Equity Research

PT RAMAYANA LESTARI SENTOSA TBK 

What an Exceptional Year

Despite the low single digit growth in FY18’s gross sales by 4.8% YoY to Rp8.54 trillion, we applaud company’s effort to boost its margins through tight discount policy, better store layout that creates bigger basket size and better sales productivity, as well as operational efficiencies. Demand-wise, in our view, despite the potential electricity and fuel price hike (which likely will occur in 2H19) as well as weak commodity prices YTD, the consumption of low-income segment this year will continue to grow, particularly due to increase of employment in formal sector andincreasing portion of government’s social assistance program (Program KeluargaHarapan/ PKH and Dana Desa). To reflect much-better than expected profitability margins, we revisit our projection and come up with higher TP of Rp1,800/ share. Maintain NEUTRAL.

4 Key Drivers to 220bps Surge in GPM

RALS booked a total gross sales of Rp8.54 trillion, grew by 4.8% YoY on the back of 2.9% SSSG (vs -1.2% in 2017), in line with strong CCI and relatively low inflation over the year. The higher-priced consignment sales also grew strong by 11.1% YoY to Rp3.73 trillion and contributed 43.7% to total sales (vs 41.2% in 2017). Interestingly, the net profit boosted by 44.4% YoY to Rp587 billion, which mostly contributed by 220bps YoY increase in GPM, that was mainly driven by: 1) tight discount policy, in which the company has set a “discount matrix” in order to control the discount timing; 2) better store layout and certain zoning of product display that creates bigger basket size and better sales productivity; 3) changes in store managers’ KPI, which encourage them to prioritize EBIT growth instead of sales growth, and; 4) on supermarket side, following the partnership termination with SPAR due to lack of compatibility in business standpoint in 2018, the company reviewedthe products composition (cut down number of SKUs and reduce the composition of fresh products which had been burdensome, as customer prefer to shop fresh products in wet market nearby), closed down 2 loss-making stores (total 16 stores to date) and downsized several stores. This led to increase of supermarket’s GPM by 200bps to all-time-high level of 15.2%. Furthermore, EBIT margin expanded by 250bps YoY to 7.1%resulted from higher GPM, better sales productivity and efficiencies in opexi.e salary cost (-7.5% YoY in line with decline of employee number by 17.3% YoY), utility costs (-2% YoY), etc.

Expansion Plan: Smaller Format, Ramayana Prime and Revamp Existing Stores

In terms of expansion, last year the company opened 5 new Ramayana stores (including 3 Ramayana Prime) and closed down 2 stores due to underperforming (PondokAren) and tsunami (Palu), making the total stores owned to 119. The current expansion, as guided by company, is more focused on smaller and more efficient format, by only 4,000-5,000 sqm/ store. In 2019, the company plans to open 5 new stores that will be rolled out in 2H19. RALS allocates capex from its internal cash amounted to Rp350 billion this year, which will be used for 1) Rp100 billion for 5 new store openings (approx. Rp20 billion each); 2) Rp100 billion for revamping 20 existing stores (25 stores had been revamped during 2016-2018); 3) Rp100 billion for normal maintenance, and 4) Rp50 billion for upgrading the existing stores’ front display.

Grab as Much in 1H19

Demand-wise, in our view, the consumption of low-income segment this year will continue to grow, particularly in 1H19 due to increase of employment in formal sector to date, political campaign prior to election in April, and increasing portion of government’s social assistance program (Program KeluargaHarapan/ PKH and Dana Desa) which also estimated to be disbursed in April and Lebaran that falls in May this year. However in 2H19, there will be some challenges from potential electricity and fuel price hike (which likely will occur in 2H19, after the election) as well as weak commodity prices YTD. All-in-all, the company guided a conservative sales growth by 4.5%-5% this year, SSSG of 3.7% YoY, while GPM expected to expand by 50-150bps YoY.

HigherTPof Rp1,800/ share. Already Priced in, NEUTRAL

We made several changes in our projections particularly in margins, SSSG and sales area assumption. Hence, we came up with new higher fair value of Rp1,800/ share (from prev. Rp1,100/ share), whichimplies a 19.9x PER and 11.9x EV/EBITDA 2019F.Based on yesterday’s closing price, our fair value still offers a 2.3% upside and the stock is currently traded at 19.5x and 11.3x PER and EV/EBITDA 2019F, respectively. According to our definitions of investment rating, our recommendation on RALS is currently NEUTRAL.