RHB Indonesia - Mitra Adiperkasa - Sharp Recovery Ahead - (Mitra Adiperkasa, Regional Oil & Gas, Timah Persero) Unknown Jumat, 10 Februari 2017


Good morning,
Mitra Adiperkasa - Sharp Recovery Ahead
With new co-pilots in the active sportswear and F&B businesses, we expect Mitra to have better business navigation going forward. As Mitra operates several business lines with thousands of stores in total, we believe co-pilots in some of its key businesses can help management navigate better to stay on course. We see good momentum in Mitra’s financial performance, underpinned by its business realignment, gradual economic recovery, as well as financial leverage. Reinitiate coverage with BUY and IDR6,675 TP (22% upside) derived from 10-year DCF.

¨ New co-pilots… Mitra Adiperkasa (Mitra) is driving its active sportswear and food & beverage (F&B) businesses with new co-pilots. In the active sportswear segment, plans are in place for tighter merchandising control, whilst at the F&B segment, the new partnership plans to turbocharge expansion. Both partners have injected fresh capital to repair cash flow and financial positions. After entering into the new partnerships in 2Q15, the active sportswear division managed to show improved profitability at its specialty stores in 2016.
¨ …better navigation. Mitra operates several business lines with thousands of stores in total. Hence we believe co-pilots at its key businesses can help management to navigate better in order to stay on course. Furthermore, Mitra plans to improve performance at its department store division by closing down unprofitable formats or converting them to more time-tested formats.
¨ Strong recovery around the corner. Over the medium-term Mitra is eyeing gross and EBITDA margins to recover to 48% and 12% respectively, improving slightly from 2016’s estimated 46.6% and 10.2% respectively, and below its peak performance. Below the operating line, financial leverage is expected to magnify the impact at the bottomline. Coming from a very low base, an estimated 1.3% net margin in 2016 and 1-2% margin expansion would materially boost its bottomline growth, based on our estimates. Our model suggests margin recovery to 2%/2.8% in 2017F/2018F, albeit at only half of Mitra’s 2011/2012 net margin of 6.1%/5.7%.
¨ Financial performance to improve sharply. We are forecasting strong 2016-2018F revenue, operating profit and net profit CAGR of 12%, 29% and 156% respectively. The bottomline’s primary growth driver would be financial leverage as we expect Mitra’s net gearing to lower to 19% in 2018F from 55-31% in 2015-2016. We modelled net margin expansion to 2%/2.8% in 2017/2018F from just 0.2%/1.3% in 2015/2016. Considering the progress and various steps taken by management, Mitra’s profit performance is set for a rebound.
¨ Reinitiate with BUY and IDR6,675 TP, derived from 10-year DCF with 12.5% WACC and 3% terminal growth. Our TP implies 2018F P/E of 22x and EV/EBITDA of 7.8x, which we believe are fair as the latter still falls at 1SD below its historical trading range. We like Mitra and see good performance momentum ahead, supported by gradual economic recovery, leveraged by its improving financial position. Mitra trades at 2017F/2018F P/E of 28x/18x with profit growth of 80%/55% over the same period. (Stifanus Sulistyo)

Link to report: Mitra Adiperkasa : Sharp Recovery Ahead
Link to Daily report: Indonesia Morning Cuppa - 100217

Sector News Flash:

Regional Oil & Gas (Overweight), Production Cut Rollover a Possibility
The OPEC members are now talking about possible rollover in the production cuts, should the oil markets require. Saudi Arabia’s Energy and Industry Minister’s comment that all players are willing to extend their cuts, if necessary, is positive and supportive of the oil markets and price. We maintain our OVERWEIGHT on the oil & gas sector and our Top Picks are: Petronas Chemicals, PTT Global Chemicals, Keppel Corp and Perusahaan Gas Negara.
¨ Sweet spot in the upstream oil & gas market. The Organisation of the Petroleum Exporting Countries’ (OPEC) strategy of flooding the world with oil to lower production from the higher cost producers, over the last two years, has changed to one of managing the markets. This provides confidence for the upstream producers (national and international oil companies) that there should be more stability in the oil markets, thus more large scale projects should move forward over the next 12-24 months.
We are now in a sweet spot in the upstream oil & gas markets. We have an oversupply in the oil & gas assets (jack-up rigs, tender rigs et al) that cater to the E&P companies. The oil & gas upstream asset owners are now more than willing to accept work at a depressed price to improve their cash flows, and to survive this long-harsh winter. According to research group WoodMackenzie, around 20-25 large scale development projects are to move forward in 2017, compared to nine projects in 2016.
¨ OPEC back to managing the markets. The OPEC and non-OPEC production cuts that were agreed upon in Dec 2016 are only for a six-month period. However, we believe OPEC is now back to actively managing the oil markets from here on. Bloomberg reported on 8 Feb that oil ministers from Iran and fellow group member Qatar are now saying that OPEC and other major crude producing nations may need to extend output cuts in 2H17 in order to re-balance the market. Additionally, a rollover is an option, if needed. Saudi Arabia’s Energy and Industry Minister Khalid Al-Falih had indicated on 16 Jan that “all players have indicated their willingness to extend (their output cuts), if necessary”. The issue will require further study before a decision is made. This is positive, and in our view, supportive of crude oil markets and prices.
¨ The other supplies that could enter:
i. The US Energy Information Administration’s (EIA) latest forecast is for total US production to increase to 9mbpd in 2017 (2016: 8.7mbpd). For 2018, the EIA expects an increase of 0.5mbpd, ie to 9.5mbpd. This all depends on crude oil price levels, where higher crude oil production from the shale oil producers is possible.
ii. Libya and Nigeria (both OPEC members) are exempt from the current production cuts, as such, we estimate that around 0.8mbpd could possibly enter the markets should political unrest ease for these two countries. (Kannika Siamwalla, CFA)
Visit Notes:

Timah Persero (TINS IJ, NR), Company visit notes
We visited PT Timah to get updates about the company’s performance and strategy. For 2016, management is indicating that production volume may reach 26,000 – 28,000 tonnes (Vs. 2015 achievement of 26,361 tonnes). Management also indicated that ASP for the full year 2016 maybe in the range of USD19,000–20,000/tonne with blended cash cost to be around USD16,000/tonne. With the given info, we estimate FY16 revenue to range from IDR 6.9 trn (-0.1% YoY) to 7.4 trn (+7.5% YoY) that will be 7% - 15% above consensus (USD/IDR 13,540). No indication was given regarding bottom line nor margins.
In light of the recent tin price hike that reached USD20,000/tonne, we feel management intends to ride the wave with production and sales volume expectation of 30,000 tonnes or above that will be the base for an aggressive 20% YoY top line target growth. In effort to reach those targets, IDR2.7trn was allocated for FY17 capex where majority will be used for facilities maintenance and capacity expansion from current 54,000 tonnes to at ~60,000 tonnes. Capex source of fund will be from IDR 1trn bond issuance in 2017 and internal cash.
Management also mentioned business diversification beyond mining to utilize idle assets such as 176 Ha of land bank in Bekasi. The company plans to develop 10 Ha of residential development as the 1st phase through subsidiary PT Timah Karya Persada Property (TKPP) with no timeline yet. However, we believe contribution from this property business will be insignificant in the short term.
Post meeting, we feel that TINS’ target maybe overly aggressive given that tin price has fallen to USD19,000/tonne level with 56% Ytd rise on LME tin inventory since end of December 2016. Currently, the stock is traded at 23.7x FY17 consensus PE with bottom line consensus estimate of +75% YoY. The company is also quite healthy with 0.3x net gearing and 5.3x interest coverage ratio. (Yualdo Tirtakencana Yudoprawiro)

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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia


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