RALS - Cheapest play in the department store space

Unaudited FY12 NPAT was weak but expected. It would have been 12-15% higher if the supermarket delivered. Margin enhancement and strong wage hike would be the catalysts. We reiterate BUY. Valuation re-rating in the department stores space could catalyze RALS as the cheapest play.

Weak FY12 NPAT is expected. RALS will report audited FY12 results in end-March. Unaudited NPAT was revealed at Rp424bn (+12.3%yoy), 11% lower than our previous estimates and 5% lower than consensus.

We have fine-tuned our numbers to factor these. Weak NPAT came as supermarket booked some Rp15bn net loss versus Rp40-50bn profit targeted. Consolidated NPAT would have been 12-15% higher if supermarket division met the management's budget.

Record high productivity indeed. 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 enhancement to continue. Core department stores business performed very well last year. Its EBIT margin could reach c.11% in FY12, higher than MAPI. As consignment proportion rises, the gradual operating margin improvement should continue going forward. Fashion consignment can generate 3-6ppt higher operating margin than outright.

RALS expects fashion consignment proportion to reach up to 35% this year, versus 30.6% in FY12. For department stores alone, consignment proportion is 50%, far below MAPIs department stores (~80%) and LPPFs (~70%), suggesting ample room for operating margin improvement.

Recent hire of an operational manager for the supermarket division, rather than a top-level guy, should also be more effective in addressing the core issues of the business.

Take a more conservative approach. 2013 strong minimum wage hike would benefit RALS. If adjustments are smooth, RALS indicated that achieving Rp550bn FY13F NPAT (8.8% above consensus) is possible. But we decided to be conservative as some deferment in wage adjustments is possible as hundreds of companies are applying for excemption from the wage hike.

We slashed FY13F EPS by 5.9%, factoring higher wages and electricity costs, now aligned with the street.
Reiterate BUY with unchanged TP at Rp1,400 still pegged to 1.0x PEG. Current 16.2x FY13F PE makes RALS an underdog against regional average of 26.2x or even local peers at 30.4x.

Valuation re-rating in the department stores space could catalyze RALS as the cheapest play. On a 12-month forward, RALS 16x PE is also on par with its mean. A discount to execution risk is understandable, but not this high.
me @ LOTS Trading Club (LTC)

Bakrie vs Rothschild: Potential Mandatory Tender Offer US$8bn?

· What happen?
Local newspaper quoting from Bakrie Group key spokeperson, Christopher Fong, highlighted that if somehow Rothschild won the EGM on 21 Feb 2012 and replace the existing 12 boards of Directors in Bumi Plc, meaning that the Bakrie Separation Agreement signed last week has been breached and Bakrie Group would take a legal action to the Indonesia Financial Services Authority (OJK) which the new board members of Bumi Plc  will face a potential  Mandatory Tender Offer (MTO) if Nat’s proposal passed.

· How possible US$8bn cash offer?
Mr Fong reiterates that based on Indonesia’s capital market regulation, if there’s a change in majority shareholders in Bumi Resources (BUMI IJ), then Bumi Plc will subject to MTO and has to pay US$4bn of 70% of BUMI IJ floating shares and US$4bn debt in BUMI IJ, as creditor has the priority to be paid off if there’s change in majority share/stake holders (based on general financial covenant in banking). BRAU IJ tender offer occurred in 2011 at Rp540/share when Vallar acquired the majority stake.

· Comment:
This is a valid reason in our view, considering Bakrie Group has a strong network access to Indonesia capital market regulators. In addition, political wise Indonesia regulators or Government will unlikely let one of the largest Indonesia coal assets, KPC and Arutmin (CCoW 1st Gen), controlled by foreign Investor which against the New Mining Law 4/2009 as it also subject to foreign ownership divestment clause as well. So from here, BUMI IJ stock may look attractive for trading idea.

me @ LOTS Trading Club (LTC)

KZ - SMGR gains more market share

·         Jan domestic cement sales was at 4.65m tonnes, down 9.1% MoM, up 14.5%YoY. The increase in YoY figure is encouraging, cementing our view on rising trend demand. Historically, January and 1Q are usually a weaker period,  representing around 8% and 22% of full year domestic sale, respectively.
·         Export market only contributes 0.4% of total national cement sales.
·         SMGR gained market share at the expense of INTP and SMCB:
§         SMGR continued to gain market share due to more capacity (operational of Tuban IV on July 2012 and Tonasa V plant on late 2012): 43.9%, from 42.1% in 4Q12.
§         INTP market share declined to 30.1% (from 31.4% in 4Q12), while SMCB market share declined to 14.8% (from 15.1% in 4Q12).
·         We expect 12% volume growth for FY13; in line with Cement Association’ expectation.  This implies the players running at 93-94% utilization rate. Still a very tight market. We expect ASP to rise 4-5% this year.
·         INTP is now trading at 14x PE13, SMGR at 18.3x PE13, and SMCB 16.7x PE13. We are reviewing our SMGR assumptions post additional capacity from Thang Long and the newly commissioned Tonasa V.
me @ LOTS Trading Club (LTC)