Brief Equities Bottom-Up: Matahari Department Store (LPPF IJ) – A Retail Conundrum and more

In this briefing:

1. Matahari Department Store (LPPF IJ) – A Retail Conundrum
2. Mizuho Financial Group (8411 JP): Writing Off the Past
3. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
4. Accordia Golf Trust (AGT): Buy but Please Consider This…
5. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

1. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

2. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

3. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

4. Accordia Golf Trust (AGT): Buy but Please Consider This…

Accordia Golf Trust (AGT SP) is the second largest golf course operator in Japan that offers stable DPU with assets that are less correlated to the global economic cycle but they have their own challenges; aging demographics that makes the number of games played lower over time, volatile weather in Japan (unlike in Singapore where it’s sunny summer all year long), limited upside impact from automation initiative and golf tax. 

5. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.