Feb 22, 2017 11:07:45

Retail - Tailwinds Trump Headwinds

We see stronger signs of improvement in consumer demand and expect the trend to continue, supported by better commodity prices, lower interest rates, and more investment inflows. In addition, rationalised expansion over the last few years should help retailers’ margins, in our view. As such, we believe retailers in general would do well this year. We reinitiate coverage on the sector with OVERWEIGHT. In particular, we like turnaround efforts at Mitra and Ramayana. Key risks include political instability and currency volatility that could prolong the recovery process.

  • Demand side: Gradual improvement along with economic recovery. We believe consumer confidence is key in supporting private sector spending, and we see the positive momentum potentially being boosted further by improving commodity prices in the near term, and more investment inflows in the longer term. As such, we expect retailers’ topline to grow at high single-digit to low double-digit levels in 2017F, from mid- to high single-digit growth rates in 2016.
  • Supply side: Rationalised expansion lowers pricing pressure. We think retailers’ margins should be underpinned by rationalised expansion and improved inventory levels. Retailers’ expansion over the past two years has been generally slower than previous years’, thanks to slower property completion and the weaker market. Retailers’ inventory positions have also generally improved, with some retailers already at comfortable inventory levels. We believe these conditions have eased pricing pressure and provided some upside to margins.
  • Online shopping a promising market in the longer term, but obstacles continue to drag the full unleashing of its potential in the near term. Rising income and a young population are long term key growth drivers, in our view. On the flipside, short term obstacles such as relatively high costs of good internet access and mobile devices, drag online shopping adoption. The online shopping format is set to grow as more Indonesians come online, and purchasing power grows. We believe this trend would have a disproportionately negative impact on Matahari Department Store ($LPPF) as incremental online shoppers are likely to come from Matahari’s target market segments, in our opinion.
  • Tailwinds trump headwinds. Overall, we expect profit acceleration in 2017-2018F, stemming from gradual topline growth, GP margin recovery, operating leverage as well as financial leverage. We forecast average topline growth of 10-11% in 2017-2018F, a slight improvement from previous years, supported by higher commodity prices and rising confidence level. We expect margin recovery as rationalised expansion and economic recovery gain pace. Politics and currency stability are macro wild cards, though we remain optimistic.
  • We like turnaround efforts at Mitra and Ramayana. Ideally, an investment case should be made on a company that is heading towards the fourth quadrant in Figure 1, or at least one that is pushing its asset turnover towards the first quadrant, or improving its profitability/margin towards the third quadrant. Ramayana Lestari Sentosa ($RALS) and Mitra Adiperkasa ($MAPI) are our Top Picks with relatively faster asset turnover growth and stronger margin improvements, a combination that would ultimately increase profitability. Both companies have undertaken business and management turnarounds, which were timed well with the improvement in general economic conditions. (Stifanus Sulistyo)