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Stock Index
Bahana Securities

26 Sep 2018 | 13:20 WIB
INDEX
SCORE
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%
COMPOSITE
5.867,577
-14,643
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Currencies
Bahana Securities

26 Sep 2018 | 13:20 WIB
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BUY
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Indonesian retail sector: a walkabout

As we enter 2017, we have wanted to find out how the current low inflationary environment has affected prices of FMCGs at the retail level. Our findings of the 25 popular products surveyed (in 4 hypermarkets, 6 supermarkets and 2 minimarkets) underline difficult operating conditions amid weak purchasing power, with many items undergoing lower prices, translating into an average price increase of just 1.5% in the past 7 months.

 

We found that most of the higher prices were from CPO-derivative products, such as cooking oil (Bimoli: +17.6%), shampoo (Rejoice 3 in 1: +6.9%) and toothpaste (Pepsodent: +6.1%). We believe this was due to higher 2016 average CPO prices, +12.3% y-y in IDR terms (exhibit 3). The highest increase was SIDO’s product, Tolak Angin, +41.9%, most likely due to the limited supply of wild herbal raw materials. Cigarettes also saw one of the highest hikes, especially for white cigarettes, with retail Marlboro prices +13.9%, following the much higher 2016 excise tax (+16.5% y-y).

 

We saw a significant price drop in poultry-related products, with eggs dropping 12.4%, while the price of whole chickens fell 7.8%. In our view, this was due to seasonality, as poultry prices usually bottom at the end/beginning of the year, compared to yearly highs in the period leading up to Lebaran. We also found that MYOR’s instant coffee product, Torabika Susu, dropped 6.7% on intensified competition in the coffee business. Following the soft-drink industry’s 2016 sales volume contraction of 5% y-y, we saw lower ASPs from products such as Coca Cola, -3.6% y-y.

 

In our surveys, we discovered that Alfamart was the cheapest place to shop with the minimarkets’ average being the cheapest compared to hypermarkets (7.7% premium to minimarkets) and supermarkets (12.9%). We believe mini-markets’ economies of scale are greater than hypermarkets, unlike in developed countries. AMRT booked 9M16 sales of IDR41.4tn, reflecting IDR37.9m sales/sqm (nearly double versus MPPA’s IDR19.4m per sqm on 9M16 sales of IDR10.9tn).

 

Going into 2017, the government recently increased the non-subsidized electricity tariff by 140% y-y for 900VA. According to our economist, monthly electricity bills comprise about 14-16% of household disposable income (IDR150k). We estimate that mid-low consumer discretionary spending would decrease by 21% post the full impact of the electricity hike, ceteris paribus. That said, we expect the current trend in the consumer shift towards convenience stores and forecourt retailers to continue as we believe the average basket size among grocery retailers not to improve in the ST period.

 

On a brighter note, we think expected low inflation (3.8-4.5%), a maintained BI rate and higher GDP growth (5.3%) should improve consumer-spending behavior in 2H17. Furthermore, higher oil palm fresh fruit bunch (FFB) productivity and rubber prices should increase farmer disposable income going forward. Although we expect weak 1H17 outlook, we maintain our OW view on the sector, as we expect retailers to remain one of the main beneficiaries of an improved economy in 2H17, particularly once political instability dissipates.

 

In this regard, we prefer non-grocery retailers like RALS (RALS IJ, IDR1,320, BUY), despite expected ST weak consumption in the low-end segment for its: (1) visible and promising operational overhaul post recent leadership changes; (2) potential SPAR supermarket spin-off that could boost EPS growth, ROE, and dividend payouts; (3) cheapest valuation among peers at an 18x FY17F PER (peer target PER: 25x) with promising re-rating potential. We also like Mitra Adi Perkasa (MAPI IJ, TP:IDR6,600, BUY) as we think earnings bottomed in 2016, while the IDR outlook should remain stable.

 

Downside risks: rise in subsidized fuel (premium) price, higher BI rate on a higher-than-expected US Fed rate hike. Upside risks: Sooner-than-expected purchasing power recovery on higher CPO production and higher commodity prices, increased government infrastructure program to fuel consumer confidence.

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