CLSA Research Today: re-initiating coverage on Ramayana (RALS IJ), TP Rp360

Research Today: re-initiating coverage on Ramayana (RALS IJ), TP Rp360

Swati re-initiates coverage on Ramayana (RALS IJ) with a SELL recommendation and TP of Rp360/share. Great company but these guys have just been very unlucky with macro events. In 2005, just when SSG begins to pick up, govt raised fuel price 100%+. This time around, there ambition to aggressively in the regions hit a brick wall when commodity prices took a plunge. Although I have a very positive longer term outlook for soft commodities, it is unlikely to recover in big way in next few months. Sales continue to struggle at this low end retailer.

Swati re-initiates coverage on Ramayana (RALS IJ) with a SELL recommendation and TP of Rp360/share.

There are some positives:
Market leader in low-end dept store
Strong balance sheet, no debt
Generating FCF of US$40mn
Cheap valuation but negative earnings growth this year

But more negatives for now…
January 09 SSG -2.1%, we forecast -7% SSG for 2009
Rapid fall in commodity prices = falling rural income
RALS’ strategy of expanding into the provinces and midsize towns makes sense longer run but facing a hard time now
Falling overseas remittances (overseas workers being laid off)
Rising unemployment
Question on cash management: total cash Rp1.433tn = 45% market cap = 63% equity. About 30% of total cash is invested in mutual funds, bonds, and shares. We prefer to see the company to look for attractive acquisition opportunities or paying dividends (and leave the investment of the cash to each shareholder).