Mandiri Sekuritas RALS: 2010 strong prospects has been priced in

Despite expected strong performance in 2010, we downgrade our recommendation from Neutral to Sell as we deem strong share price performance has already factored in the expectation. What we think has not been priced in is the expected rising electricity cost and wage pressure. Our DCF target of Rp800/share has been surpassed and hence the downgrade.

2009 net income fell 22.% yoy, and 4Q09 dropped 84.8% qoq. Lower yoy net income was mainly due to Rp77bn in differences from forex gain (loss) account. Whereas, the quarterly drop in net profit as Lebaran, the biggest annual contributor for RALS sales was celebrated in the 3Q09. On operating level, same-store growth of -1.8% has reduced per sqm/year productivity from Rp7.4mn in 2008 to Rp7.2mn per sqm/year in 2009. RALS re-arranged its stores in 2009 by adding 21,416sqm in gross ! space and downsized/closed 24,214sqm gross space.

2010: less interest income and higher electricity expenses. On non-operating line, less forex loss is expected this year. RALS has US$28.1mn in USD-denominated assets. The rupiah was Rp9,404 to the U.S. dollar as of the end 2009 appreciating 18.2% from end-08. We are forecasting Rp8,927/US$ at the end of 2010, giving an appreciation of 5.3%. But less income from: (1) smaller interest income. RALS has Rp562.8bn in cash and time deposits. In FY09, IDR time deposit rates were 6.25%-! 13.5%, now are 6.0%-8.5%. ; and (2) rising electricity expenses. Electricity to sales is 3% in FY09. Government raise electricity by 15% on average, it will slash operating margin by 45 bps.

More expansion expected. In 2Q10, RALS plans to open stores in Padang (11,000sqm), Cinere (13,000sqm), Abepura (9,000sqm), Samarinda (14,000sqm). In August, it will open its doors in Pekanbaru (13,000sqm) ! and Padal arang (12,000sqm). Total new 2010 gross space of 72,000sqm is 9.3% of current RALS gross space. Assuming Rp5mn/sqm capex, total capex 2010 will be Rp360bn.

Share price has factored in the expected strong result, downgrade to Sell. We are downgrading our recommendation, despite raising our target price from Rp 640/share to Rp 800/share on improved earning estimates. Our TP was derived from DCF calculation with 12.5% WACC, and TG of 5%. We think the market has not priced in the potential electricity hike in their forecasts.