by Bahana Securities
RALS reported 3Q11 net profit of IDR270b, flat y-y and 11% below our expectation, bringing 9M11 bottom line to IDR343b, up 8% y-y, some 5-7% lower than our and consensus estimates.
On the cost front, margins contracted across the board on a y-y basis, which we suspect was partly due to discounting caused by weak purchasing power. At the operating level, 3Q11 earnings declined 5.4% y-y, which brought 9M11 operating profit to IDR376b, some 11-18% below our and consensus estimates (exhibit 5).
On the top line, 3Q11 revenue growth was just 5% y-y on continued weak same-store sales growth (SSG) of 3%, which is negative when we take into account inflation.
Outlook: Margins to remain under pressure on intense competition
RALS performance during this year’s Lebaran festivity, Indonesia’s single largest Muslim shopping season, is testimony that the company will continue to suffer from weak pricing power as its target market undergoes falling overseas remittances and overextensions in credits related to motorcycles and electronics (TVs, DVDs, mobile phones, etc). Additionally, RALS will have to face competition from cheap Chinese imports, hypermarkets selling basic clothing items (similar to what RALS provides to its customers) and deal with higher transportation costs as RALS is forced to open up stores in far away islands). This will continue to pressure margins going forward, in our view.
Recommendation and valuation: From Reduce to HOLD on price fall
RALS’ share price has underperformed the market by nearly 24% ytd (exhibit 4), bringing down valuation to 2012 PE of 11.8x, based on our unrevised forecasts. Hence, we have raised our rating from Reduce to HOLD on RALS. At the same time, we downgrade our target price to IDR700 from IDR780 previously, to account for this disappointing result performance.