ACE Hardware Time To Awake The Captain
We reinitiate coverage of Ace Hardware Indonesia, Tbk (ACES IJ) with a NEUTRAL and a DCF-derived TP of IDR640, implying 20x/18x FY15/16F P/E. This year proves challenging due to a weak IDR vs USD which might erode ACES’ lifestyle product gross margin, increasing inventory days, while its aggressive store expansion plan might further lower its SSSG due to cannibalization. On a positive note, ACES’ strong balance sheet can withstand the slowing economy.
Multistrada Will Issue Bonds and Retail Expansion
Fast Food’s AA Credit Rating from Pefindo
Multi Bintang Spur non Beer Sales Segment
Bank Indonesia Currency Cooperation with Singapore
Al Baraka Acquisition Bank in Indonesia
Persistent, increasing inventory days. We are concerned with ACES’ increasing inventory days as the company embarked on an aggressive new store expansion to strengthen its dominant market share in the lifestyle home improvement retailer industry. Lower margin for lifestyle product category. ACES imports 80% of its merchandise. With a weak IDR against USD, we believe ACES may not be able to pass on a price increase big enough to keep its lifestyle product category margin stable. We expect ACES may resort to more discounting in order to reduce its already high inventory.
Perusahaan Gas Negara’s Revenue USD1.4bn in the Weakening Economy
Bank Permata Bond Issuance
ABM Investama Cushion Play
Sharia Banking’s Market Share Reaches 7.22%
Asian Market Selling Action
Lower and negative Same Stores Sales Growth (SSSG). ACES’ share price has been declining since early 3Q14 as, we believe, the market has been concerned with ACES’ negative SSSG for all regions starting 3Q14, including the Jakarta region. ACES’s SSSG has been declining partly due to cannibalization, as ACES keeps opening new stores. At 5M15, SSSG is already a negative 3%. ROE has been trending down. Despite the high ROE, its ROE trend has been declining due to a lower asset turnover and increasing inventory days.
MD Pictures’s IPO Issue 1.3Bn Shares
Hexindo Adiperkasa Raised Selling Price amidst Rupiah Weakened
Nippon Indosari to Buyback 10% Shares
The Government Assumes the Rupiah at the Level of 15,000 in 2019 State Budget
JCI Predicted Continued Strengthening of Today
Strong free cashflow and healthy balance sheet. Despite the negative points above, ACES has a strong free cashflow generation ability and a healthy balance sheet, with net cash. Reinitiating coverage with a NEUTRAL and a TP of IDR640 (a 1% upside). We derive our DCF-based TP from using a WACC of 12.0% and a TG of 5%, implying a 20x/18x FY15/16F P/E. Weak IDR against USD might further erode ACES’ gross margin.
Investment Thesis
Persistent, increasing inventory days. We noticed ACES’ increasing inventory days as the company embarked on an aggressive new store expansion to strengthen its dominant market share in the lifestyle home improvement retailer industry. Lower margin for lifestyle product category. ACES imports 80% of its merchandise. With such a weak IDR against USD, we believe that ACES will not be able to pass on a price increase sufficient to keep its lifestyle product category margin stable. Furthermore, we expect ACES to resort to more discounting in order to reduce its high inventory.
Elnusa Realized 80% of its Capital Expenditure
Sinergi Indah Internusa Targets 191% YoY Revenue Growth in 2018
Indosat to Expand its 4G Networks Outside Java
Credit Grew 11.5% in 2018
First 2Q17 Auction Result Exceeds Target
Lower and negative Same Stores Sales Growth (SSSG). ACES’s SSSG have been declining, partly due to cannibalization, as ACES keeps opening new stores. At 5M15, its SSSG is already at negative 3%. For FY15F, we are forecasting a 0.4% SSSG as we expect the economy to grow faster in the second half this year. ROE has been trending down. Despite the high ROE, its ROE trend has been declining due to lower asset turnover and increasing inventory days. Strong free cashflow and healthy balance sheet. Despite the negative points above, ACES has strong free cashflow generation and a healthy balance sheet, with net cash.
BNI Syariah’s Net Profit Growth 23% YoY
Acset Indonusa’s Revenue Growth 63% in 1H18
Bank BCA Credit Growth 13% Support by All Segment
Third-Party Funds Banking Only Grew 6.3%
Premium fuel consumption increases 23% during 2018 Eid Day
Reinitiating coverage with a NEUTRAL and a TP of IDR640 (a 1% upside). Our DCF-based TP is derived using a WACC of 12.0% and a TG of 5%, implying a 20x/18x FY15/16F P/E (as corroboration we show a comparison with peers). ACES’ share price has been declining since early 3Q14 as, we believe, the market has been concerned with ACES’ negative SSSG for all regions starting 3Q14, including the Jakarta region. Persistent, increasing inventory days. We are concerned with ACES’ increasing inventory days as it has embarked on an aggressive new store expansion in order to strengthen its dominant market share in the lifestyle home improvement retailer industry.
Matahari Department Store Plans to Open 8 Outlets Next Year
Watson’s New Concept to Fulfill Market Needs
Mitra 10 to Enter Eastern Indonesia market
Online Shopping via Crypto Currency in Indonesia
Bond Retail Online Ready in 2018
Lower margin for ACES’ lifestyle product category. ACES imports 80% of its merchandise. With a weak IDR against the USD, we believe ACES may not be able to pass on a price increase sufficient enough to keep its lifestyle product category margin stable. We actually expect ACES may resort to more discounting to reduce the high inventory. Lower and negative SSSG. ACES’s SSSG have been declining, partly due to cannibalization, as ACES keeps opening new stores. At 5M15, SSSG is already at a negative 3%. For FY15F, we are forecasting a 0.4% SSSG as we expect the economy may grow faster in the second half of this year.
Bank Mandiri Net Interest Margin Decreased
Murabahah Margin Significantly Supported Adira Finance’s Revenue
Pefindo Lowered Another Indonesia Stated Owned Construction Company
Domestic Economic Data Encouraged the Rupiah Strengthening This Week
No Import Tax Rate Increase affect the Low Income Society
SSSG by region. On a closer look into the monthly SSSG, all regions (including the Jakarta region) had mostly negative SSSG since 3Q14. ROE has been trending down. Despite the high ROE, its ROE trend has been declining due to lower asset turnover and increasing inventory days. Strong free cash flow and balance sheet. ACES has strong free cash flow generation and a healthy balance sheet, with a net cash.
One Upgrade; One Downgrade
One Downgrade, One Negative Outlook
S&P Upgraded Japfa Rating to B+/Stable
Inalum Publish Global Bonds in Singapore
Around 51% of Freeport stake will not be Funded by SOE Banks
Lifestyle versus building material focus. Currently, there are two major camps of HI retailers: a) one that focuses on building materials while also selling home improvement products, such as Catur Sentosa Adiprana “CSAP” (CSAP IJ, BUY, TP: IDR 525) and b) another that positions itself within the lifestyle retailers niche (such as ACES). In Figure 11 we compare representatives from these two camps, with ACES’ core strategy of high margin and low volume while CSAP’s is high volume and low margin business.
ACE Hardware Huge Inventory Iceberg Ahead
Bumi Serpong Damai Booked 50% YoY Marketing Sales Growth
Sumber Alfaria Trijaya Records 7% YoY Growth in Festive Season
Bank Indonesia Indicate Stronger Consumer Optimism in June 2018
November Consumer Confidence Index Higher
Key players
As shown in Figure 12, the lifestyle/home improvement retailer sector includes ACES as the biggest player with 115 stores and others such as Pongs Home Center, Courts, and IKEA. The building material/home improvement retailer sector includes Mitra10 (a subsidiary of CSAP) with 21 stores, Depo Bangunan, BJ Home, Dunia Bangunan, and Radja Bangunan.
The leading lifestyle/home improvement retailer
ACES is the leading retail company in Indonesia for lifestyle and home improvement products. Going forward, the company tries to increase the sales contribution from the lifestyle products which include automotive, furniture, houseware and gift, sporting goods, pet supplies, and home appliances. Taken as a group, the lifestyle products have higher margin than the home improvement products which consist of hardware, cleaning aids, lawn and gardening, lighting, outdoor, paint and sundries, plumbing, electrical, tools, and horecaba (hotel restaurant café bakery).
Store expansion
As ACES position itself as the lifestyle retailer, most of its stores are located inside malls, targeting the impulse mid-to-mid-upper shoppers. Year to date, ACES has opened five new stores to 115 stores in total. We assume a risk free rate of 8.0%, market risk premium of 5.0%, equity beta of 0.8, terminal growth rate of 5.0%, which results in a WACC of 12.0%. We believe the DCF is the most appropriate valuation methodology, since ACES’ net income has been growing quite stable at c.11%-13% annually. Our DCF valuation results in a TP of IDR640 based on our assumptions for sales growth and gross margin as shown. This constitutes our base case scenario.
Middle to Up Class Consumers Maintain Mitra Adiperkasa’s Performance
Mitra Adiperkasa Revenue Growth 13.5%
ACE Hardware Huge Inventory Iceberg Ahead
November 2017 Core Inflation Lowest Since 2004
The Low Core Inflation, amidst Low Purchasing Power Parity
Best Case Scenario: In this scenario, we forecast the lifestyle product can grow faster than the base case by 3% starting in FY16F and the company can increase its gross margin back to 49.4%. Worst Case Scenario: In this scenario, we forecast the lifestyle product’s sales growth to be -5% this year and its gross margin to remain flat. Scenario analysis summary: Based on our scenario analysis, we conclude that our TP for ACES ranges from IDR595-690, with our base case scenario placing the TP at IDR640.
Jembo Cable Focusing Sell High Margin Product
Wijaya Karya’s Net Profit Growth 19% YoY
Astra Graphia’s Net Profit Growth 23.1%
Domestic Economic Data Encouraged the Rupiah Strengthening This Week
Indonesia Foreign Exchange Reserves dropped to USD114.8Bn
Government regulations might change, such as changes in importation and trade policy, taxation and VAT tariffs. Weakening IDR against USD is the biggest risk for ACES as it imports 80% of its total merchandise. At some point, ACES will not be able to pass on entirely a price increase to its customers, which would probably result in lower margins for ACES. Although Mitra 10, a subsidiary of Catur Sentosa Adiprana (CSAP IJ, BUY, TP: IDR525) and Depo Bangunan focus on building material supermarket segment, some of ACES’ customers might shop in Mitra 10 and Depo Bangunan if ACES’ products are becoming more expensive due to the weak IDR against USD.
Company Profile
PT Aces Hardware Indonesia Tbk (ACES IJ) was established in 1996. For nearly two decades, ACES has strengthened its leading position in the business of retail products for home improvement and lifestyle in Indonesia. Currently, as of June 2015, ACES has grown to 105 stores in major cities throughout Indonesia.
