Corporate Flash - Ramayana Lestari Sentosa - Bahana

May same-store sales growth: Further deterioration

§ With the harvesting season coming to an end in May, RALS’ same store sales growth (SSG) for the month weakened further to 1.9%, down from April’s level of 3.0% (exhibit 5). This reflects weaker May SSG across the region (exhibit 7) and negative real SSG if we take into account inflation.
§ For five consecutive months, May sales of IDR471b disappointed, coming in nearly 13% below the management’s internal target, cementing our negative view on Indonesia’s mass-market exposed companies like RALS, which are suffering from lack of purchasing power.

§ 5M11 sales reached IDR2.1t, 33% of our full-year projection, but only 31% of management’s estimate and 32% of consensus forecast (exhibit 5). With 5M11 sales now 7.3% below management’s ytd guidance, we believe there could be further earnings downgrades.

Outlook
While gross margin has held up at 24.3%, weak sales could force RALS to apply discounting to bolster top line going forward, which would spell bad news for earnings growth given the company’s high fixed cost.

Recommendation and valuation
With pressure on earnings, we expect RALS’ underperformance (exhibit 4) to persist. Based on our estimate, the stock currently trades on 2011 PE of 15.4x, just a 5% discount to market valuation. This is unjustified in our view on the back of weak growth and RALS’ lack of liquidity. We believe the discount should widen to 30%, translating to our IDR600 TP. REDUCE.