Mandiri Sekuritas RALS: Weak demand at play

Ramayana (RALS)’s 1Q09 net profit tumbled to its lowest level in 14 years, as revenues declined. In Apr09, sales were below management’s expectations again. To add to its woes, RALS is facing an investment problem (after the stock repo in 4Q08) in Rp12.6bn Mobile-8 bonds, whose status is in default. FY09F outlook remains poor and we believe that the market rebound is bound to happen in FY10F. Hence, we maintain Sell reco mmendation with target price of Rp370/share.

Profitability stumbled. Even though 1Q09 revenue was in line with our estimates, the operating profit was barely positive, while high interest income and foreign exchange gain saved the bottom-line. In 1Q09, gross and operating margins reached its lowest in 14 years (considering 1Q only). Gross margin fell from 25.6% to 25.0% due to weaker demand while operating margin slipped from 3.2% to 0.6% as the company was unable to suppress operating expense growth when reve nue declined. This would worsen should future sales fail to show some growth.

Apr09 sales still showing lack of buying appetite. RALS booked Rp332bn for Apr09 sales, below the management’s expectations by 7.9%. For the past eight months, only two months’ sales (Oct08 and Jan09) met or surpassed the management’s target. Cumulatively, RALS recorded Rp1.3tn (-5.6% yoy). For FY09F, we believe RALS will struggle to prop up sales, as outlook remains poor. We view that the possibility of rebound in sales would be in FY10F.

Another hit from doing activity outside its area of expertise. In FY08 RALS incurred Rp1.5bn in loss arising from stock repurchase agreement. Now, the company is facing problem in Rp12.6bn Mobile-8 bonds investment, as the issuer defaulted in redeeming its bond. It is not clear how this would end, but we believe the company should store its cash in investments with capital preservation focus (e.g. time deposit, government bonds) to avoid more losses.

We maintain Sell recommendation on RALS. Outlook for FY09F remains poor and threat of lower profitability margin lingers. We maintain our earnings forecast and reiterate Sell recommendation with target price of Rp370/share (based on DCF, WACC 15.7%, and terminal growth 5.0%). Currently, the stock is trading at PER09F of 12.4x according to our estimates.