MIDI, a retailer under the Alfamart Group, currently operates more than >2,600 outlets, and the figure will only continue to grow thanks to the company’s aggressive expansion strategy. MIDI plans to open 700 new stores in FY23F, more than double its 3-year average (246 stores), most of which being Lawson stores (+500 stores, FY22: +127 stores), reflecting the total change in Lawson’s expansion strategy (in 2011-2021, MIDI only opened 65 Lawson stores). We believe that MIDI’s aggressive expansion strategy will bear sweet, fresh fruits for the company, boosting its FY24F net profit growth (projection: +19.4% YoY), supported by new Lawson stores (projection: > 1,000 Lawson stores in FY24F) and the potential for a decline in opex/store, which in turn should help lift MIDI's FY24F NPM. We initiate our coverage on MIDI with a BUY recommendation and a TP of IDR 560, implying 0.9x FY24F P/S, on par with its peers. Upside/downside risks: 1) Better/slower-than-expected store expansion and 2) Higher/lower-than-expected sales and profit margin from Lawson.

 

Aggressive expansion plan. MIDI is a subsidiary of AMRT engaging in retail staples sector, with four retailer brands: Alfamidi (81% of MIDI’s stores), Alfamidi Super, Midi Fresh, and Lawson. Compared to Alfamart’s, Alfamidi’s sales area is larger (~300m2, Alfamart: ~150 m2) with more SKUs offered. Meanwhile, Alfamidi Super’s sales area is closer to supermarkets (>500 m2), and Midi Fresh offers the concept of small fresh produce stores (30-60 m2), while Lawson (which is operated by MIDI's subsidiary, PT Lancar Wiguna Sejahtera or "LWS”) focuses on selling ready-to-eat (RTE) and ready-to-drink (RTD) products, which account for 70% of its total sales. This year, MIDI has a rather aggressive expansion plan, with 700 new stores planned (500 Lawson outlets and 200 Alfamidi outlets). To note, the two brands have different expansion targets; while Alfamidi will focus its expansion on areas outside Java, Lawson will focus on Java. By the end of 1H23, MIDI had opened 250 new Lawson stores (102 standalone stores and 148 store-in-store stores), more than its other brands, which also helped boost Lawson’s contribution to MIDI’s total sales to 5.7% (FY22: 3.2%). In total, MIDI currently operates 2,640 stores across Indonesia.

 

Massive GPM potential from Lawson. To support its Lawson expansion plan, MIDI has prepared a budget of IDR 600 billion, approximately 37.5% of its Capex budget for FY23F (IDR 1.6 trillion). To note, it requires less capex to open a new Lawson store than Alfamidi (Lawson: ~IDR 2 billion for standalone and IDR 500 million for store-in-store; Alfamidi: ~IDR 3 billion). We believe that the store-in-store format will benefit MIDI more; aside from the smaller Capex required, the format may also generate higher GPM since it only focuses on selling RTE and RTD products (RTE and RTD products can produce a GPM of ~50%, while dry groceries can only produce ~20%)

 

BUY, TP IDR 560. In light of the catalysts outlined above, we project MIDI’s FY23/24F revenue and net profit growth to reach +18.1% YoY/+15.3% YoY and +17.9% YoY/+19.4%. We believe that the impact of the aggressive Lawson expansion plan will be more apparent in FY24F, along with its plans to add another 500 new Lawson stores next year (FY24F Lawson estimate: ~1,100 stores), which should help reduce MIDI’s opex/store and boost its OPM (especially for Central and East Java). Lastly, MIDI is currently trading at an attractive valuation, with a price-to-sales ratio of 0.7x FY24F, below AMRT’s (1.0x). We initiate our coverage on MIDI with a BUY recommendation and a TP of IDR 560, implying 0.9x FY24F P/S, on par with its peers.