RHB Indonesia - ACE Hardware - Weighed Down By Challenges - (Ace Hardware, Inflation) Unknown Kamis, 09 Februari 2017




Good morning,
ACE Hardware - Weighed Down By Challenges
Weak SSSG and a still-relatively high inventory position are negative for a company’s profitability, in our view. Although ACE trades at relatively low multiples compared to its historical range, we believe this is justified given falling ROEs and slower projected profit growth. To grow faster, we think it would need to tap into the lower-income segments but execution is not going to be a walk in the park. Reinitiate coverage with SELL, and a DCF-derived IDR670 TP (11% downside) implying 2017F/2018F P/Es of 18x/16x. The stock currently trades at 2017F/2018F P/E of 20x/18x, with 6%/11% profit growth and 2.1%/2.2% yields respectively. This report marks the transfer of coverage to Stifanus Sulistyo.
¨ Unloading baggage. We understand that management is comfortable with 180-200 inventory days, which is slightly lower than its 9M16 position of 206 days (trailing 12 months’ COGS). Unloading inventory would add pressure to pricing, while slowing inventory purchases may hurt its topline due to a lack of fresh products. We believe that only a sharp pick-up in the economy, which is not in our base case, would allow ACE Hardware (ACE) to cut its inventory days without hurting its performance.

¨ Growth at lower part of income pyramid. The average ticket size data allows us to gauge ACE’s target market – our analysis suggests that it has almost exhausted its key target segment and would need to tap into the lower segment of the income pyramid in order to grow faster. ACE’s average member reward card ticket size is at IDR663,000, ie spending around IDR2-3m pa. Assuming this spending equals 1% of a household’s spending, it would suggest that only 3-4% of households (1.8-2.4m) are ACE’s target market. ACE’s reward card members reached 1.5m as of 9M16. To expand beyond overall rates of growth, we believe ACE would need to introduce products at lower price points, or under different store formats to serve customers from the lower segment of the pyramid – although execution of such a move would not be easy, in our view.
¨ Unexciting growth. For 2016-2018, we forecast profit CAGR of 7%, which is slower than 2013-2015’s CAGR of 10%. The slower projected growth is due to its topline, in particular, its weak store productivity (ie SSSG). Until 2013, ACE expanded its store count aggressively to corner its rival, “Do It Best Pongs”. Selling space grew by 19-34% pa in 2010-2013, and this aggressive expansion was cited as the reason for lacklustre store productivity. Looking ahead, overall economic recovery would be the key to ACE’s future growth. As we only expect a gradual economic improvement, we have assumed gradual unexciting profit growth rates of 6-11% in 2017F-2018F for the company.
¨ Reinitiate coverage with SELL and a TP of IDR670. Our TP is derived from a 10-year DCF valuation (WACC: 12.5%, TG: 3%). ACE is trading at relatively low multiples compared to its historical range but we think this is justified, considering its slower growth outlook and declining ROE trend. Our TP implies 2017F/2018F P/Es of 18x/16x. (Stifanus Sulistyo)

Link to report: to be sent out later
Link to Daily report: Indonesia Morning Cuppa - 090217

Economic Updates:

Inflation On An Upward Trend But Is Still Manageable
Indonesia’s consumer price index (CPI) increased to 3.5% in Jan 2017, and has been on an upward trend in recent months. We expect the trend of inflation to continue rising through the whole of this year, mainly led by higher fuel and food prices as well as administered priceinflation. We expect the CPI to rise +4.2% in 2017 (vs +3.5% in 2016), boosted by:
i. Higher fuel prices;
ii. Electricity tariff hike;
iii. A modest pick-up in volatile food prices.
¨ Key policy rate to be cut by 25bps, albeit with limited room. As inflation may likely continue to be manageable, we expect Bank Indonesia (BI) to maintain its loose monetary and macroprudential policies. Although room for further monetary easing is becoming increasingly limited, we still expect BI to slash its key policy rate by 25bps in 2017 to 4.5%. This is in order to support economic growth under stable IDR circumstances.
¨ Food prices, in our view, are set to record a modest pick-up in 2017, on account of a projected increase in distribution costs and slightly higher commodity prices.
¨ The decline intransport, communications & financial services costs narrowed toward the later part of 2016,before recording an increase in Jan 2017 due to an upward adjustment in domestic fuel prices. With crude oil prices staying firm at current levels, the cost of this category of goods & services is expected to register a faster increase throughout the year.
¨ The cost of housing & utilities is on an upward trend of late. In particular, the upward electricity tariff adjustment started to put pressure on inflation in Jan 2017.
¨ We envisage prices of education, recreational & culture, healthcare and clothing to elevate in 2017 due to higher energy prices, rising labour costs and a moderate demand-pull effect. (Rizki Fajar)
Media Highlights:

Corporates

Semen Indonesia Lower Average Selling Price in 4Q16
Semen Indonesia's 4Q16 ASP declined to IDR766,000/tonne (-3% QoQ, -8% YoY) and based on our calculation, its market shares still declined to 40.7% in 4Q16 (from 42.4% in 3Q16). Given the current overcapacity situation, we expect competitive landscape to remain intense and cement selling price will continue to be under-pressure in 2017. Maintain our Neutral on Semen Indonesia. (Andrey Wijaya)

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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia


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