In this briefing:
- Matahari Department Store (LPPF IJ) – A Retail Conundrum
- January Chip Revenues Down 15.6% Year-On-Year
- PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
- Sea Ltd (SE US): Placing Price Leaves Money on the Table
- Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle
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. January Chip Revenues Down 15.6% Year-On-Year
The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues. Monthly revenues are down 15.6% from January of 2018. While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.
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. Sea Ltd (SE US): Placing Price Leaves Money on the Table
Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.
In our previous note, we stated that we would participate in the public offering at or below the last close price of $23. While the share price will initially trade around the placing price, we believe that share price will recover as Sea post-placing fundamentals are now materially stronger.
5. Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle
Our positive view of the Asian region in 2018 was not reflected in stock market performance. But now is not the time to discard fundamentals and fundamental analysis. Unlike the US, the Asian region is in the early stages of a profit upcycle. As we have argued on many occasions, that is the building block required to kick start the investment cycle. But theoretical explanations of the growth process aside, is there any empirical support for the argument that profits and investment, and therefore growth, are related? We would answer in the affirmative and, in the following report, we try to show how the process works and where Asia stands on two of our Austrian Stress Indicators (ASIs). Market volatility aside, the conditions for good growth gains are firmly in place in most of the region.
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