CIMB Ace Hardware Indonesia Result note - A matter of valuations

(ACES IJ / ACES.JK, UNDERPERFORM - Downgraded, Rp1,530 - Tgt. Rp1,520, Consumer)

We downgrade Ace to Underperform from Outperform. 9M09 reported core net profit was Rp102bn, up 15% yoy on 8% sales growth. This matches our estimate as we are expecting 4Q sales to be stronger on rebounding consumer demand. However, if the 4Q rebound does not take place, the results could be deemed to be below our estimate by over 7%. We downgrade Ace to Underperform but with a higher target price of Rp1,520 (from Rp1,190) as we roll over to CY10. Our target remains DCF-based with a lower WACC of 13.5% (from 15.9%), adjusting for a lower beta, and implies 15x and 13x CY10-11 earnings. While we like Ace's business model and above-average growth, we believe its share price has priced in most, if not all, of the good news. Further, we expect slowing growth as the base effect wears off. We would turn more bullish if Ace could speed up the development of stores which had been postponed by the global financial crisis. Or if it takes the M&A route to enlarge its sales and product offerings, such as by merging with its sister company which sells furniture.