498 13,498,0% 16,872 16,872,0%,the independent appraiser used dcf and comparables in order to arrive at its conclusion. it was furnished with internal data by the management of both companies.,sumatera midi utama total gross profit margin,2,969 2,969 5,872 29,743 35,615 4,462 5,342 15.0% 15.0%,0% 4,453 4,453 7,222 20% 36,594 43,816 20% 5,489 6,572 0% 15.0% 15.0%,0% 20% 20% 0%,jennywati, kusnanto & partners ascribed a fair value of idr1,033.66bn to djoko susantos 41.825% stake in midi. the acquisition was transacted at idr964.4bn, amounting less to the fair valuation of the appraiser. marginal impact to earnings we model for the combined company by creating 2013e pro-forma financials for midi. we then consolidate these with our forecast financials for alfamart.,ebitda dep & amort ebit jakarta other java sumatera midi utama unallocated total margin jakarta other java sumatera midi utama total pbt income tax,1,526 -625 690 702 134 -625 901 5.2% 5.2% 4.5% 3.0% 925 -185,1,702 -748 690 702 134 176 -748 954 5.2% 5.2% 4.5% 3.0% 2.7% 978 -196,12% 20% 0% 0% 0% 20% 6% 0% 0% 0% -12% 6% 6%,1,872 -768 794 877 200 -768 1,103 5.2% 5.2% 4.5% 3.0% 1,147 -229,2,088 -920 794 877 200 217 -920 1,168 5.2% 5.2% 4.5% 3.0% 2.7% 1,234 -247,12% 20% 0% 0% 0% 20% 6% 0% 0% 0% -12% 8% 8%,min interests,0,-21,0,-33,we assume midi can add idr5.9tn in revenue to alfamart in 2013 on the assumption that it can grow its revenue by 50% y-o-y, which has been,ears after tax source: hsbc estimates,740,762,3%,918,954,4%,its annual growth rate over the past two years. we are comfortable with this assumption as midi starts from a relatively low base. midi has an average lower ebit margin than alfamart at 3% versus our 2013e estimate of 4.5- 5.2% for alfamart (depending on the region see figure 5). we assume a constant ebit margin for midi in 2013e and 2014e, thus lowering alfamarts overall ebit margin assumption to 2.7% from our blended estimate of 3.0% (overall ebit margin for alfamart is lower than the 4.5-5.2% range because of unallocated costs) in 2013e and 2014e. 6,we do not factor any operational or efficiency improvements into our forecast, as it is not yet clear how alfamart intends to achieve these. overall, the acquisition marginally raises our earnings estimates in 2013e and 2014e by 3% and 4%, respectively.,idr,sumber alfaria trijaya (amrt ij) food & staples retailing 25 january 2013 alfamart vs midi at a glance figure 6: alfamart vs midi latest available numbers,our new dcf assumptions are as follows: figure 7: alfamart dcf assumptions,abc,alfamart,midi,assumptions,2008-11 revenue cagr 2008-11 earnings cagr gross margin (2011) ebit margin (2011) net margin (2011) roe (2011) roic (2011) net debt/ent value (sep 2012) net debt/ebitda (sep 2012) ebit/int expense (sep 2012),29.90% 39.50% 12.91% 2.74% 1.98% 28.34% 20.00% 0.01 0.18 23.74,150.45% 251.40% 21.00% 3.13% 1.22% 8.07% 8.29% 0.22 2.44 2.20,fcf cagr from 2013e to 2022e wacc through forecast period indonesia cost of equity weighted average cost of debt risk free rate tax rate terminal growth rate source: hsbc estimates,7.7% 9.9% 10.0% 9.7% 3.0% 20.0% 5.0%,quick ratio (sep 2012) current ratio (sep 2012) total debt/equity (sep 2012),0.32 0.97 21.37,0.28 0.84 166.24,our assumptions ascribe 48% of our valuation to the sum of the present value of free cash flow and,source: thomson reuters datastream based on alfamarts and midis operating metrics in figure 6, alfamart will be consolidatin