RALS:Return of the urban - Mandiri

Interesting phenomena found in RALS 1Q11 performance was the relative strength of Java costumers vs ex Java. In the last 3 years (excluding 2009 when commodity prices got trashed), ex Java led the SSG growth. However as Jakarta and the rest of Java took the lead in 1Q11, the role of ex Java as a growth provider is in question. Revenue in 1Q11 was only 5.2% of our FY11 estimates while the last 5 years 1Q contributed 6.3% of total full year. We are maintaining our estimates as according to RALS, 1Q11 weakness was also due to fashion inventory problem. To reflect peers comparison, we changed our target price calculation method from DCF to PEG. Based on PEG of 1.0x using our FY12/FY11 net income growth, our target price drops from Rp1,100/share to Rp880/share. We are maintaining our Buy call.

Weak 1Q11 results. Operating income was 5.2% of our and 4.8% of consensus estimates. Since 2006, 1Q usually contributed 6.3% of the total full-year operating income. SSG (same store growth) in March was just 2.0%, an improvement over Feb 0.5%, but significantly lower than January 6.7%. Ex Java contracted 1.3%, while the Greater Jakarta grew 2.1%, and rest of Java +8.0%. Over the past three months ex Java recorded a declining SSG performance. Revenue in 1Q11 was 94.8% of RALS internal target. The company attributed part of SSG weakness on fashion inventory problem.

Shortened cash cycle. We think fashion inventory problem has resulted in a lower operating margin of 1.8% vs 1Q10 of 2.0% as cash cycle actually improved in 1Q11. Cash cycle in 1Q11 was 20 days from 1Q10 of 28 days with inventory days dropping 15 days to 67 days. The reduction of inventory days also explained the fashion inventory cleanout.

Reduce target price, maintained Buy. We admit it is difficult to find catalyst for the stock. Excitement on the counter can only begin if the management implements an out-of-the box solution to current business model or returning the cash to shareholders.