Retail│Indonesia October 3, 2013 Modern Internasional FLASH NOTE MDRN IJ / MDRN.JK Current Rp820.0 SHORT TERM (3 MTH) LONG TERM Market Cap Avg Daily Turnover Free Float Target Rp900.0 Prev. Target Rp920.0 US$300.3m US$0.10m 43.9% Rp3,410,230m Rp997.0m 4,159 m shares Up/Downside 9.8% Conviction| | CIMB Analyst(s) Meeting the challenge In response to macro headwinds and intense competition, 7-Eleven has revised its expansion strategy and now plans to open fewer new stores in FY13-14 while working on new programs. However, its end-FY15 total stores target of 441 is intact. ———————————————————————————————————————— We think it is a sensible move. If 10-20%. Erwan TEGUH executed well, the strategy will help T (62) 21 3006 1720 7-Eleven retain its leading position in What We Think E [email protected] Higher fuel prices have already hurt Dewinta SUMARTONO the market. However, near-term pain T (62) 21 3006 1738 is inevitable. As such, we cut our sales, while the intensifying E [email protected] FY13-15 EPS by 5-16%. Accordingly, competition is further exerting our DCF-based target price falls to pressure on pricing. Increasingly, convenience store differentiation is Rp900 (0.7x FY14 PEG). Modern diminishing, especially as new Share price info remains an Outperform as we expect entrants strive to gain market share Share price perf. (%) 1M 3M 12M robust medium-term growth due to by offering both better in-store Relative -4.5 -0.7 13.9 new programs in the pipeline. ambiance and discounted prices. Absolute 2.5 -7.9 17 What Happened Indeed, 7-Eleven’s average sales per Major shareholders % held Our recent discussion with day (ASPD) has shown some Asialink Electronic 38.9 Inti Putra Modern 17.2 management reveals a change in weakness, despite its leading position. growth strategy, in response to higher Hence we view it is an opportune inflation and interest rate as well in time to refine its strategy in light of due to intensifying competition, the current macro headwinds. Indonesian retail scene company has cut its FY13-14 new Short-term earnings will be hit, but still has a lot of potential. stores target by 11-48%. However, it the new strategy should lead to more Competition does not depend on has raised its new stores target for sustainable long-term gains. ‘‘ FY15 by 48% to maintain its end-FY15 whether‘‘ the brand is local or What You Should Do foreign, but it depends on store store count target at 441. It will also undertake two key strategic moves: 1) The rapid expansion approach expansion. forging technical assistance with a adopted by Modern is expected to – Tutum Rahanta, Wakil Ketua Umum Aprindo have its ups and downs. This has been (Indonesian Retail Entrepreneurs Association) leading food manufacturer which would increase its fresh food SKUs by exacerbated by the weakened consumer disposable income and over a quarter next year, quintupling eventually; 2) introducing new entry of new players. We continue to prototype stores next month which like 7-Eleven for its higher would offer differentiated products. commitment and a more structured Its FY13-4 capex will come down by approach to expansion. Price Close Relative to JCI (RHS) Financial Summary 1,120 149 1,020 137 Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F 920 125 Revenue (Rpb) 897 1,009 1,261 1,880 2,654 820 113 Operating EBITDA (Rpb) 93.5 133.8 153.9 232.2 357.6 720 101 Net Profit (Rpb) 56.6 55.3 54.2 74.9 125.0 620 89 25 Core EPS (Rp) 9.22 12.98 13.03 18.01 30.06 20 15 Core EPS Growth 70.9% 40.8% 0.4% 38.2% 66.9% 10 FD Core P/E (x) 78.67 63.17 62.92 45.53 27.28 5 Vol m Vol DPS (Rp) 4.09 3.99 3.91 5.40 9.02 Oct-12 Jan-13 Apr-13 Jul-13 Dividend Yield 0.50% 0.49% 0.48% 0.66% 1.10% Source: Bloomberg EV/EBITDA (x) 40.49 26.42 23.97 16.75 11.73 52-week share price range P/FCFE (x) 44.44 NA NA NA NA 820.0 Net Gearing 88.0% 12.2% 26.8% 43.7% 65.6% 663.0 1,050 P/BV (x) 8.14 3.47 3.34 3.16 2.89 900.0 ROE 9.7% 7.7% 5.4% 7.1% 11.1% Current Target % Change In Core EPS Estimates (15.6%) (16.1%) (5.1%) CIMB/consensus EPS (x) 0.65 0.62 1.24 SOURCE: CIMB, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Sources: CIMB. COMPANY REPORTS Designed by Eight, Powered by EFA Modern Internasional October 3, 2013 Short term pains for long term gains Given the sharp increase in inflation, following the increases in subsidised fuel prices, and of late the deeply depreciated rupiah, 7-Eleven has advised Modern to revisit its growth strategy. This is also to address the proliferation of competitors which in some cases are resorting to price cuts to gain market shares. Indeed, following the fuel price hikes, the per-ticket purchases at 7-Eleven have fallen by as much as 10%, though the customer visits have remained robust. Sales over the weekdays are noticeably slower, suggesting its younger customers are squeezed by the higher expenses elsewhere. It has introduced combos to maintain per ticket purchase, though it’s admittedly a tactical rather than strategic move. Hence, the management has decided to slow down the new store openings in FY13-14, though it maintained its total store count target of 441 by end-FY15 which is in line with its expanded commissary/DC capacity. This means that the new store additions will increase sharply to 178 in FY15 from 120 previously, while the FY13 new store count will be cut to 50 from 96. YTD, it has opened 22 new stores. FY14 new store count will be reduced to 96 from 108. Figure 1: FY13-14 new store openings target has been slashed, while the target for total number of stores as at end-FY15 has been maintained 500 Title: 441 Source: 450 400 Please fill in the values above to have them entered in your report 350 300 263 250 200 167 150 117 100 50 0 2009 2010 2011 2012 2013 2014 2015 Existing store (beginning of period) New store for the period SOURCES: CIMB, COMPANY REPORTS Two specific strategic moves that would be executed over the next 3 months: • It will sign an MOU with a leading food manufacturer with a view of eventually becoming a JV partner. Coinciding with the completion of its commissary/DC by end-FY13, the new partner know-how will allow expanded fresh food offerings from some 120 SKUs presently to 150 by next year, with the final target of 500. This would allow for differentiated and proprietary product offerings, key to boosting store traffic and achieving higher margins from fresh food sales. Fresh food sales currently contribute 40-50% of total sales. • It will introduce new prototype stores in five locations by the end of this year. The new store format is designed to address short term shrinking consumer pocket (via introducing new products that better suit the purchasing power), while at the same time allowing for new product lineups. This is also in conjunction with the increased capacity of its commissary by next year. Meanwhile, Modern continues to experiment with stores at different locations. It recently opened one store attached to the central Jakarta train station which is performing well. It plans to open three more such stores this year. Eventually, the 70 train stations in Jakarta are potential sites for new stores. It can also 2 Modern Internasional October 3, 2013 serve as model for the Jakarta MRT stations, the construction of which begins this month. It has also experimented successfully with a small format (60sqm) attached to an apartment building, which will also serve as a model for office buildings. The lower store count means that our FY13-14 earnings estimates fall by around 16% as we cut our sales expectations by 7-11%. On the positive side, the financing cost should be lower. The interest rate has gone up by 75-100bp to 11.75-12%. Figure 2: Forecast changes Previous New Changes 2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F Sales 1,364.7 2,112.9 2,922.2 1,261.3 1,880.3 2,654.5 -7.6% -11.0% -9.2% COGS (846.5) (1,305.1) (1,778.6) (784.1) (1,163.6) (1,621.6) -7.4% -10.8% -8.8% Gross profit 518.3 807.8 1,143.6 477.3 716.7 1,032.8 -7.9% -11.3% -9.7% Income to Franchise - 16.5 76.2 - 20.5 62.1 Opex 414.6 649.7 866.9 383.4 554.6 762.9 -7.5% -14.6% -12.0% EBIT 103.6 141.6 200.5 93.8 141.6 207.9 -9.5% 0.0% 3.7% Tax (21.5) (29.8) (44.0) (18.1) (25.0) (41.8) -15.6% -16.1% -5.1% Minorities 0.1 0.3 0.4 0.1 0.2 0.3 Net income 64.2 89.3 131.7 54.2 74.9 125.0 -15.6% -16.1% -5.1% Core profit 64.2 89.3 131.7 54.2 74.9 125.0 -15.6% -16.1% -5.1% Gross margin 38.0% 38.2% 39.1% 37.8% 38.1% 38.9% -0.4% -0.3% -0.6% EBIT margin 7.6% 6.7% 6.9% 7.4% 7.5% 7.8% -2.0% 12.4% 14.2% Core margin 4.7% 4.2% 4.5% 4.3% 4.0% 4.7% -8.7% -5.7% 4.5% New stores 96.0 108.0 120.0 50 96 178 -47.9% -11.1% 48.3% Sales per day 16.6 17.2 18.1 15.3 16.7 17.6 -8.0% -2.9% -2.5% SSSG estimates 5% 3% 5% 5% 3% 5% 0.0% 0.0% 0.0% Interest rate 10.50% 10.50% 10.50% 10.50% 12.00% 11.00% 0.0% 14.3% 4.8% SOURCES: CIMB, COMPANY REPORTS We view the revised strategy positively given: 1) The competitors are following in the footsteps of 7-Eleven, albeit with varying degree of success, which nevertheless diminish store differentiation in forms of in-store ambiance and product offerings.