Ramayana Lestari Sentosa Margin upside as the key catalyst

Ramayana Lestari Sentosa: Margin upside as the key catalyst (RALS, Rp1,390, Buy, TP: Rp1,400)

We fine-tuned our financial model to incorporate FY12 results, which were broadly in line with our and the street forecasts. With the re-rating in the retail space, we also raised target multiple for RALS to 22x, arriving at a new TP of Rp1,600. Margin surprise should catalyze the stock, particularly when sales recover. We reiterate our Buy call.

Thanks to early heads-up on unaudited figures, the audited FY12 sales and NPAT formed 100% of our estimate. NPAT also formed 97% of consensus forecast. If not for the approximate Rp15bn net loss at the supermarket division (versus Rp40-50bn profit target), NPAT would have been ahead of estimates.

2012 sales/sqm reached Rp8.0mn (+4.4%yoy), a historic high. The decision to replace some supermarket space with the fashion consignment products enhanced productivity. SSSG recovered to 8.8% from 5.0%in 2011, albeit slightly lower than our expectation.

Margin upside as the catalyst. Wage hike has been consistently high in the past two years, thus disposable income of the low-income earners have increased. We learned from Thailand’s experience, strong minimum wage hike only took a notable impact 6 months after the increase implemented. In 2M13, we observed that RALS’ gross profit grew 10%yoy despite 1.5% decline in sales, thanks to lower discounts on fashion outright and supermarket. When the volume is back in August during the Eid-ul-Fitr month to be prepared.

We fine-tuned FY13F and FY14F EPS by -0.4% and -3.0%, respectively after incorporating FY12 results into our model. We also raised our TP to Rp1,600, as we now assigned a higher multiple for RALS at 22x FY13F PE, still at a 12% discount to MAPI’s target PE and 30% discount to current valuation of domestic peers.