Ramayana Lestari Supermarket Still Dragging Down Ramayana

The street was over exuberant with the 5.5% SSSG in Jan 2016 due to the Chinese New Year and distribution of benefits from Kartu Jakarta Pintar (KJP) in Jan 2016. However, we observe that the supermarket division recorded a lower SSSG of -7% in Jan 2016 (vs Dec 2015: -3.8%), with early indication pointing to even lower SSSG in Feb 2016. Taking into account its department stores’ good performance and supermarket division’s weak performance in Jan 2016, we keep our NEUTRAL call and slightly raise our TP to IDR700 (from IDR640, 2% downside).

Strong 5.5% same-store sales growth (SSSG) in Jan 2016
Ramayana Lestari (Ramayana) recorded 5.5% SSSG in January as the month coincided with the preparation for the Chinese New Year, with some regions outside Java such as Pontianak (West Kalimantan), Medan (North Sumatera), and Makassar (South Sulawesi) recording strong sales. The distribution of benefits from KJP to assist economically-disadvantaged students also took place in January, which boosted sales of shoes, school bags and stationery at Ramayana stores.

Supermarket division still facing tough competition from minimarkets
From our meeting with the company, we observe that the supermarket division recorded a lower SSSG of -7% in January (vs Dec 2015: -3.8%), with early indication pointing to even lower SSSG for February. As the minimarkets and Ramayana’s supermarkets target the same mid-low and low-income segments, we believe the supermarket division could keep dragging Ramayana’s overall performance. On a positive note, the company had completely ended its trader wholesale programmes last December to focus on bringing up margins of the supermarket division (note that the trader wholesale programmes were usually loss-making activities to prop up sales).

Good performance from department store division
The department store division recorded 14% SSSG and 12.5% SSSG in direct purchase and consignment sales respectively. Since Sep 2015, the department store division has been recording monthly positive SSSG as management decided to sell new merchandise post-Lebaran for its direct purchase items. In the previous years, post the Lebaran event, Ramayana’s direct purchase items were inventories of merchandise not sold during the Lebaran.

We remain NEUTRAL on Ramayana with a slightly higher TP of IDR700 (from IDR640, 2% downside) to account for its department stores’ good performance and the supermarket division’s weak performance. Our new DCF-derived TP of IDR700 implies 15.3x/13.2x 2016F/2017F P/Es, based on WACC of 13.8% and TG of 3%.

Specifically, we revise up 2016F/2017F earnings by c.9%/11% respectively to reflect higher margins from the discontinuation of the trader wholesale programmes in the supermarket division. The upside risk is the supermarket division manages to stave off challenges from minimarkets, while the downside risk would be more layoffs this year leading to lower purchasing power of the low-income segment.

Strong 5.5% SSSG in Jan 2016
Ramayana recorded 5.5% SSSG in January as the month coincided with the preparation for the Chinese New Year, with some regions outside Java such as Pontianak (West Kalimantan), Medan (North Sumatera), and Makassar (South Sulawesi) recording strong sales. The distribution of benefits from KJP to assist economically-disadvantaged students also took place in January, which boosted sales of shoes, school bags and stationery at Ramayana stores.

Supermarket division still facing tough competition from minimarkets
From our meeting with the company, we observe that the supermarket division recorded a lower SSSG of -7% in January (vs Dec 2015: -3.8%), with early indication pointing to even lower SSSG for February. As the minimarkets and Ramayana’s supermarkets target the same mid-low and low-income segments, we believe the supermarket division could keep dragging Ramayana’s overall performance.

As shown in below, Alfamart (AMRT IJ, NEUTRAL, TP: IDR570) recorded improving monthly SSSG while Ramayana’s supermarket division SSSG remained in negative territory. The company has indicated that the supermarket division would record even lower SSSG in February. On a positive note, the company had completely ended its trader wholesale programmes last December to focus on bringing up margins of the supermarket division (note that the trader wholesale programmes were usually loss-making activities to prop up sales).

Good performance from department store division
The department store division recorded 14% SSSG and 12.5% SSSG in direct purchase and consignment sales respectively (Figure 2). Since Sep 2015, the department store division has been recording monthly positive SSSG as management decided to sell new merchandise post-Lebaran for its direct purchase items. In the previous years, post the Lebaran event, Ramayana’s direct purchase items were inventories of merchandise not sold during the Lebaran.

Revising our FY16F and FY17F earnings
As mentioned previously, Ramayana completely ended its trader wholesale programmes for its supermarket division last December to focus on bringing up margins of the supermarket division (note that the trader wholesale programmes were usually loss-making activities to prop up sales). Ramayana also has guided overall SSSG of 5.5% this year. Thus, we revise down our 2016F/2017F sales by c.9%/8% respectively to reflect lower SSSG and revise up 2016F/2017F earnings by c.9%/11% respectively to reflect higher margins from the discontinuation of the trader wholesale programmes.

Valuation
We assume a risk-free rate of 8.25%, a market risk premium of 5%, an equity beta of one and TG rate of 3%, which result in an implied WACC of 13.8%.