Ramayana Lestari Sentosa ($RALS): Turning around
- Strong 4Q15 results on consignments, KJP cards and downtraders: Despite weakness in the commodity sector in 4Q15 affecting low-end consumer purchasing power, RALS booked solid 4Q15 IDR1.7tn gross sales, +3.5% y-y but -34.5% q-q on seasonality, accounting for 104.7% of our estimate. This resulted in 4Q15 net sales of IDR1.3tn (+2.6% y-y, -27.2% q-q), 6% above our quarterly forecast and brought 2015 net sales to IDR5.5tn (-5.6% y-y), in line with estimates, helped by: (1) Kartu Jakarta Pintar (KJP) disbursements in Sep-15 and Dec-15 for low-end consumers to be spent in modern retail formats (exhibit 11); (2) Increased consignment contribution (4Q15: 35.3%; 4Q14: 34.5%), attracting shoppers to downtrade during RALS’s low shopping season.
- Positive earnings surprise on higher-margin consignments: The rise in consignment sales (+6% y-y) with 1-3% higher margins than direct purchases allowed RALS to book a positive 4Q15 EBIT of IDR11bn, versus negative EBIT margins (exhibit 6, 10) in 4Qs in the previous 4 years, as RALS’ shoppers mostly do not shop at Christmas. On costs, 4Q15 opex only reached IDR415bn (-2.6% y-y), helped by labor productivity enhancements. Coupled with RALS’s cash-rich position providing interest income, 4Q15 earnings reached IDR32bn (+105.6% y-y), translating to IDR336bn in 2015 net profit (-5.5% y-y), above our (108%) and consensus (106%) estimates.
Outlook: Stonger helped by Jokowi’s cards
At this stage of the market cycle, we are more bullish on companies with low-end mass-market exposure due to Jokowi’s support for people at the grass root levels. In this regard, RALS does benefit from Jokowi’s biannual disbursement of KJP and KIP cards (exhibit 11), particularly as the 2016 budget increases by 12-19% y-y with the next card disbursement to be in May-June. Additionally, in 1Q16, RALS has been pursuing more control over wholesale trading among store managers, paving the way for 1-2% y-y higher GPM. On this front, RALS plans to continue to increase its consignment proportions and attract mid-low milennials by promoting clothing lines (both for DP and consignment) brought by famous on-the-ground artists, which could increase traffic with fewer marketing costs. Thus, we are looking for 6.4% y-y 2016 gross sales growth, backed by 3.0% SSSG and 3 store openings (2 RALS and 1 SPAR). As such, we raise our 2016-17F earnings by 12-17% (exhibit 5), helped by higher contributions from consignments and increased labor productivity. Our still low 2016 SSSG assumption stems from our concerns about temporary downtrading patterns and the closer gap between the holiday season and Lebaran this year.
Recommendation: Upgrading to BUY and raising TP to IDR850
On valuation, RALS is attractive on 13.6x 2016F PE, a 50% discount to regional peers (exhibit 7). Hence, we raise RALS to BUY with higher 12M TP of IDR850 (from IDR640), based on 16.3x 2016F PE, still a 10% discount to its average 5-year 3M MVA and a 40% sector discount. Hence, we expect continued ytd market ourperformance (exhibit 4), particularly as mass-market exposed consumer stocks experience upward valuation re-rating ahead, helped by lower fuel prices and contained inflation. Risks: More intense local competition and lower than expected tax collection to delay infrastructure-related projects.