Overview of Matahari Department Store

Matahari Department Store (LPPF IJ) is Indonesia’s largest department store operator, catering primarily to the middle-class segment with a focus on fashion items. Despite its competitive pricing and convenience, the company faces challenges from rising competition, including independent local brands and e-commerce platforms. This report provides an in-depth analysis of LPPF’s financial performance, ESG initiatives, and future outlook.

Investment Recommendation

The report maintains a SELL recommendation for Matahari Department Store, with a revised target price (TP) of IDR 1,150, down from IDR 1,500. This reflects a projected weak EPS growth trajectory for FY24-26, driven by customer shifts to fresher store concepts and online channels. While the company has made strides in improving its ESG score, it remains below the industry average, further impacting investor sentiment.

Financial Performance and Metrics

Revenue and Profit Trends

LPPF’s revenue is forecasted to grow modestly at 5% and 4% YoY in FY25 and FY26, reaching IDR 13,706 billion in FY26. However, gross margins are expected to compress due to rising competition, leading to EBIT margin pressures alongside higher operational expenses. Core net profit is estimated to increase at a slower pace, with growth rates of 6.8% in FY25 and 8.0% in FY26, reaching IDR 961 billion by FY26.

Key Financial Ratios

• Core P/E Ratio: Expected to decline from 4.3x in FY24 to 3.8x in FY26.
• EBITDA Margin: Projected to decrease from 14.5% in FY24 to 13.2% in FY26.
• ROAE: Anticipated to decline sharply from 167.1% in FY24 to 44.8% in FY26.
• Net Dividend Yield: Expected to improve slightly to 4.0% by FY26.
• Cash Conversion Cycle: Projected to improve from -15.0 days in FY24 to -20.9 days in FY26.

Balance Sheet Highlights

The company’s financial position shows a positive outlook for liquidity, with cash and short-term investments expected to grow to IDR 1,362 billion by FY26. However, the inventory levels are projected to decline significantly, reaching IDR 404 billion in FY26, reflecting optimization efforts.

ESG Analysis

Overall ESG Score

Matahari’s ESG score has improved to 35 from 22 in the previous year, driven by initiatives such as reducing plastic packaging and implementing waste-recycling programs. However, this score remains well below the industry average of 50, signaling room for improvement. The company’s decarbonization roadmap aims to enhance its score further by 2030.

Environmental Initiatives

• Switched to biodegradable cassava-based shopping bags in 2011.
• Implemented LED lighting across all stores and warehouses, resulting in a significant reduction of 7,281.9 GJ in electricity consumption in 2023.
• Plans to use 12,000 MWh of renewable energy by 2030, though only 1,200 MWh has been achieved so far.

Social Responsibility

• Maintains a balanced workforce gender ratio of 44% male to 56% female.
• Provides scholarships, humanitarian initiatives, and donations to social institutions through its Community Development Programme.
• Average employee training hours stood at 1.3 hours in 2023, indicating a need for more robust staff development programs.

Governance Practices

• Board of Commissioners (BoC) comprises six members, 50% of whom are independent commissioners.
• Total remuneration of the BoC and Board of Directors (BoD) accounted for 1.2% of sales in 2023.
• Recurring related-party transactions accounted for 2.0% of operating expenses in 2022.

Future Challenges and Opportunities

Key Risks

• Faster-than-expected consumer shift to online retail formats.
• Potential increases in minimum wages and electricity tariffs.
• Continued erosion of market share due to rising competition from local brands and e-commerce portals.

Upside Potential

• Improvement in same-store sales growth (SSSG) and EBIT margins.
• Cost reductions through lower rent and operational expenses.
• Returning to consignment models, which could lower inventory and mitigate cost risks.

Conclusion

Despite incremental improvements in its ESG initiatives and a focus on long-term sustainability goals, Matahari Department Store continues to face significant challenges in maintaining its competitive edge and profitability. The combination of rising competition, shifting consumer preferences, and below-average ESG performance underscores the report’s SELL recommendation. Investors are advised to approach with caution, given the limited upside potential and ongoing structural challenges within the retail sector.