Monday, August 1, 2011

Ramayana Lestari Sentosa Tbk. - Maintain Outperform

by CIMB Securities

In line, maintain Outperform. Ramayana reported 1H11 earnings of Rp84bn (+150% yoy) on Rp2.6tr sales with same-store sales growth (SSG) at 4% and YTD space additions of 3%. The company’s 1H11 core profit forms 20% of our full year forecast, and consensus, was within expectations after adjusting for seasonal factors. The weaker top line growth was offset by a strong 2Q11 gross margin of 26% vs 24% in 2Q10. The stock – trading at 8-10x FY11-12 – has been the sector laggard due to its weak SSG compared with other listed retailer peers and concerns over its earnings delivery. We believe value will emerge as sales rise in 2H boosted by the Muslim New Year and supported by the company’s strong cash position. We maintain our OUTPERFORM call with an unchanged target price of Rp1,100, P/E-based at par with the market P/E.

Tepid SSG offset by higher margin. Ramayana’s 1H11 SSG of 4% came in significantly below its industry peers that averaged 10%. Sales were Rp185bn, or 2.7%, short of its internal budget as a result of a management decision to focus on higher margin merchandise. Gross and operating margins rose to 26% (+1.2% pts) and 2.6% (+80bp) respectively in 2Q and helped cushion the decline in sales.

Management indicated that sales should recover in 2H as its inventory issues have been resolved last month. New inventories have arrived at all stores in anticipation of the festive season. The company expects about Rp2tr worth of sales in Jul/Aug supported by its extended trading hours and additional retail space.

Rising inventory risks. Inventory levels have risen to Rp1tr (+5% yoy, +40% qoq) in anticipation of Rp1.6tr worth of sales during the festive season. Nevertheless, bulky inventory could be a double-edged sword for Ramayana if it fails to achieve its sales target. Despite inventory trending up, Ramayana has trimmed its cash cycle by another 5 days compared with a year earlier, while its balance sheet has stayed healthy with a cash hoard of Rp1tr (+19% yoy, +4% qoq). Cash represents about 17% of the company’s total market capitalization.

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