Quality-Value Investing

Marc Melendez, CFA

Emerging Market Small and Mid Cap Equities

Reperio Capital

Reperio Capital Research was founded in 2013 with the goal of better serving the investment community with in-depth, high quality, value oriented research.

Reperio means to discover in latin. Using value investing principles, we aim to discover a minimum of 12 investment opportunities per year within the Emerging Markets Small and Mid Cap universe.

We take a business owners perspective with a long term investment horizon. We conduct bottom up, fundamental research. We focus on downside risks and require a significant margin of safety in any investment to prevent the permanent loss of capital. All factors differentiating our research from the short term, trading focus of traditional research providers.

Equity Bottom-Up

Matahari Department Store / Equity Bottom-Up

<h2>Investment Thesis </h2>Matahari Department Store is the largest department store in Indonesia. The company is one of the most profitable retailers in the world. A number of factors drive the company’s profitability, but the biggest drivers are the company’s size, its distribution network, and its brand advantage.The company’s size provides bargaining power over suppliers and allows the company to outspend peers on important fixed costs including the company’s distribution network, IT systems, opening new stores, refurbishing existing stores, tailoring merchandise to local tastes, and hiring the best management from around the world. Matahari’s distribution network generates revenue for the company and allows the company to extend the length of time non-interest bearing liabilities (NIBCLs) are paid creating a situation where the company has negative working capital and invested capital from high NIBCLs level. The company has built the distribution network over decades and given the topography of Indonesia, it would take years for competition to replicate.The company also has a brand advantage that provides the company with pricing power and allows the company to generate a gross margin similar to peers catering to premium-income consumers.Matahari’s same store sales growth slumped to -3.5% in Q1 2017 due to macroeconomic weakness rather than structural issues. Due the short-term weakness in growth, the company offers a base case expected annualized return of 16.3% over the next five years using conservative assumptions. The 16.3% expected annualized return is generate by an 8.3% free cash flow yield combined with a same store sales growth rate of 5.0%, which half the same store sales growth rate, and an additional 3.0% return from store expansion, at half the company’s historical rate of expansion. The bull case offers 23.3% expected annualized return while the bear case offers 8.3% expect annualized return.Overall, Matahari has a very strong competitive position due to its size, distribution network, and a brand advantage. Its current expected return under conservative assumptions leads to a 16.3% expected return.

Investment Thesis Matahari Department Store is the largest department store in Indonesia. The company is one of the most profitable retailers in the world. A number of factors drive the company’s profitability, but the biggest drivers are the company’s size, its distribution network, and its brand advantage.The company’s size provides bargaining power over suppliers and allows the company to outspend peers on important fixed costs including the company’s distribution network, IT systems, opening new stores, refurbishing existing stores, tailoring merchandise to local tastes, and hiring the best management from around the world. Matahari’s distribution network generates revenue for the company and allows the company to extend the length of time non-interest bearing liabilities (NIBCLs) are paid creating a situation where the company has negative working capital and invested capital from high NIBCLs level. The company has built the distribution network over decades and given the topography of Indonesia, it would take years for competition to replicate.The company also has a brand advantage that provides the company with pricing power and allows the company to generate a gross margin similar to peers catering to premium-income consumers.Matahari’s same store sales growth slumped to -3.5% in Q1 2017 due to macroeconomic weakness rather than structural issues. Due the short-term weakness in growth, the company offers a base case expected annualized return of 16.3% over the next five years using conservative assumptions. The 16.3% expected annualized return is generate by an 8.3% free cash flow yield combined with a same store sales growth rate of 5.0%, which half the same store sales growth rate, and an additional 3.0% return from store expansion, at half the company’s historical rate of expansion. The bull case offers 23.3% expected annualized return while the bear case offers 8.3% expect annualized return.Overall, Matahari has a very strong competitive position due to its size, distribution network, and a brand advantage. Its current expected return under conservative assumptions leads to a 16.3% expected return.

Matahari Department Store (Initiation)- High Quality Retailer at a Reasonable Price