ace hardware indonesia (aces id) indonesia |...

Page | 1 | PHILLIP SECURITIES INDONESIA RESEARCH

MCI (P) 019/11/2014_0013 Ref. No.: INDO2014_0014

Ace Hardware Indonesia (ACES ID)

Leading Retail Company in Indonesia

INDONESIA | Retail Trade | Initiating Coverage

15 December 2014

Company Background

Ace Hardware Indonesia or AHI was established by PT Kawan Lama

Sejahtera in 1995.

The opening of the first Ace Hardware store in 1996 at Karawaci,

Tangerang, Banten, marked the initial milestone for Ace Hardware

Indonesia-or AHI- to keep focusing on its home improvement and

lifestyle retail business.

Now, Ace Hardware Indonesia has three business segments, comprises

home improvement, lifestyle and toys.

The company has 110 outlets all around Indonesia, covering Java,

Sumatra, Kalimantan, Sulawesi and Bali, with a total area of 302,499

sqm.

In the next five (5) years, AHI plans to expand with 15 new outlets

every year.

Initiated coverage with “ACCUMULATE” recommendation, and target

price of IDR 940 for FY15.

Investment Merits

High Gross Profit Margin (GPM). Ace Hardware Indonesia maintained

GPM at 46%-48%, one of the highest GPM in retail trade industry in

Indonesia.

Expansion funded by Internal Cash. AHI’s expansion has been funded

by internal cash, with minimum fund from bank loan, indicating strength

in its financials.

Positive Same Sales Growth (SSG). In the mid of huge expansions,

SSG remained positive at 4.7% in 3Q14.

Outlets all around Indonesia. Ace Hardware Indonesia has 110 outlets

all around Indonesia, beating other competitors in home improvement and

furniture distribution industry.

Key Risk Factors

Economic risk. Fluctuation in income of middle-class customers and their

priorities.

Government regulation risk. Government regulations, such as changes

in importation and

trade policy, taxation, and VAT tariffs.

Exchange rate fluctuation risk. Rupiah fluctuation is important

considering that a considerable portion of Company’s merchandise is

imported.

Business Competition Risk. In the next few years, new competitors in

retail trade industry especially home improvement and lifestyle product

could emerge.

Accumulate CMP IDR 785

TARGET IDR 940 (+19.7%)

COMPANY DATA

O/S SHARES (BN) : 17.15

MARKET CAP (IDR TN) : 13.5

MARKET CAP (USD BN) : 1.08

52 - WK HI/LO (IDR) : 570 / 1,025

3M Avg. Volume (mn shares): 22.5

PAR VALUE (IDR) : 10

SHARE HOLDING PATTERN, %

PT Kawan Lama Sejahtera: 59.97%

Public & Others : 40.03%

PRICE VS. JCI

80

90

100

110

120

130

140

150

160

170

Nov-13 Mar-14 Jul-14 Nov-14

ACES IJ JCI Rebased

Source: Phillip Securities Indonesia Research

KEY FINANCIALS

IDR bn FY14E FY15E FY16E FY17E

Revenue 4,656 5,546 6,538 7,642

EBITDA 708 779 848 897

Net Profit 513 557 615 659

EPS, IDR 30 33 36 38

PER, x 26.2 24.2 21.9 20.4

EV/EBIDTA, x 19.8 20.9 19.3 18.3

P/BV, x 5.8 4.8 4.1 3.5

ROE, % 22 20 18.7 17.2

Debt/Equity (%) 1.2 1.1 1 0.9

Source: Phillip Securities Indonesia Research Est.

Valuation Method: Residual Income Valuation

Analyst

Phillip Research Team (+65 6531 1240)

[email protected]

PHILLIP SECURITIES INDONESIA | 2 | P a g e

ACE HARDWARE INDONESIA INITIATING COVERAGE

Valuation and Recommendation

Ace Hardware Indonesia is expected to deliver net profit CAGR of 8.7%

over FY14‐18e with return on asset of 15.7% and return on equity of

20% at the end 2015. At current market price of IDR 785, the stock

trades at 27.1x and at 24.2x in 2015. We initiate coverage with an

ACCUMULATE rating and target price of IDR 940 per share.

Retail Trade Industry Development in Indonesia

Indonesia, the fourth (4th) biggest population and economy in the world,

has large market share for trade and development. Indonesia’s economy

is growing, despite slower pace in recent years. In 3Q14 Indonesia’s

economic growth reached 5.11%. With population around 253.6 million,

53.3% of Indonesia’s society is anticipated to be urban population by

2015, according to Statistics Indonesia estimate. Rising income creates

cities from villages.

Besides, demographic bonus of productive age populace and growth in

middle income class are some of the reasons household expenses tend

grow every year. Local households with annual disposable incomes

exceeding USD 15,000 may surge to 19.7% in 2018 from 12.9% in

2014, according to Euromonitor. It indicates that in the next four years,

middle income class will grow 6.8%.

Households spending increases every year, according to Indonesia’s

Consumer Confidence Index (CCI), which stood at 120.6 in October, the

highest level since January 2014. Consumer confidence is at the top of

its range for the past five years, which may also boost spending at retail

outlets. Since January to October, CCI rose 3.3%. CCI is the index that

shows if the consumers are optimistic, they will tend to purchase more

goods and services. This increase in spending will inevitably stimulate

the whole economy.

Source: Tradingeconomics, Bank Indonesia



The increase of middle income class will be followed by residential

needs. Their properties are dominated by minimalist concepts. The

homeowners will seek knocked-down furniture, adapted for the house

size. Young families classified as middle income class tend to buy their

living needs at shopping centers or mall. This will also encourage growth

of retail home improvement and furniture outlets in Indonesia.

National retail trade turnover in 2014 is predicted to grow 10%.

Indonesian Retail Merchants Association (Aprindo) forecasted sales

value of modern retail trade in 2014 to reach IDR 162.8 trillion. The

number of retail outlets, comprising supermarkets, hyper-marts and

minimarkets tend to increase every year. The average growth is

currently 17.9% for hyper-marts, 17.4% for minimarkets, and the

smallest growth is supermarkets, which rose only 3%. The national

penetration in terms of number of outlets is lower than other ASEAN

countries such as Singapore, Thailand and Malaysia. Market penetration

level in Indonesia is around 14%, Philippines 25% and Malaysia 53%. It

implies that market is still underdeveloped and has ample room for

growth.

For the next few years, retail trade industry in Indonesia is expected to

undergo development. The opportunity of expansion is still opened wide,

especially in areas outside of Jakarta and other metropolitan cities in

Indonesia. Expansion opportunities are present in areas outside Java,

such as Sumatra, Sulawesi, Kalimantan and eastern regions of

Indonesia, supported by growing population in those areas. In 2015,

urban population in Kalimantan is predicted to be 45.2% of its

population, Sumatra to reach 43.1%, Sulawesi 35.1% and eastern

region of Indonesia 31.6%.

Home Improvement and Lifestyle Products Players in

Indonesia

Ace Hardware Indonesia or AHI is the main player in home improvement

and lifestyle products. In the furniture segment, there are several

players such as IKEA, Courts and Chandra Karya Pramuka. IKEA and

Courts are new players in the furniture segment in Indonesia. IKEA

currently has one outlet at Alam Sutera, Banten, and Courts has one

outlet at Harapan Indah, Bekasi. The last is Chandra Karya Pramuka

who has experience of more than 35 years and has 3 outlets.

Source: Lamudi Indonesia, Bloomberg



Based on a survey by Lamudi Indonesia, Ace Hardware is the most

frequently visited store, with 67% vote from respondents, followed by

Informa, a unit of Kawan Lama Group with 37%, and Depo Bangunan

33%. From the three players in this business, no direct competitor can

be compared head-to-head, except for Do It Best Pongs, who sells

similar products to Ace Hardware. IKEA on the other hand, cannot be

compared as direct competitor to Ace Hardware, as it dominantly sells

furniture.

Business Overview

Ace Hardware Indonesia is a subsidiary of PT Kawan Lama Sejahtera.

Established in 1995, Ace Hardware Indonesia is the licensee of Ace

Hardware Corporation based in United States. The opening of the first

Ace Hardware store in 1996 at Karawaci, Tangerang, Banten, marked

the initial milestone for Ace Hardware Indonesia –or AHI– to keep

focusing on its home improvement and lifestyle retail business.

In addition to pioneering in home improvement and lifestyle retail

business, Ace Hardware has also been a player in toys retail industry

through the opening of Toys Kingdom starting from the first store

opening on June 4, 2010. Now Toys Kingdom has 4,239 sqm areas.

Source: Kawan Lama Group

Currently, Ace Hardware Indonesia is the market leader in home

improvement and lifestyle business with number of outlets growing

every year. In 2014, Ace hardware Indonesia owned 110 outlets all

around Indonesia. In fact, Ace Hardware Corporation, USA, has also

recognized Ace Hardware store in Living World Mall of Alam Sutera,

Banten, as “The Largest Ace Store on Earth” in 2011. So far, the total

area of Ace Hardware’s 110 outlets has reached 302,499 sqm.

Ace Hardware has been constantly expanding. The company still focuses

on organic growth. Ace Hardware sets a target to open 15 new outlets

every year, with this year’s target has been achieved at the time of this

report. From the 15 new outlets, 9 are located outside Java (5 in

Sumatra, 2 outlets in Sulawesi and the rest in Bali and Kalimantan).

These expansions are mostly concentrated outside Java. Total added

store area in 2014 is around 37,300 sqm.



Store Openings in 2014

Opening Date City Areas (sqm)

25 January 2014 Medan, North Sumatra ± 2,500

Samarinda, East Kalimantan ± 2,800

9 February 2014 Makassar, South Sulawesi ± 3,700

13 March 2014 Medan, North Sumatra ± 2,000

25 April 2014 Surabaya, East Java ± 6,000

11 May 2014 Surabaya, East Java ±1,900

14 May 2014 Binjai, North Sumatra ± 1,700

Medan, North Sumatra ± 1,100

12 June 2014 Bandung, West Java ± 1,400

18 June 2014 Pekanbaru, Riau ± 2,900

12 July 2014 Jakarta, DKI Jakarta ± 3,000

18 July 2014 Bali ± 1,600

18 October 2014 Makassar, South Sulawesi ± 2,800

26 October 2014 Tasikmalaya, West Java ± 1,900

15 November 2014 Malang, East Java ± 2,000

Total Areas ± 37,300

Source: Company, Phillip Securities Indonesia Research

Aces Hardware’s expansion is aimed at middle-up class, by opening new

stores in metropolitan cities. The company prefers to open new stores in

a region if SSG remains positive. The consequence of constant

expansion is cannibalism among outlets outside Java and Jakarta, thus

reduces Ace Hardware’s SSG. Cannibalism happens when the distance

between one outlet and the other is too close. But Ace Hardware’s SSG

grew 4.7% in 3Q14, versus the target of 5% at the end of 2014. Ace

Hardware sets SSG target of 5% in 2015. Most of Ace Hardware’ outlets

are located in Java excluding Jakarta, comprises 39.7%, Jakarta around

34.3%, and outside Java around 26%. In the next five years, Ace

Hardware plans to rebalance its number of outlets in each region. Java

excluding Jakarta will be reduced from 39.7% to 33% in the next five

years, and regions outside Java, such as Sumatra, Sulawesi, Bali and

Kalimantan will be increased from 26% to 33%.

Sales by Region

FY10 FY11 FY12 FY13 9M14 FY18e

Jakarta 45.5% 41.2% 39.5% 36.6% 34.3% 34%

Java ex Jakarta 30.2% 36.0% 37.3% 39.0% 39.7% 33%

Ex Java 24.3% 22.8% 23.2% 24.4% 26.0% 33%

Total 100.0% 100% 100% 100% 100% 100%


Ace Hardware Indonesia Products

Ace Hardware Indonesia provides various products of more than 80,000

items. These products are divided into three segments:

Home Improvement:

Hardware

Home Appliances

Cleaning Aids

Lawn and Gardening

Lighting

Outdoor Living

Paint and Sundries



Plumbing Supplies and Fixtures

Electrical

Tools

Miscellaneous

Lifestyle:

Automotive Accessories

Furniture

House-ware and Gifts

Sporting Goods and Pet Supplies

HORECABA (Hotel, Restaurant, Cafe, Bakery) Supplies

Recently Ace Hardware Indonesia added new products in automotive

accessories segment, in collaboration with Top One Oil, a prominent

auto lubricant brand in Indonesia.

Toys:

Toys Kingdom is operated by its subsidiary since 2010. Working

together with local distributors and overseas suppliers, Toys Kingdom

does not only provide toys with various world-class brands, but also

become a place offering a wide selection of unique products with brands

that can only be found at Toys Kingdom.

In 3Q14, the biggest support for net revenue came from Home

Improvement department with 57.3% contribution, followed by Lifestyle

department with 38.2%, and Toys department with 4.5%. In the next

five years, ACES will reduce contribution from Home Improvement to

45% and increase contribution from Lifestyle department and Toys

Kingdom to 45% and 10%, respectively.




Investment Merits

High Gross Profit Margin (GPM)

Ace Hardware Indonesia maintained GPM at 46%-48%, one of the

highest GPM in retail trade industry. GPM in the last five years averaged

at 46.9%. It indicated the company’s ability to maintain high sales

growth, though COGS also increased in the last five years.

Internal Cash for Expansion

Ace hardware’s expansions have been funded with internal cash. The

company has low debt ratio. Ace’s prefers to seek bank loans than to

issue shares or bonds. It drew bank loan when it funded the entry to

toys business in 2010 and that so far is the only bank loan drawn by the

retailer.

Positive Same Sales Growth (SSG)

In the mid of huge expansion, SSG growth is still positive at 4.7% in

3Q14. In the last 3 years, SSG grew 12%, but SSG is in a declining

trend, due to massive expansions. The consequence of this is

cannibalism among outlets outside Java and thus reduces Ace

Hardware’s SSG. However, Ace Hardware’s SSG still has positive growth

of 4.7% in 3Q14, versus the target of 5% at the end of 2014.

Outlets all around Indonesia

Ace Hardware Indonesia has 110 outlets all around Indonesia, beating

other competitors in home improvement and furniture business. Ace

Hardware consistently expands to areas across Indonesia, especially in

urban areas such as Java, Sumatra, Sulawesi, Kalimantan and Bali.

Key Risk Factors

Economic risk

The income level of middle-class customers and their spending priorities

are a few of the major factors affecting the Company’s business

performance and turnover, along with other factors such as weakened

purchasing power, inflationary pressure, electricity tariff and social

uncertainty. From April 1, 2014 electricity tariff rose 5.6%-27.7%. Ace

Hardware has several outlets located in shopping malls. Moreover, the

average national minimum wage increased 12.77% from IDR 1.58

million to 1.78 million. It may decrease retailer net income due to

increase in SG&A expenses.

Government regulation risk

Government regulations, such as changes in importation and trade

policy, taxation, and VAT could affect the company’s income generation.

Government has increased subsidized fuel price at November 17, 2014.

The effect from this policy may decrease household spending for lifestyle

product.

Exchange rate fluctuation risk

Rupiah exchange rate is important to the company, considering a

considerable portion of the company’s merchandise is imported. 80%



Ace’s products are imported. 50% of the products are manufactured in

China, 10% in the United States (US), 10% in Europe, and 10% in Asian

countries excluding China.

Business competition risk

In the next few years, new competitors in retail trade industry especially

home improvement and lifestyle products could emerge. There are

currently only several new players, namely IKEA and Courts. These

competitors may reduce Ace Hardware’s market share and profit

margin.

Financial Overview

Third Quarter Update Performance

In 3Q14, Ace Hardware booked revenue of 3.4 trillion, a 20.2% increase

yoy. The revenue increase was supported by home improvement,

lifestyle and toys segments. Toys segment has the highest growth

among others segment, with 50.5% yoy growth, followed by home

improvement segment which grew 21.9% yoy, and lifestyle segment

with 16.6% yoy advance.

As revenue grew, Ace Hardware generated IDR 376 billion in net profit,

18% higher than the same period last year.

(IDR Billion) FY11 FY12 FY13 3Q-2013 3Q-2014

Total Revenue 2,410 3,223 3,895 2,788 3,353

% growth y-y N/A 33.8% 20.9% N/A 20.2%

Operating Income 383 562 651 410 488

% growth y-y N/A 47.0% 15.8% N/A 19.0%

% operating profit margin 15.9% 17.5% 16.7% 14.7% 14.5%

EBITDA 415 582 640 N/A N/A

% growth y-y N/A 40.1% 10.0% N/A N/A

% EBITDA margin 17.2% 18.0% 16.4% N/A N/A

Net Income 286 437 509 318 376

% growth y-y N/A 52.8% 16.4% N/A 18.0%

% net income margin 11.9% 13.6% 13.1% 11.4% 11.2%


Financial Performance Projections

With its constant expansion moves, revenue is projected to grow 19.5%

until the end of this year. We estimate revenue to reach IDR 4.6 trillion,

dominated by home improvement segment with 55% revenue

contribution.

In the next five years, we forecast revenue to grow 17.5% CAGR. The

growth will be in line with middle income class growth. In 2015, 53.3%

of Indonesian population is expected to live in urban areas.

Operating profit is projected to grow 3.4% to IDR 673 million. For the

next five years, operating profit is projected to grow at an average of

7.6%. Net profit is estimated to reach IDR 513 billion this year, up 0.8%

from last year. We estimate net profit to grow 8.7% CAGR in the next

five years.



Dividend

Based on the annual report, the company has a dividend policy based on

the following method:

Net Profit After Tax Estimated Percentage of Cash Dividend to Net Profit After Tax

Up to IDR 200 billion 10%

More Than IDR 200 billion to IDR 500 billion 15%

More than to IDR 500 billion 20%


We projected Ace’s dividend for the financial year 2014, 2015, 2016 and

2017 to amount to IDR 5.9, IDR 6.0, IDR 6.5 and IDR 7.2 per share,

respectively.

FY12 FY13 FY14e FY15e FY16e FY17e

EPS (IDR) 25.0 29.7 29.9 32.5 35.8 38.4

DPS (IDR) 2.5 10.0 5.9 6.0 6.5 7.2

Div. Payout Ratio (%) 15% 39% 20% 20% 20% 20%

Source: Company, Phillip Securities Indonesia Research Est.

Valuations

Middle income class growth is the blessing given to retail business in

Indonesia. Consumption has been growing every year and increase in

purchasing power has made retail a promising industry. Increasing

needs for residential homes from new mid-income populace have also

provided retailers such as Ace Hardware Indonesia with opportunities to

sell household equipments.

In addition, development in eastern part of Indonesia could become a

new target market for expansion. In the next few years, urban

population in eastern Indonesia is expected to increase significantly.

Based on these advantages and the company’s future growth potential,

we recommend accumulate for Ace Hardware Indonesia’s shares. We

have positive view on retail industry as it is an important industry that

supports economic growth in Indonesia.

We derived our valuation for Ace Hardware Indonesia with Residual

Income Valuation method, with Cost of Common Equity of 8.04% and

terminal growth of 5.5%. We estimate Ace Hardware Indonesia’s fair

value for end of 2015 at IDR 940 per share. Dividend for 2015 financial

year is estimated at IDR 6 per share, with a dividend payout ratio of

20%. From Ace Hardware Indonesia’s closing price on Dec, 12 at IDR

805 per share, there is a potential upside of 19.7%.



SWOT Analysis

S

GPM above 40% in the last 5 years.

Outlets located in various regions in Indonesia, including

Sumatra, Sulawesi, Kalimantan, Java and Bali.

SSG grew positively in the last 3 years.

W

Dependence on purchasing power.

Dependence of imported products.

Sensitivity to exchange rate.

O

Expanding population in Indonesia (the world's fourth largest,

after China, India and the US).

Growth of middle income class.

Room for expansion in eastern Indonesia region is still wide

open.

T

Rise of new players in furniture segment, such as IKEA and

Courts.

Competitors with the same concept with Ace Hardware Indonesia

could emerge.

Changes in the government’s trade policy, taxation and VAT

tariffs.



FY12 FY13 FY14e FY15e FY16e FY17e

Valuation Ratios

P/E (X) 37.23 26.60 26.25 24.15 21.91 20.44

P/E (X). Adj 36.45 26.60 26.25 24.15 21.91 20.44

P/B (X) 9.86 7.07 5.78 4.84 4.09 3.52

EV/EBITDA (X), adj 24.7 16.1 19.8 20.9 19.3 18.3

Dividend Yield (%) 0.27 1.26 0.76 0.76 0.83 0.91

Per Share data (IDR)

EPS, reported 25 30 30 33 36 38

EPS, adj. 26 30 30 33 36 38

DPS 2 10 6 6 7 7

BPS 94 112 136 162 192 223

Growth & Margins (%)

Growth

Revenue 33.8% 20.9% 19.5% 19.1% 17.9% 16.9%

EBITDA 40.1% 10.0% 10.6% 10.1% 8.8% 5.8%

EBIT 41.6% 9.6% 11.1% 9.3% 7.9% 4.5%

Net Income, adj 52.8% 16.4% 0.8% 8.7% 10.2% 7.2%

Margins

EBITDA Margin 18.0% 16.4% 15.2% 14.1% 13.0% 11.7%

EBIT Margin 16.0% 14.5% 13.5% 12.4% 11.3% 10.1%

Net Profit Margin 13.6% 13.1% 11.0% 10.0% 9.4% 8.6%

Key Ratios

ROE (%) 27.0% 26.6% 22.0% 20.0% 18.7% 17.2%

ROA (%) 22.8% 20.5% 17.2% 15.7% 14.6% 13.5%

Net Debt (Cash) (240,712) (133,104) (256,541) (292,856) (335,719) (364,307)

Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net Cash Net Cash

Debt / Equity 1.8% 1.5% 1.2% 1.1% 1.0% 0.9%

Income Statement (IDR bn)

Revenue 3,223 3,895 4,656 5,546 6,538 7,642

EBITDA 582 640 708 779 848 897

Depreciation & Amortization 66 75 80 93 108 123

EBIT 515 565 628 686 740 774

Net Finance (Expense) / Income -25 -28 -32 -35 -40 -44

Associates & JVs 0 0 0 0 0 0

Profit Before Tax 537 623 642 707 770 816

Taxation 108 120 135 156 162 163

Profit After Tax 429 503 507 551 608 652

Non-controlling Interest -8 -6 -6 -6 -6 -6

PATMI 437 509 513 557 615 659 Source: Company, Phillip Securities Indonesia Research Est.



FYE Dec FY12 FY13 FY14e FY15e FE16e FE17e

Balance Sheet (IDR bn)

PPE 445 446 497 549 601 653

Others assets 253 286 321 379 438 505

Total Non-Current Assets 698 732 818 929 1,040 1,158

Inventories 620 1,113 1,304 1,553 1,831 2,140

Account Receivables 31 25 33 44 59 53

Investments 0 0 0 0 0 0

Cash 270 162 283 322 368 400

Others 298 448 545 708 903 1,135

Total Current Assets 1,219 1,747 2,164 2,628 3,160 3,728

Total Assets 1,917 2,479 2,983 3,557 4,200 4,886

Short Term Loans 22 28 34 29 32 36

Account Payables 49 195 239 287 342 405

Others 138 216 247 294 342 389

Total Current Liabilities 208 439 520 610 717 829

Long Term Loans 14 7 0 0 0 0

Others 77 117 135 163 195 232

Total Non-Current Liabilities 91 124 135 163 195 232

Non Controlling Interest 17 11 12 13 15 16

Shareholder's Equity 1,618 1,915 2,328 2,784 3,288 3,825

Cashflow Statements (IDR mn)

CFO

Net Income 437 509 513 557 615 659

Adjustments (572) (654) (502) (667) (755) (822)

WC Changes 330 297 336 374 425 456

Cash generated from ops 195 152 348 264 285 292

Taxes paid (8) 7 4 6 2 0

Cashflow from Operating 204 145 343 258 283 292

CFI

Capex, net 138 84 0 132 145 160

Others (231) (126) (121) (249) (273) (298)

Cashflow from Investments (93) (42) (121) (117) (128) (138)

CFF

Share Issuance 0 0 0 0 0 0

Loans, net of repayments 37 33 11 28 32 37

Dividens (43) (171) (102) (103) (111) (123)

Others (46) (74) (10) (27) (31) (36)

Cashflow from Financing (51) (211) (101) (101) (110) (121)

Net change in cash 60 (108) 122 39 46 32

CCE, end 270 162 283 322 368 400 Source: Company, Phillip Securities Indonesia Research Est.



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