Sumber Alfaria Trijaya (AMRT IJ) Entering new upcycle
Revenue growth is key for earnings growth. With solid sales figures increasing and its revenue is still dominated by food products (68.43%), AMRT failed to maintain its operating margin as it has been gradually decreasing from 2.36% in FY14 to 0.63% in 9M18. Fee-based income has been the supporting source to AMRT earnings with notable surge of IDR112bn (+57.5% YoY) in 9M18. With SSSG bottomed out in FY17 at ~1.5% and the company expects to see SSSG turn back to ~5.5% in FY18 forward, AMRT fee-based income contribution will be significant to the company earnings. The top 3 transactions attributable to the soaring fee- based income are 1) Electricity Bills, 2) Motorcycles installment, 3) Train ticket.
Slower capex leads to deleveraging. AMRT plans to open 900 new stores and close 400 stores which sums up to additional 500 stores including franchise. This translates into IDR2.2tn capital expenditure, lower than the past two years (IDR4tn/IDR3.5tn in FY16/FY17). We estimate AMRT EBITDA to reach IDR3.7tn in FY18 which will generate cash surplus. The management intends to use the cash surplus to deleverage from IDR1tn bonds with maturity in 1H20 despite net gearing of 87% in 9M18.
Wiz phone launching timeline is unclear; no significant impact to profitability. Wiz phone is expected to be distributed across the stores of AMRT with selling price of IDR99k. Whilst it is not expected to contribute substantially to revenue stream, the presence of the phone itself is expected to generate additional traffic in store and eventually increase cross selling to other higher margin products such as Ready to Eat (RTE) and Ready to Drink (RTD).
Regulatory risk: maximum stores rule relaxation is on the way. As the rule is currently being revised, AMRT has an average number of self-owned stores opening of 1000 over the past five years exceeding the max limit of self-owned stores of 150. Whilst the revision might have insignificant to no effect on AMRT, risks might rise should the government revise the rule again in the future.
Valuations. AMRT share price is currently trading at 64x 18F P/E and 6.4x 18F P/B on consensus estimates. We believe that AMRT is attractive enough due to the solid financial performance going forward. However, due to higher P/E and P/B compared to other companies, we recommend investors to wait for a better entry price.
