ACE Hardware On Grand Sale
The company is having another up-to-50% sales promotion this month to reduce its excessively high 227 inventory days as of 9M15 – the highest among retailers under our retail coverage. Better Consumer Confidence Index in Dec 2015. Indonesia’s Consumer Confidence Index rose for the second time above 100 in Dec 2015 (Oct 2015: 99.3; Nov 2015: 103.7; Dec 2015: 107.5). We agree that the recent gasoline price reduction and a 25bps cut in Indonesia’s Central Bank benchmark rate to 7.25% would boost the country’s consumer spending this year. Ongoing aggressive sales promotion. To reduce its high inventory days (9M15: 227 days – the highest among retailers under our coverage), Ace Hardware had up-to-50% year-end sales promotion till 4 Jan 2016. Based on our ground check, the company is having another 20-50% sales promotion this month.
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Sales promotion on premium imported products. We also observe that Ace Hardware is having a 10% discount on its premium imported products, such as Clark & Kensington decorative paints. With the USD/IDR exchange rate at c.13,900, we believe more customers prefer the very popular and lower-priced decorative paints such as Mowilex and Dulux paints, which are sold at independent, small building material shops, or via Mitra10 stores operated by Catur Sentosa Adiprana (CSAP IJ, BUY, TP: IDR450). Remain SELL. Considering all the factors above, we believe Ace Hardware is overvalued as it needs to reduce its inventory at a faster pace and given its dependence on imported products, as it imports c.80% of its goods. Our IDR640 TP is based on DCF valuation (12.2% WACC, 3% LTG), which implies 18.3x/15.6x FY16F/FY17F.
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