Ramayana Lestari (RALS IJ) - Metamorphosis?

In a Smartkarma Originals series of Insights on ASEAN Retail, we seek to determine which retail formats are winning out in the battle for consumer attention. The first company we look at is one of Indonesia's oldest department store operators, Ramayana Lestari Sentosa (RALS IJ), where we ask the question, has the company finally reached its metamorphosis, after a series of false dawns? Is the company's move to reduce its own space in favour of cinemas and F&B the long-awaited catalyst to bring in a more affluent, less seasonal customer? Is it now better positioned to weather the storm of competition from online players than closest competitor Pt Matahari Department Store (LPPF IJ)?

We look at the history and background of this iconic Indonesian retailer, which has been attempting to structurally morph into an altogether more modern creature, under the tutelage of the founder's daughter, Ibu Jane Tumweru, who has now taken up the reigns of guidance.

The company is in the midst of a "transformation" program, which has seen it reducing the size of its own department stores in favour of specialty stores such as Mitra Adiperkasa (MAPI IJ)'s Sports Station or Sketchers, as well as introducing cinemas and a multitude of F&B players to increase footfall and to bring in more affluent customers.

The company has also been reducing the number of supermarkets within its stores and using the space for more consignment vendors. It is also looking to gradually increase the consignment margins at its stores which are significantly below peers.

Ramayana Lestari Sentosa (RALS IJ) is working with Tokopedia PT (1087142D IJ) and www.bukalapak.com to sell its products online but has also teamed up with the three major e-wallet players in Indonesia on payments, which has proved quite successful.

Ramayana Lestari Sentosa (RALS IJ) has always had promise, given its strong brand name and almost unique footprint across the Indonesian archipelago. It has had its occasional days in the sun but has always been pulled back into the shade by its seasonality and poor execution, especially for its supermarket business. It looks like this is about to change, with the next generation starting to put their stamp on the business and its transformation program starting to see real traction. Should this latest metamorphosis be successful then this company deserves a re-rating. It looks attractive from a valuation standpoint on an FY20E PER of 12.1x with forecast 3-year CAGR EPS growth of+12.6%, putting the company on a PEG ratio of less than 1x. The company is in a net cash position and throws off a dividend yield of 5.2% for FY19E. It is also forecast to generate an ROE of over 16% for the next three years, with its 2022 ROE forecast at 17.3%.