ACE Hardware Not Red Hot Yet

No surprises from 6M15’s performance, as sales and net income were in line with our/consensus FY15 estimates. Maintain NEUTRAL and IDR640 TP (0% upside) for now as we remained concerned with negative SSSG and persistently increasing inventory days. Furthermore, as Ace imports 40% of its goods from outside China, the recent import tariff hike would have some negative impact on its products.

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6M15 results were in line. Ace Hardware’s (Ace) sales of IDR2.2trn in 6M15 were in line at 45.5% and 43.4% of our and consensus FY15 sales estimates respectively. Likewise, its net income of IDR246bn was also in line at 45.5% and 43.0% of our and consensus FY15F net income respectively. Negative same-store sales growth (SSSG). Ace’s 6M15 SSSG was still -2.7%. In June, SSGS was -1.1%, mainly due to the -5.9% SSSG for the regions outside Java. As Ace is to keep opening new stores in 2H15, we are concerned over store cannibalisation that would result in continued negative SSSG in the coming quarters.

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JCI Predicted Continued Strengthening of Today

Persistently increasing inventory days. We are also concerned with Ace’s inventory days. 2Q15 inventory days escalated to 220 days (1Q15: 204 days, FY14: 178 days). Increased import tariff. As Ace imports 40% of its goods from outside of China, the import tariff would have an impact on non-discretionary products, especially lifestyle ones. It remains to be seen if the company can continue to pass on the required price increases in the midst of the weak IDR vs the USD. Maintain NEUTRAL. We remain NEUTRAL on Ace with a DCF-based TP of IDR640, derived from using a WACC of 12.0% and a TG of 5.0%, implying 20x/18x FY15F/FY16F P/Es. Negative SSSG. Ace’s 6M15 SSSG was still -2.7%. In June, SSGS was -1.1%, mainly due to the -5.9% SSSG for the regions outside of Java region. As Ace would keep opening new stores in 2H15, we are concerned with store cannibalisation that would result in continuing negative SSSG in the coming quarters.

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