Ace Hardware Indonesia (ACES IJ): A Little Diet Won’t Hurt November 2, 2017

Highlights

  • 9M17 bottom line maintained its double digit growth (+12.1% YoY) as net profit posted at IDR 527 bn.
  • However, 3Q17 net sales figure shows a stagnation (-0.1% QoQ) as we left behind Ramadan festivities back in 2Q17.
  • ACES’ 9M17 SG&A and others expenses grew by 23.7% YoY. As the result, net profit growth (+12.1% YoY) couldn’t catch up with net sales’ (+18.9% YoY).

More New Stores

ACES had just opened its 12th store for this year in Bandung, West Java, adding another 27,543 sqm retail space into 139 stores in total with more than 363,000 sqm of retail space. We believe newly opened stores have contributed to net sales figure of IDR 4.22 tn (+18.9% YoY), which represent 77.3% of our FY17 forecast. In our view, this is an impressive figure amidst a challenging time for brick and mortar retail industry recently.

Home improvement was still the biggest contributor to 9M17 net sales with 56.4% shares. Toys remained the fastest growing segment (+36.7% YoY) followed by Lifestyle (+25.0% YoY) and Home Improvement (+14.38% y/y).

Rising Expenses

We are concerned with SG&A and others growth rate (+23.7% YoY) that eclipse net sales growth rate (+18.9% YoY) (figure 2). As a result, operating margin and net profit margin for 9M17 were slightly deteriorated compared to 9M16, in spite of improved gross margin (figure 2). As we dig further, remuneration expense took the lion’s share of the overall SG&A and others expenses (figure 5) and posted the highest growth rate compared to the other components (figure 6), in line with ACES’ rapid store expansion.

We saw a potential improvement in operating expenses area, as the overall retail industry faces a challenging time and other players were maximizing efficiency. ACES needs to keep its expenses in check with revenue to maintain profitability margins, hence, net income at the end of the road.

Rating and Valuation

We maintain our SELL rating due to recent price surge. Our projection for FY17 net income remains unchanged, as rising expenses threatened to hinder net sales’ sterling performance. We reiterate the 12-month forward target price at IDR 1,035, translating into 27.4x FY17E P/E. ACES currently is trading at 31.2x 2017F P/E, (1 standard deviation above 4-year average).

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