Ace Hardware, 100 stores by 2015, CLSA

Having opened its 59th new store in Tebet (South Jakarta) this month, the
company is on track to meet their targeted 15 additional stores or +20%
on gross space basis. Coupled with strong same-store-sales growth
(Sssg) number of 18.3% as of 3M12, we foresee the company to deliver a
robust 26% top-line growth this year. Well execution should lead them to
possess 100 stores by 2015, while competition may however limit their
margin expansion. We maintain our BUY rating on the company with
slightly lower TP of Rp5,400/sh to reflect some margin pressure.


1Q12 result preview
We forecast this middle-class retailer to deliver astounding 1Q12 result, with
earnings hit Rp75bn (+27% y/y or 23% of our FY12 number), assuming net
margin of 10.5%. This is well supported by their on track expansion and
strong 18.3% Sssg number. Note that the company has just opened its 6th
new store in Tebet (South Jakarta), bringing accumulative total space of
nearly 11k sqm (+7% ytd, 35% of company’s FY12 target)

Rental cost pressure
Along with their aggressive expansion, rental expense will likely to jump by
38% y/y, translating to 4.6% of sales in FY12 (from 4.4% last year). The
management claimed that bargaining power from land owner or mall operator
is increasing, basically to take advantage of stiffer competitive environment.
Hence, pressure really comes from its new rental rate, instead of the renewal.
We overall expect Ebit margin to contract to 13.7% in 2012, from 14.5% last
year

Upcoming IKEA: how threatening is it?
We do some analysis on pricing and product comparison between Ace and
IKEA, which eventually suggest that an estimated 30% of Ace’s product will
be overlapping with IKEA. In regard to price point, it seems that IKEA might
offer as much as 50% lower price for inferior product quality, while similar
price for slightly better quality product. Though it still takes time for IKEA to
ramp up their stores, Ace needs to gradually improve their value to customers

Re-iterate BUY
Underpinned by rising middle-class spending power, we continue to believe
that there is room to occupy more than two players in this business. We
tweaked our EPS by 3-5% to reflect lower margin and cut our TP to
Rp5,400/sh, based on 1x PEG.

Download file : Indonesia ACES Final 190412