FREE Stock in Focus: MRSGI (4 June 2018) by AP Securities

PinoyInvestor’s “Stocks in Focus” summarizes our partner brokers’ Fundamental Analysis of a company and explains the rationale for the stock’s long-term Target Price and broker’s recommendation. Learn how you can use this report in this PinoyInvestor guide.


Summary of Broker’s Recommendation
AP Securities BUY 3.30 4 June 2018


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Our Partner Broker’s Analysis

Earnings Underperform

MRSGI’s 1Q 2018 earnings fell by 5.9% to PHP 90.2 Million, accounting for only 93.0% of our 1Q 2018 estimates. This was due to the unforeseen closure of two of its stores in Cebu which accounts for 14% – 17% of total sales. Management noted that they are working towards the reconstruction of the damaged stores. By 4Q 2018, Phase 1 is set to resume 55.0% of operations, and will be 100.0% operational already by 2Q 2019.

On the other hand, gross margins improved by 250 bps to 23.3% as MRSGI decided to rationalize sales from non-performing institutional clients. This was partially offset by higher wages and frontloading of expenses related to new store openings, leading to flat operating margins of 1.4%, a 10 bps improvement.


Focusing on Profitability

Back in 2015, MRSGI initiated its 5-year expansion plan to double its GFA from to 800K sqm by 2020. However, MRSGI is now shifting its focus on improving the profitability of its stores rather than reaching the 800K sqm goal. For this year, MRSGI is planning to open only 5 new stores compared to the previous guidance of 11 new stores. We view that the shift towards margin improvement may lead to slower topline growth. Management still noted that they are on track in securing the needed sites to achieve the 800k sqm target (currently 626K sqm are secured). MRSGI is also looking at M&A and JV opportunities as possible leg for growth.


Downside risks

We see faster trend of inflation rate as one of the key risks that may dampen consumer demand, especially for discretionary goods. This will eventually translate to slower sales for the department store segment of MRSGI which generates the highest gross margins among its store formats at about 30% gross margins.

Another concern is the aggressive expansion of other retailers such as RRHI and PGOLD. With MRSGI focusing on improving profitability, it will be easier for other retailers to expand in the former’s turf.


Our Partner Broker’s Recommendation

We maintain our BUY rating on MRSGI with a price target of PHP 3.30/share (from PHP 5.00/share). This is based on a 2018 P/E of 11.5x, a 50.0% discount to valuation of listed retailers RRHI and PGOLD.

We revisited our assumptions and ended with a lower Target Price as we expect a bumpy 2018 due to certain downside risks. Nonetheless, we expect MRSGI to continue expanding its store count going forward which would be the key catalyst for the stock over the long-run.


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AP Securities (formerly Angping & Associates Securities)
AP Securities (formerly Angping & Associates Securities)

AP Securities (formerly Angping & Associates Securities) is one of PinoyInvestor’s partners in delivering superior and reliable stock research reports that help Filipino investors make smart stock investing decisions! Learn more about them here.