Ramayana Lestari Sentosa (RALS IJ, Rp730 BUY) A return to the good times? - Danareksa

Reiterate BUY, TP of Rp850
We reinitiate coverage on RALS with a BUY recommendation. Things seem to be going RALS’s way, helped by a strengthening macro-economy with restrained inflation, stronger purchasing power and higher sales on the back of increases in commodity prices. More importantly, in our view, is the management’s optimism on this year’s planned expansion. Cooperation with several potential foreign partners is also in the offing – if this materializes, it could boost growth further. Valuation wise, the stock looks good value compared to its peers and company committed to paying out around 50% of its earnings as dividends, which translate into dividend yield 3.6%. Such is the basis for our BUY recommendation. Our TP is set at Rp850, implying 15.8x and 14.8x PE FY11-12.

Benefiting from a low inflationary environment…
Our chief economist expects Indonesian consumers to continue fuelling economic growth in 2011. Indeed, the Indonesian economy is expected to grow a brisk 6.4% in 2011 on the back of stronger consumption. According to the draft 2011 state budget, the government will increase civil servant salaries by around 10% this year. At the same time, minimum regional wages have also been increased in the private sector. And for regions out of Java, we believe that the commodity price boom should help give an additional boost to sales given that many workers are employed in the plantations and mining sectors. Moreover, we expect stable inflation of 6.2% which leads to higher purchasing power as consumers tend to have more disposable income. Thus, we remain positive on the company’s outlook this year, and expect sales growth of 11% pa 3-year CAGR, based on higher same-store growth of 8% pa (assuming the opex to sales is flat at around 21%). This is a significant increase from the sales growth recorded in the past 3 years which reached a mere 7% pa cagr.

Aggressive expansion planned
Location is one of the key factors for RALS’s expansion strategy. The management is maintaining its expansionary strategy. There will be 6 new stores (adding approximately 80,000sqm) – three in Java and three “out of Java”. One store already opened in Padalarang (West Java) with 2 more new stores to be opened in Garut and Kediri before Idul Fitri. Moreover, Ramayana just added 2 distribution centers last year in Samarinada and Pekanbaru, so Ramayana now has 6 distribution centers which will help the company to further penetrate the market. All in all, the company expects to spend around Rp400bn on capex.

Supermarket JV still possible
Ramayana’s supermarket business is expected to contribute around 28%-29% to total sales. The supermarket gross margin is 12%-13% with productivity of Rp1-1.25mn/sqm - still low compared to its competitors who enjoy gross margins of around 15%-16%. By comparison, the fashion division has a much better gross margin of around 31%-33%. However, RALS has kept the supermarket business since it provides a boost in traffic to the Ramayana stores on weekdays. To improve the return, RALS may seek foreign expertise or consider the possibility of entering into a JV with several foreign companies. One possibility would be to spruce up its supermarket division. Assuming that the supermarket chain can achieve a similar standard (i.e. gross margin of 15%-16%), then we estimate that the net profit for FY11 could improve by 15%.

High dividends
High dividends are another attraction. Ramayana is committed to paying out around 50% of its 2010 earnings as dividends. This reflects the company’s good financial health and translates into a dividend yield of 3.6% - higher compared to the average of less than 1%. The company is able to pay high dividends as it is cash rich and has positive retained earnings. Although the stock has shown poor performance since last year - largely reflecting a lack of growth – the shares are now attractively priced in our view. At the current price, the stock is now trading at 13.6x PE FY11, or lower than the retailers’ average of 22.2x PE FY11.