Initial Report: PT Ace hardware Indonesia Tbk (FRA:4AH1), 27%% 3-yr Potential Upside (EIP, Fernando KHO)
Fernando presents a "BUY" recommendation based on the company's controlled expansion plans, favourable macroeconomic conditions, and resilient brand positioning.
LinkedIn: Fernando Kho
1. Business Description
Ace Hardware (ACES) was established in 1995 under the main company of PT Kawan Lama Sejahtera. PT Kawan Lama Sejahtera is Indonesia's largest technical equipment supplier, specializing in industrial equipment and machinery. ACES is the sole license holder of ACE Hardware Corporation (USA).
Since the opening of the first shop in Karawaci Supermall, ACES has grown its reach to 190 stores across Indonesia. ACES also opened the largest Ace shop in Alam Sutera, Serpong with a total area of 15.000 meters squared. ACES is now Indonesia’s largest home equipment shop – providing not only goods but also robust after-service such as free delivery, free assembly services, and a 10-day return satisfaction guarantee.
2. Business Segment and Revenue Drivers
Mainly centered on goods and services, ACES has three major segments:
A. Home improvement: includes hardware for hotel, restaurant, café, bakery, cleaning aids, lawn and gardening, and electrical tools.
B. Lifestyle: automotive, furniture, houseware, sporting goods and pet supplies, and home appliances.
C. Toys: all sales through Toys Kingdom, a brand established in 2010 to cater to toy demand in Indonesia.
The main rationale for this segmentation is that they source their goods from different sources, hence the three segments all cater to different brands with only some intersection. Home improvement is the largest contributor to the total sales (53%), followed by lifestyle (39%).
3. Past Financial Analysis
Financially, although Covid dealt a huge blow to ACES’ business, it has rebounded significantly recently. From closing 11 of its outlets in 2021 and 2022, the company achieved Rp204.81b profit in Q124 – a huge 29.34% y-o-y growth from Rp158.36b. The main driver of the growth is the top-line growth, where ACES revenue rose by 17.05% y-o-y. The growth is also accompanied by same store sales growth (SSSG) increase of 13.2% y-o-y – which is attributed to the increased consumer growth.
4. Market Outlook
Indonesia's macroeconomic outlook for 2024 is cautiously optimistic, reflecting a blend of steady growth and manageable inflation amidst global uncertainties. The economy is expected to grow between 4.7% and 5.5%, with a median projection around 5.1% to 5.2%, indicating a slight increase compared to 2023. This growth is supported by robust domestic demand, particularly from private consumption and investment in infrastructure and digital economy sectors.
Inflation is anticipated to be well-controlled, staying within the central bank's target range of 1.5% to 3.5%. The moderate inflation rate is attributed to a combination of softening commodity prices and stable domestic demand. This economic stability is expected to bolster consumer confidence and sustain investment inflows.
There are significant investments planned for 2024, aiming to enhance Indonesia's infrastructure and digital sectors, which are seen as key drivers for future economic resilience. Additionally, geopolitical tensions and political transitions globally might influence economic stability, but Indonesia's economic fundamentals are expected to mitigate these risks effectively.
In conclusion, the different macroeconomic conditions support the conditions for further domestic consumption and infrastructure development – which all will support ACES’ top line growth as their products are mainly consumer goods.
5. Investment Thesis
Controlled expansion plan supported by macroeconomic conditions. As mentioned, the company experienced 13.2% SSSG with expectations at only 7%. This growth has prompted ACES to set up expansion, overcoming the slowdown triggered by Covid. Disclosed in the annual report, they plan to open 15-20 new stores by deploying Rp200-250b capital – on top of the 7 stores that they opened in Tarakan, Batoh, Denpasar, Gianyar, Singkawang, Bontang, and Purwarkata. The nearest store planned is in Cilacap, Central Java. The capital is relatively healthy and reasonable, given their available cash of more than 10x the required capital.
The expansion is also justifiable from Indonesia’s macroeconomic conditions, where the significant jump in sales is on big holidays – signaling that people are now more willing to spend on these occasions rather than in the past few years.
Higher traction as compared to competitors. In the hardware store section, Ace Hardware has not had many competitions for quite some time, until recently when some brands came to the Indonesian market.
One major competitor is Mr DIY. This Malaysian company has a significant presence in Indonesia, with over 470 stores as of February 2023. They target the middle to lower market segment, with a focus on affordability. This puts them in direct competition with Ace Hardware's Ace Express format, which offers a more limited selection of products at lower prices. Other competitors include e-commerce players – often not carrying a specific brand.
Despite the competition, it is reasonable to believe that ACES is well-positioned to face the competition and maintain its market share, as:
A. Mr DIY operates and targets a slightly different market, mainly the middle to lower market. On the other hand, Ace Hardware positions itself as a premium brand with a wider selection of higher-quality products. They also emphasize customer service, with staff trained to assist customers with product selection and DIY projects. Moreover, while there might be overlap on some basic items, Ace Hardware boasts a larger and more diverse product range. This includes established international brands and a focus on lifestyle products beyond just hardware essentials. In the space of internet shopping, ACES also have ruparupa.com, which cater the online shoppers.
B. That being said, we also believe that hardware shoppers, at least in Indonesia, still have a stronger preference for offline shopping. By going directly to the shop, shoppers can be sure of the items and avoid the hassle of non-fit items upon purchase. Having the most established retail shops throughout the country, ACES is ahead of the competitors in this matter.
Those reasons, although not directly quantifiable, provide a good justification for why ACES is still the market leader in Indonesia for home supplies.
6. Valuation
The valuation through DCF yielded a value of IDR 961 – 1231, and by having a blended valuation of 40-60 with the comps, the valuation is given at IDR 1121, indicating a 26% upside potential and IRR of 9.6%.
7. ESG Consideration
ACES is currently covered by IDX’s ESG rating system, which is based on the Sustainalytics ESG rating system. ACES consistently scores well, with the most recent rating at 18.95 – indicating low ESG risk. They are also classified as 0 on the controversy report, meaning that there is no evidence of relevant controversy.
However, they have recently scored a lower score on environmental risk score, and upon inspection of the sustainability report, it is attributable to the fact that not much reporting and effort has been done in greening their supply chain, or sourcing of the products and the increased energy consumption of the stores even on per capita basis – which might be caused to increased inventory. As such, one improvement is on the increased energy efficiency and emissions management – which can be done on per store basis.
8. Conclusion
PT Ace Hardware Indonesia Tbk (ACES) presents a compelling investment opportunity. The company boasts a strong financial performance with significant recent growth and a healthy balance sheet to support its controlled expansion plans. ACES maintains a leadership position in the hardware market due to its premium brand positioning, diverse product range, and exceptional customer service. Additionally, favorable macroeconomic conditions in Indonesia are expected to drive further domestic consumption, benefitting ACES’ top line. While ESG considerations highlight the need for improvement in greening the supply chain and energy efficiency, the company’s overall low ESG risk profile remains positive. Considering the attractive valuation and strong growth prospects, ACES appears well-positioned for continued success.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
9. Reference
https://corporate.acehardware.co.id/en/investor/financial-reports/2023
https://corporate.acehardware.co.id/en/keberlanjutan
https://web.iaiglobal.or.id/assets/files/file_publikasi/Outlook_JFR.pdf
https://ajaib.co.id/ace-hardware-indonesia-benarkah-sahamnya-menjanjikan/