Ramayana Lestari Supermarket Is Better, But Not Enough
During 1Q15 Ramayana (RALS) experienced consecutive quarters of negative operating income and negative SSSG which may set the tone for FY15. Although the supermarket division had positive operating income, the 3.2% gross margin decline YoY in its department stores and higher opex resulted in below our and consensus earnings. We downgrade RALS to SELL (from Neutral) with a TP of IDR640 (18% downside) based on a DCF valuation.
First time consecutive quarters of negative operating income
1Q15 marked the first time that RALS had consecutive quarters of negative operating income since FY06. We think this is an early indicator that FY15 will probably be another tough year for RALS to navigate since its low-income target segment is the hardest hit in a slowing economy.
Negative Same Store Sales Growth (SSSG)
RALS’ consolidated SSSG was -3.3% in 1Q15 with the following breakdown: -0.5% SSSG for greater Jakarta region, -0.3% SSSG for rest of Java, and -6.9% SSSG outside Java, which means the purchasing power for RALS’ low-income segment is very weak. In contrast, Matahari Department Store (LPPF IJ, BUY, TP:IDR 22,000) had a good 5.4% SSSG in 1Q15 as its middle-income target segment has been resilient in a slowing economy.
Supermarket performance is good while department stores’ is not
RALS’ supermarket managed to achieve its first positive operating income in 1Q15 since 1Q14. We would wait a few more quarters to determine whether RALS’ supermarket is really turning around and is sufficient to offset the declining department stores’ operating margin.
1Q15 net income below consensus
3.2% gross margin YoY decline in department stores and higher operating expenses (eg 27% YoY increase in utilities and 45% YoY increase in repair/maintenance) in 1Q15 resulted in net income below consensus, even after considering seasonality, at only 1.7% and 1.5% of our and consensus estimates.
Downgrade to SELL
We downgrade RALS to SELL (from Neutral) with a new TP of IDR640. Our DCF-based TP is derived using a WACC of 12.5% and TG of 5%, implying a 16.8x FY15 P/E.
First time consecutive quarters of negative operating income
1Q15 marked the first time that RALS had consecutive quarters of negative operating income since FY06. It is an early strong indicator that FY15 will be another tough year for RALS to navigate as its low-income target segment is the hardest hit in a slowing economy.
Negative Same Store Sales Growth (SSSG)
RALS’ consolidated SSSG was -3.3% in 1Q15 with the following breakdown: -0.5% SSSG for greater Jakarta region, -0.3% SSSG for rest of Java, and -6.9% SSSG outside Java, which means the purchasing power for RALS’ low-income segment is very weak. In contrast, Matahari Department Store (LPPF IJ, BUY, TP:IDR 22,000) had a good 5.4% SSSG in 1Q15 as its middle-income target segment has been resilient in a slowing economy.
Supermarket performance is good while department stores’ is not
RALS’ supermarket indeed managed to achieve first positive operating income in 1Q15 since 1Q14. We would wait a few more quarters to determine whether RALS’s supermarket is really turning around and is enough to offset the declining department stores’ operating margin since FY11.
1Q15 net income below consensus
3.2% YoY gross margin decline in department stores and higher operating expenses (eg 27% YoY increase in utilities and 45% YoY increase in repair/maintenance) in 1Q15 resulted in net income below consensus, even after considering seasonality, at only 1.7% and 1.5% of our and consensus estimates.
Downgrading RALS to SELL (from Neutral)
We cut our FY15F/FY16F earnings to IDR270bn/296bn (-22.9%/-22.6%). In 1Q15, the gross margins of RALS’ direct sales and gross margins were at 23.3% and 25.0% respectively. To better reflect current condition, we revised down the gross margin of direct sales by 150 bps to 24.0% (from the original assumption of 25.5%) in FY15F onwards. We also revised down the gross margin of consignment sales by 50 bps to 25.5% (from the original assumption of 26.0%) in FY15F onwards.
