What’s New
Modern Internasional reported an 8% y/y increase in 1H11 net profit to Rp22b. This came on the heels of higher operating profitability despite a higher effective tax rate.
On a quarterly basis, net profit surged by 47% to Rp13b with sales up by 19% to Rp226b. Margins were stable with gross profit margin at 29% and operating profit margin at 7%.
Our View
The results were in line with our expectation with 1H11 net profit achieving 43% of our full‐year estimate. Although we do not expect heavy seasonality in the business, we expect Modern to post a stronger performance in 2H as it is still expanding its store network.
Modern plans to open 36 new stores this year. As of early July, it was still slightly behind schedule with just 16 stores added, bringing the total number of stores to 37. Nonetheless, we do not think the target is beyond reach as Modern has completed its feasibility study of potential locations and is expanding its distribution centre. Its balance sheet is also supportive, with net gearing of 73%.
Gross margin for the 7‐eleven stores inched up by 3ppts to 35.7% in 1H11. We attribute this to better product mix as 7‐eleven continues to introduce new proprietary products and create new flavours and combos. We expect margins for this business to further expand in 2H11 as distribution becomes more efficient with the completion of the new combined distribution center.
Action & Recommendation
We are monitoring the competition posed by Lawson Inc. This Japanese retailer plans to collaborate with Alfa Midi to open stores similar to 7‐eleven in concept. Modern’s progress has been on track and we reiterate our BUY recommendation with TP of Rp3,250, pegging the stock at 34.7x 2012F and 17.9x 2013F PER.
source: KIM ENG dated 12 August 2011
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