Ace Hardware (ACES IJ, BUY, TP IDR925) Results Review: So Far So Good

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Ace Hardware (ACES IJ, BUY, TP IDR925) Results Review: So Far So Good

Low seasonality during 1Q14 has led ACES to book revenue of IDR1.07trn (-2.9% q-o-q) and net profit IDR136.7bn (12.7% q-o-q). However, despite lower sales, operational expense during the quarter remains constant which led to margin compression. Going forward, the company has revised its expansion strategy from initially 10 stores to 15 stores this year. We maintain our forecast with BUY and unchanged TP of IDR925 derived from DCF valuation.

       Low sales during 1Q14 led to margin squeeze. The revenue of IDR  IDR1.07trn (-2.9% q-o-q) and net profit IDR136.7bn (12.7% q-o-q) were in line with our forecast as it took account of 22.7% and 25.4% of our FY14 estimates. Company’s aggressive expansion strategy of opening 5 new stores coupled with low seasonality during the quarter led to margin pressure. EBIT margin declined to 15.3% from 17.4% while net profit 11.3% from 13.6% for 1Q14 and 4Q13 period respectively.

       Adding more stores to the plan. Looking at the store opening phase in 1Q14 of which had achieved 50% of the FY14 target of 10 new stores, management decided to revised the new stores target to 15 by year end. The company has opened stores in  2 stores in Medan, and 1 in Samarinda, Makassar and Surabaya respectively. Ace’s budgeted capex for the year remains unchanged ranging IDR120bn-IDR150bn and per store cost assumption of IDR8bn-IDR10bn.

       Execution is the key. Adding new stores to the portfolio does not necessarily being positive catalyst for company. In our view, the aggressive expansion might led to lower SSSG especially during the 2H period of the year, once significant number of new stores have been opened. New stores might lead to cannibalization and in short term could cause a drag down in Ace’s same store growth. Thus, the management will need to consider the location carefully to minimize the cannibalization impact

       Maintain BUY with TP IDR925. We maintain our forecast and BUY call on the company with TP of IDR925 from DCF valuation, implying 29.5x FY14 PE.

Best regards,

RHB OSK Indonesia Research Institute

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