CLSA Ramayana (RALS IJ) downgrade earnings and rec

Swati is downgrading low-end retailer Ramayana’s earnings by 15-20% for 2010-12 and brings down recommendation by a notch from BUY to Outperform.

After a disastrous 1H2010, performance in 3Q is not likely to improve much either as sales were already 7% below internal company target. Also, RALS is far behind its own schedule to launch new stores. Out of the planned six new stores before Ramadan, only three were opened. Two non-productive stores were closed so net store addition was only one!

Seems like these days it is very fashionable to blame things that go wrong on heavy rain. Indeed, the crazy weather has affected coal miners, coal contractors and cement producers. Rain has even provided some people with a great excuse to come in late for work (clearly none of us here in this office). But should it also affect Ramayana’s sales and launching of new stores? Hmmmm…..

Ramayana has grown its earnings by a tiny 0.6% Cagr since 2001 (excluding 2008) and EBIT margins continue to trend down. Its supermarket division remains problematic, so operational turnaround has remained elusive.

Swati was perhaps a bit generous. On her new numbers, Ramayana is trading at 16x next years earnings. She is also almost 20% below consensus so perhaps more downgrades from the street. Perhaps it should be a downright SELL?

After all, investors have other consumer names to choose from. We like Gudang Garam (GGRM IJ), Ace Hardware (ACES IJ) and Mitra Adiperkasa (MAPI IJ).

Key points from the report:

· After a disappointing 1H10, Ramayana’s 3Q10 is also likely to be weaker than expected. Heavier rains were cited as one of the reasons for lower than expected sales.
· The 3Q10 sales were 7% below internal target and Ramayana has only added three stores so far vs. guidance of six. So far this year, net store addition is only one as Ramayana closed two stores.
· We cut earnings by 15-20% adjusting for higher costs and lower.
· That said, Indonesia’s country risk premiums are reducing and consumer stocks are getting re-rated.
· Ramayana is still trading at 14% discount to regional peers with 15% ROE, zero debt and a possible M&A angle. Therefore we remain on the positive side. Outperform