Retail Sector: MPPA and HERO

As a retail company owned by Lippo Group, Matahari Putra Prima (MPPA) has a quite good performance. But if we see its share price movement, the speculation is so fantastic that you can take a big profit in a short term if you could buy the stock in the right moment. But how if you do the buy in the less precise moment? Fortunately, MPPA dropped dramatically from its top level by the end of April at 1,340. Now, MPPA stood in position 1,020.

With that price, MPPA had market cap about Rp4.9 trillion, which reflected PBV 1.4 times. But if we see the company from its performance which merely earned net profit about Rp38 billion in the first quarter ago, the annual PE of MPPA was 36.4 times, so its share price is classified as an expensive share compared to the general market, and quite expensive for the retail sector.

It is true that the retail company cannot earn a big profit, even though the selling is big, so that the net profit margin toward its asset and equity is small. This is because the company is only the seller, not the producer. For example if you buy a bottle of beverage at the price Rp12,500 in a supermarket, the gross profit which is taken by the supermarket might be only 2,000 - 3,000, while the rest income about 9,500 - 10,500 will go to the beverage producer.

So MPPA cannot promise a big return on equity or asset, even though its equity and asset is big. However, if we compare MPPA with the other big retail companies such as Hero Supermarket (HERO), the performance of MPPA is actually not good. With the asset equal to Rp9.7 trillion, MPPA can only earn net profit about Rp38 billion. On the other hand, HERO whose asset is only Rp2.8 trillion can earn net profit around Rp44 billion in the same period.

Now, the price of HERO (4,500) reflects market cap about 1.5 times of its equity value, or almost the same with MPPA. However, if we see from its net profit, HERO is cheaper from MPPA because its annualized value of PE is only 8.5 times, comparing with MPPA who reaches 36.4 times. It is a simple and easy valuation, isn’t it?

Nevertheless, the share of HERO is not liquid so that its share movement is not fair: easy to go up and easy to go down, and at some moments its price is going nowhere. In the case of liquidity, the share of MPPA is far better than HERO.

But the point is both stocks should not be chosen for long term investment (more than that, the investment in retail sector is not so promising comparing to other sectors because its small profit margin). The performance of MPPA is not good while the HERO’s share price movement is not good. However, if you like to gamble on it, you could put a few of your portfolio in MPPA. Technically, MPPA has never too long in its weak position (this time, it is caused by the dramatic dropped). In one or two months later, MPPA can return to level 1,200 - 1,300. But of course, that wasn’t a recommendation.

Original article was written on May 10, 2010.