Blessings of Ramadhan
Against the backdrop of tepid or even negative growth registered by other players in the industry, RALS managed to post modest 1H17 growth. RALS is neck and neck with ACES in battling for top position in the industry (Figure 5). Total sales, net revenue and net income rose 14.1% (y/y), 9.8% (y/y) and 45.16% (Y/Y) respectively.
Receiving significant boost from Ramadan festivities total sales reached IDR 3.5 tn (+21.5% y/y) in 2Q17 following a mild start in previous quarter. Direct purchase sales rose 12.7% (y/y) and 118.7% (q/q) to IDR 2.04 tn.
Furthermore, as RALS strived hard for bigger contribution from consignment sales, consignment fees leaped 36.2% (y/y) and 167.2% (q/q). In 2Q17, consignment sales contributed 41.8% to total sales, a vast improvement from 37.3% in 2Q16.
Responding to prolonged economic slowdown, RALS has been running a tight ship. Costs were kept low through a number of cost saving measures. Growth in SG&A was virtually flat (+1.0%) in 2Q17 as 3 new stores were opened. For 1H17, SG&A stood at IDR 929.4 bn (-1.7% y/y) led by electricity (-7.5% y/y) and in turn boost d operating margin to 11.9% from 7.9% a year ago.
1H17 net income was IDR 368.8 bn (+48.9% y/y), equaled to a 86.2% run rate to our FY17E net income target (IDR 427.9 bn). We are fairly confident that RALS’ net income in no time would surpass our estimate despite risk of further deterioration in consumer’s purchasing power in the second half of the year.
Supermarket is Under Scrutiny
Supermarket segment are still languishing deep in the red ink. 1H17 net revenue growth contracted 2.3% (y/y).
Rapidly declining revenues combined with razor-thin margins (Figure 8 & 9) made operating loss for this segment seemed inevitable. RALS is seriously pondering an option to spin-off the supermarket segment in the near future as it plans to strengthen its core business fashion.
Rating and Valuation
We lowered our DCF-derived 12-month forward target price to IDR 1,250, translating into P/E 19.6x 2017F. We upgrade our rating from previously HOLD to BUY on the back of recent price movement (buy the dip).