PT BCA Sekuritas

Pandu Anugrah, Head of Research
Johanes Prasetia, Equity Analyst

3Q18 revenue grew stronger

Aggregate 3Q18 revenue in the retail sector exhibited positive momentum of 14.4% YoY vs. softer growth in the past two consecutive quarters (1Q18 and 2Q18 of 13.5% and 9.9% YoY, respectively). This was largely driven by stronger revenue from mid-high retailers (ACES and MAPI) on new store expansion last year, and revenue improved from mid-low retailers (LPPF and RALS) which booked positive revenue growth in 3Q18 (on higher SSSG, up by ~400bps) vs. negative growth in 3Q17.

Asian Games events and an extended “Hari Belanja Diskon Indonesia” also underpinned retailers’ toplines in 3Q18. Note that in aggregate, new store addition last year, totaling 54 outlets, also supported 9M18 revenue growth. We envisage this new store contribution will likely be prolonged, as we estimate revenue growth of 12.7% YoY will be delivered in 4Q18, translating FY18 to 12.4% YoY.

Diverse margins delivered on IDR depreciation and product mix

We have started to witness the adverse impact from a weakening currency in 9M18, mostly apparent on ACES and MAPI, given their 80% and 60% of imported products, translating gross margin suppressed by 20-50bps range; we nevertheless view this as still manageable. Out of all corporates under our coverage, RALS bucked the trend with margin expanded the most (>300bps), on recovery in supermarket and improvement in fashion segment, from outright in particular (due to product mix portfolio). Higher marketing expenses in 9M18 squeezed margins for 2018F as LPPF’s strategy was to push its outright products, including Disney and 361˚ products. We view it will prolong efforts next year as those outright products will be available in all stores in 2019.

Mixed 3Q18 earnings

Stronger performance per store has underpinned ACES, MAPI and RALS’ profit on an EBIT level in 3Q18, while LPPF booked negative EBIT growth, due to operating leverage, as revenue registered flat growth. Supermarket has consistently booked EBIT profit since beginning of the year, supporting RALS’ net earnings to book 43.4% YoY despite one-off loss from earthquake in Palu (cost them IDR10.5bn). Net ACES, LPPF and RALS monetary assets denominated in foreign currencies should benefit FX gains on the back of IDR depreciation – further supporting earnings.

Maintain NEUTRAL, RALS and MAPI are our top picks

Our expectation of RALS performance leads us to adjust assumptions, with 11.8% YoY and 8.2% YoY earnings revision in 2018F and 2019F. Risk on IDR depreciation might impact all retailers for ACES & MAPI on higher COGS costs (given imported products) while LPPF & RALS are more impacted by impaired customer purchasing power.

As such, we maintain our NEUTRAL stance on sector, with preferences: RALS and MAPI are our top picks on the back of inflection point from supermarket division which support the earnings to grow as consolidation on RALS and further new stores expansion of 200 stores in specialty stores and F&B segment to support earnings on MAPI. Limited space area availability in big cities might limit retailers from expanding further; thus, we view going forward retailers will add new stores, mostly in Rest of Java and outer islands, given space availability and lower opex.

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