RALS:Leveraging Ex-Java expertise - Mandiri

Same-store-growth in the Greater Jakarta beat the rest of Java (7.4% vs 6.7%) in 2010, after being the worst performer in 2009 and 2008 even compared with Ex Java. As the social upheavals in the Middle East and North Africa could negatively affect remittances sent by Indonesian migrant workers to their families outside the Jakarta, the Greater Jakarta is expected to support RALS revenue growth together with commodity-based regions (Ex Java). RALS now has the lowest operating margin vs its peers such as Ace Hardware (ACES), and Mitra Adiperkasa (MAPI). With a lenient operation, better margin can only be achieved through higher price points. This year we expect RALS to have a robust year thanks to the government's decision in delaying fuel price hike. But threat remains. RALS is now trading at consensus PEG of 0.67, while MAPI is 0.39 and ACES is 0.86. We like RALS for its clean balance sheet, however we acknowledge catalyst remain elusive.

Profit is in outside Java. Revenue contribution from the ex -Java area in FY10 was 46.0%, a continuous improvement in comparison with FY09 and FY08 of 43.0% and 42.0%, respectively. Ex Java SSG, with the exception of FY09 when commodity prices took a plunge, was the highest (9.1%) in comparison with the rest of Java (6.7%) and the Greater Jakarta (7.4%). Ex-Java also recorded the highest gross margin for FY10 of 28.4% compared with the Greater Jakarta (24.1%) and the rest of Java (25.9%). The importance of Ex- Java was highlighted by RALS FY10 expansion pattern. From the total new 76,810sqm gross new spaces, 81.9% was allocated to Ex- Java, while from 18,927sqm area closed, 39.3% from the rest of Java, and the remaining from the Greater Jakarta. Closing down less profitable stores, we think, helped improve SSG of the Greater Jakarta area.

Taking advantage of first mover. As RALS cash conversion cycle is -5.0 days (they pay their suppliers 5 days longer than they receive payments from customer), while in 2009 was -6.6 days, we believe there is a limited room to extract more values from operational activities. As RALS operating margin is still below its peers, RALS must be able to raise its selling prices and this is its weakest point as it serves mid to low consumer segments. Other area to improve is having more return from its cash holding. As of Dec 30, 2010, RALS was holding Rp1,086bn of cash, deposits and bonds, 31.1% of total asset. Yield of the short-term assets is only 3.6%. I use average of FYE09 and FYE10 position as denominator, and the sum of interest income, gain on sales, and forex gain (loss) as nominator. Why not use the cash to buy properties especially in promising ex- Java areas where it knows the areas well.

Maintain Buy. We like the company but to have excitement in its share price, an out of the box solution for its current business model or asset management is needed. While conservatism is good, too much can also kill.