BUY. (SPAR)ring partner. Target Price, Rp 1,140 Upside 16.3% Market Cap, Rp bn 6,955 (US$ mn) 589 3M T/O, US$mn 1.1 RALS IJ/RALS.

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1 Thursday, 11 September 2014 BUY Target Price, Rp 1,140 Upside 16.3% RALS IJ/RALS.JK Last Price, Rp 980 No. of shares (mn) 7,096 Market Cap, Rp bn 6,955 (US$ mn) 589 3M T/O, US$mn 1.1 Last Recommendation 18-Aug-14 HOLD Rp 1, Jan-14 HOLD Rp 1, Jan-14 BUY Rp 1,240 RETAIL SECTOR/COMPANY UPDATE Ramayana Lestari Sentosa (SPAR)ring partner RALS management has finally found the way to improve the performance of its Supermarket business. On September 1 st 2014, company signed the agreement with SPAR International, the world s largest food retailer based in the Netherlands. This will be a long-term partnership agreement - profitability improvement will not happen in a blink of eye, we believe. For the first 3 years, the company targets over 30 new SPAR supermarkets opened across Indonesia. We have not made any adjustment to our numbers regarding to this new partnership, thus we maintain our Target Price of Rp1,140. However, with the recent share price correction that gives more upside to our target price, we upgrade our recommendation to BUY. The stock is currently trading at FY14-15F PE of 16.0x-15.2x. RALS relative to JCI Index RALS (LHS) Relative to JCI Index (RHS) Rp 1,500 1,350 1,200 1,050 % Partnership with SPAR International RALS announced its new partnership agreement with SPAR International the agreement was signed in September 1 st, SPAR is the world s largest food retail chain based in the Netherlands, which currently has 12,332 stores across 36 countries in the world. The cooperation between both parties is under the license agreement, with no change in the ownership structure. Following this agreement, we will see over 30 new SPAR supermarkets opened across Indonesia within the next three years /11/13 Market Recommendation BUY HOLD SELL 10/17/13 11/22/13 12/30/13 2/4/14 3/12/14 Danareksa vs Consensus 3 5 Our Cons % Diff Target price, Rp 1,140 1, EPS 2014F, Rp PER 2014F, x /17/14 5/23/14 6/30/14 8/5/ /10/14-25 Rebranding its existing supermarket RALS s management has made efforts to improve the supermarket business profitability in quite long time, include looking to the possibility towards a strategic partner for managing the supermarket business. Seeing the light at the end of the tunnel, we believe that this cooperation will give positive impact for RALS supermarket business in the future. With this partnership, SPAR International will further help RALS in day-to-day supermarket business operational, by providing support for the implementation of best international practice. Hence, RALS will need to pay the license fee to SPAR International. Profitability improvement in the longer term The supermarket business (all products exclude apparel and accessories) contributed around 47% to total sales in However, the business is still loss making. By partnering with SPAR International, company expects to raise the yield of its food business to Rp2 mn per sqm per month within the next 3 years, from Rp1.25 mn per sqm per month currently. However, we don t expect any significant profitability improvement in the near future. As such, we have not made any adjustment to our numbers. Anindya Saraswati (62-21) anindyas@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Revenue, Rp bn 7,454 7,968 8,316 8,676 9,286 EBITDA, Rp bn EBITDA growth, % 10.5 (2.3) Net profit, Rp bn Core profit, Rp bn Core EPS, Rp Core EPS growth, % 12.6 (7.8) Net gearing, % (43.5) (39.6) (40.7) (40.2) (40.7) Core PER, x PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report

2 11 September 2014 Ramayana Lestari Sentosa Exhibit 1. SPAR s retail chain figures in 2013 Partnership with SPAR International RALS announced its new signed partnership agreement with SPAR International regarding to its supermarket business. The cooperation between both parties is under the license agreement, with no change in the ownership structure. Following this agreement, we will see over 30 new SPAR supermarkets opened across Indonesia within the next three years. Currently, RALS operates a total of 118 stores, of which 98 stores have Supermarket section. SPAR International is the world s largest food voluntary retail chain based in the Netherlands, which has been in the retail market for more than 80 years. At present time, SPAR operates 12,332 stores across 36 countries in the world. To support the growth and expansion of its network throughout the world, SPAR International undertakes comprehensive programs by updating the retail formats, providing technical support on retail operations and supply chain, and supplying SPAR International private label solution. Country Year Joined Retail sales Retail stores Retail sales Country Year Joines Retail sales Retail stores Retail sales SPAR mn euro numbers area (sqm) SPAR mn euro numbers area (sqm) Austria ,800 1,566 1,115,906 Netherlands ,196 South Africa , ,802 Croatia ,233 Italy ,476 1, ,394 Germany ,865 United Kingdom ,009 2, ,156 Australia ,601 Norway , ,474 Zimbabwe ,616 Hungary , ,316 Namibia ,517 China , ,479 Poland ,350 Russia , ,946 Botswana ,583 Spain ,306 1, ,159 Portugal ,591 Ireland , ,598 Zambia ,832 Denmark , ,754 Japan ,849 France ,244 Ukraine ,797 Belgium ,556 Nigeria ,513 Slovenia ,506 U.A.E ,300 Greece ,266 Mozambique ,725 Czech Republic ,333 Mauritius ,700 Switzerland ,591 Malawi ,650 Source: SPAR International In expanding their business throughout the world, SPAR International undertakes multi retail format strategy to easily adapt with each store location. The formats includes: 1) Hypermarket format (more than 2,500 sqm), 2) Supermarket format (1,200-2,500 sqm), 3) Neighborhood format (400-1,200 sqm), and 4) Convenience store format ( sqm). SPAR International achieved considerable worldwide success in 2013 supported by the rollout of the new strategy Growing our Future Together. For instance, SPAR China and Russia booked outstanding growth of 19% yoy and 18% yoy in Given the attractive demographics profile and buoyant domestic economy, the prospect for Indonesia s retail sector is undoubtedly great. It attracts SPAR International to expand their brand to Indonesia market. Unlike in China, where SPAR International is cooperating with 6 local partners, the exclusive partner agreement for Indonesia market is given to RALS. Rebranding its existing supermarket RALS s management has made efforts to improve the supermarket yield and margin for quite a long time, including looking for a strategic partner to manage the supermarket business. Given SPAR s extensive experience in the business, including that in emerging markets, we believe that this cooperation will give positive impact for RALS supermarket business in the future. With this partnership, the existing RALS supermarket will be gradually rebranded into SPAR brand. The company also plans rollout new supermarkets under SPAR brand. 2

3 11 September 2014 Ramayana Lestari Sentosa SPAR International will further help RALS in term of the day-to-day supermarket business operational, by providing support for the implementation of best international practice in operational terms through transfer knowledge and knowhow. Furthermore, there is no equity transfer in this transaction, the supermarket business is still 100% owned by RALS. However, RALS will need to pay the license fee to SPAR International. The amount will depend on some variables, primarily the business scale the fee will progressively increase as the business grows. However, there is no further disclosure on the license fee scheme. All decisions related to the capital and financial needs will remain with RALS s management. As is planned in the agreement, RALS will manage to rollout 30 stores in the next 3 years. To implement this plan, RALS expects to spend about Rp5 bn capex per store. This will not be an issue for RALS as the company has a very strong balance sheet with over Rp1 tn in cash. Exhibit 2. Plenty of cash in the balance sheet (Rp bn) 1,400 1,200 1, Cash balance, Rp bn (LHS) Cash conversion cycle (RHS) Profitability improvement in the longer term The supermarket business (all products excluding apparel and accessories) contributed around 47% to total sales in However, the business is still loss making. In 2013, the supermarket business booked -1.0% pre-tax profit margins, compared to 17.3% margin generated by the apparel and accessories products. By partnering with SPAR International, the company expects to raise the yield of its food business to Rp2 mn per sqm per month within the next 3 years, from Rp1.25 mn per sqm per month as of now. Exhibit 3. The loss-making supermarket business (Rp bn) Product segment Outright sales Apparel & accessories ,524 2,784 Supermarket ,469 2,440 Gross profit Apparel & accessories ,648 1,840 Supermarket Operating profit Apparel & accessories Supermarket (6) (38) Pretax profit Apparel & accessories Supermarket (9) 11 (25) Source: Company 3

4 11 September 2014 Ramayana Lestari Sentosa However, we believe that the improvement will not happen in a blink of eye, since it will take some time to adjust the supermarket business with the new format and operational strategy. We do not expect any significant profitability changes in the near future. As such, we haven t made any adjustment from the new partnership agreement to our numbers. All in all, we expect pre-tax margin and net margin of 6.1% and 5.2% respectively at the end of this year. Exhibit 4. RALS margins 27.0% 26.9% 26.8% 26.7% 26.6% 26.5% 26.4% 26.3% 26.2% Gross margin (LHS) Net margin (RHS) % 5.7% 5.5% 5.3% 5.1% 4.9% 4.7% 4.5% We have not made any adjustment to our numbers regarding to this new partnership. Going forward, we expect RALS to still maintain stable profitability growth given its dominant position in the lower-income segment. We maintain our Target Price of Rp1,140. However, with the recent share price correction that gives more upside to our target price, we upgrade our recommendation to BUY. The stock is currently trading at FY14-15F PE of 16.0x-15.2x. 4

5 11 September 2014 Ramayana Lestari Sentosa Exhibit 5. Profit and loss (Rp bn) Sales 7,454 7,968 8,316 8,676 9,286 COGS 5,479 5,828 6,098 6,342 6,786 Gross profit 1,975 2,140 2,218 2,334 2,500 SG&A 1,557 1,742 1,780 1,875 1,996 Depreciation EBITDA Operating income Interest expense Interest income Forex gain (loss) Other income (exp) Pre-tax income Income tax (71) (67) (73) (77) (84) Net income Exhibit 6. Balance sheet (Rp bn) Cash and cash equivalent 1, ,047 1,158 Account receivables Inventories Other current assets Total current assets 2,319 2,375 2,469 2,567 2,744 PPE 1,202 1,445 1,552 1,691 1,810 Long term rent - net Others Total assets 4,073 4,379 4,579 4,816 5,113 Account payable Other current liabilites Total current liabilities ,004 1,076 Deferred tax liabilities - net Long term rent - net Other long term liabilities Total non-current liabilities Total liabilities 1,031 1,161 1,163 1,202 1,274 Capital stock Additional paid in Unrealized gain on stock (6) (8) (8) (8) (8) Retained earnings 2,576 2,753 2,953 3,150 3,375 Total liabilities and equity 4,073 4,379 4,579 4,816 5,113 5

6 11 September 2014 Ramayana Lestari Sentosa Exhibit 7. Cash flow (Rp bn) Cash flow from operating activities Cash receipt from sales 7,469 7,964 8,316 8,676 9,286 Cash payment to suppliers & employees (6,657) (7,057) (7,661) (8,002) (8,546) Payments for income taxes (66) (88) (73) (77) (84) Receipt of interest income Others 25 (40) Net cash flow from operating activities Cash flow from investing activities Additional PPE (228) (422) (300) (350) (350) Proceed (placement) from sale of ST investment Placement ST investment (40) Additional advance to long term rent (339) (249) Proceed from sale of PPE Additional of security deposit (33) (251) Others (1) (0) Net cash flow from investing activities (369) (919) (300) (350) (350) Cash flow from financing activities Dividend payment (213) (213) (234) (260) (275) Option exercised Others Net cash flow from financing activities (213) (213) (234) (260) (275) Changes in cash and cash equivalent 242 (300) Forex Beginning balance 927 1, ,047 Ending balance 1, ,047 1,158 Exhibit 8. Ratios Profitability (%) Gross profit margin Operating margin Pretax margin Net margin ROA ROE Leverage Net debt/equity (%) (43.5) (39.6) (40.7) (40.2) (40.7) Per share data (Rp) EPS BVPS DPS

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8 11 September 2014 Ramayana Lestari Sentosa DISCLAIMER The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Danareksa Sekuritas and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. We expressly disclaim any responsibility or liability (express or implied) of P.T. Danareksa Sekuritas, its affiliated companies and their respective employees and agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, action, suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a results of acting in reliance upon the whole or any part of the contents of this report and neither P.T. Danareksa Sekuritas, its affiliated companies or their respective employees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy therein or omission therefrom which might otherwise arise is hereby expresses disclaimed. The information contained in this report is not be taken as any recommendation made by P.T. Danareksa Sekuritas or any other person to enter into any agreement with regard to any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice. 8