Ace Hardware Indonesia Plagued by Weak Rupiah & Purchasing Power

The fragile rupiah (amid tighter monetary policy in the USA) is a major problem for Ace Hardware Indonesia as this retailer imports about 80 percent of the products it sells on the Indonesian market. So far this year the Indonesian rupiah has depreciated nearly 13 percent against the US dollar and the currency may depreciate further in 2016 as the US central bank plans to implement more (small) interest rate hikes next year. Last Wednesday, the Federal Reserve announced it decided to raise the key Fed Fund Rate by 0.25 percent in the December policy meeting (the first rate hike since 2008).

The combination of weaker purchasing power (amid the economic slowdown) and the fragile rupiah implies pressure for Ace Hardware. As the rupiah will continue to be plagued by external pressures in 2016, the company will have to put its hope in government efforts to boost economic growth (hence boosting people's purchasing power). Acceleration of economic growth of Indonesia in the second half of 2015 and full-year 2016 is heavily dependent on the smoothness of execution of public spending. The World Bank stated in its latest Indonesia Economic Quarterly report (released earlier this week) that Indonesia's GDP growth is expected to grow from an estimated 4.7 percent (y/y) in 2015 to 5.3 percent (y/y) next year.

After touching a low in May 2015, Ace Hardware's sales have risen. In October and November the company sales grew 11 percent (y/y) and 5 percent (y/y), respectively. Provided that the company's sales will grow by 5 percent (y/y) in the last month of the year, then full-year sales revenue in 2015 will have expanded by about 4 percent (y/y).

In line with expectations the company opened eight new stores in Indonesia in 2015. Next year Ace Hardware intends to add another ten stores (seven on the island of Java and the three remaining stores on other islands). Contrary to earlier targets, the company will cut the number of new outlets outside Java in the foreseeable future on the sluggish economic environment. Meanwhile, the company shut one store (in Tebet Green, Jakarta) in 2015.

Ace Hardware's share performance has been solid. Since 1 October, when the company's shares touched a low of IDR 500, the price has risen to IDR 800 per share, an impressive 60 percent advance. This performance is due to the general rebound of Indonesian stocks in October after concerns about the Fed Fund Rate hike and China's economic slowdown eased (implying a more stable rupiah rate), the company's solid sales growth in Semester I, and on the company's share buyback program. By buying back shares, it restored investor confidence while taking advantage of the decision of the Financial Service Authority (OJK) that relaxed regulations regarding the buyback of shares for listed companies. However, Ace Hardware's shares have only risen 1.9 percent so far this year.

Stock Quote Ace Hardware - ACES:

The graph below shows a steep decline as ACE Hardware conducted a stock split with a ratio of 1:10 in November 2012. This measure was taken to increase the company’s share liquidity.

In the first nine months of 2015, Ace Hardware's sales revenue grew 3.2 percent (y/y) to IDR 3.4 trillion (approx. USD $243 million), while net profit grew 4.5 percent (y/y) to IDR 393.3 billion (approx. USD $28 million) over the same period.

Future Projection ACE Hardware Indonesia's Financial Highlights:

	2013	2014	2015F	2016F	2017F
Net Sales	3,895.4	4,541.5	4,708.0	5,248.0	6,056.0
Net Income	503.0	548.9	551.0	639.0	760.1
EBITDA	651.0	737.0	735.0	846.0	1,013.0
P/E (x)	26.3	23.5	23.5	20.3	17.0
P/BV (x)	6.80	5.49	4.92	4.39	3.89

^{in billion IDR rupiah unless otherwise stated
Source: CIMB Securities}

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