Ace Hardware Indonesia

If we talking about Ace Hardware, what comes to your mind when you hear the word of 'Ace Hardware'? For me, I will answer: 'That is the name of a big store, which I often stopping by to look around, but almost never buy anything'. The reason is, although it must be admitted that Ace Hardware store sells unique and good quality items that are not available in the other stores, but most of these items are not so necessary for the daily needs. For example, do you need a set of barbeque grill tool for backyard party at your house? Well, if your house has a backyard, then maybe you do. But really, how many houses in Jakarta which has a backyard? This is a crowded city, you know?

On the other hand, if you have a big house in elite area like Menteng, Pondok Indah, or Pantai Indah Kapuk, then the barbeque grill tool was probably a must have item, and so it is with the other products that are sold at Ace Hardware. Yup, Ace Hardware, is not an ordinary retail store. They sell the products of home improvement, products that are specifically designed to improve the quality of your house, as the residence for you and your family. For example, in addition to the barbeque grill tools which mentioned above, you will find a wall clock with a design that is very, very fancy, at the Ace Hardware, even though the price is much more expensive than ordinary clock. But for some people, the clock price is commensurate with the ‘beautiful’ effect that is given to the overall interior appearance of the house.

Thus, although most people are quite happy if they are able to have a decent house, but for certain people from the middle and upper class, they would like to improve the quality of their houses. And in Indonesia, Ace Hardware is the only store that provides such home improvement products, so the company is arguably monopolize this business. Actually there are also some other similar stores, such as Super Home or IKEA, but so far they are not serious competitors for Ace Hardware in this field.

About the Company

Ace Hardware Corporation (AHC) is a global retail company which was established in 1924 in Chicago, United States, with its founding father Richard Hesse. And since then, AHC continues to grow rapidly. In 1968, the company opened its first Ace Hardware store outside the United States, precisely in the Guam Islands. In 1990, AHC began working with local companies in each country to open the store (after previously only open its own store), probably with the same concept of franchise.

Then in 1995, AHC entered the Indonesia market in a collaboration with the Kawan Lama Group, where the two sides agreed to establish PT Ace Hardware Indonesia (ACES), but 100% of ACES shares are fully held by Kawan Lama (became 6 % after the company went public in 2007, of which 40% is held by public investors). In its contract, ACES required to pay royalties to the AHC, but the value is realtively small, only Rp17 billion in the first semester of 2013 (while the company's revenue at the same periode reached Rp1.8 trillion). For the compensation, ACES gained an exclusive right to use the brand of 'Ace Hardware', and also an exclusive right to purchase home improvement products from the AHC. The contract will be matured by 2024.

The logo of Ace Hardware with its slogan, the helpful place

ACES opened its first store in Karawaci, Tangerang, in 1996. Since then, the company continues to grow rapidly and become one of the most success subsidiary of Kawan Lama Group so far. To these day, or eighteen years since its inception, ACES has a total of eighty-five stores/outlets across Indonesia, and still growing. The management itself, especially since the company went public in 2007, expects to open at least 15 new outlets each year, thanks to the increasing number of the middle class population in Indonesia in the last five to ten years.

And since 2010, ACES opened a new business unit, namely Toys Kingdom, which is a toy store for babies, kids, and adults. Just like the store of Ace Hardware, in Toys Kingdom you will find fancy and good quality toys that do not available in other stores. So far ACES already has sixteen Toys Kingdom outlets in Jakarta and its surrounding areas, and is targeted to grow to twenty-one stores by the end of 2013. So overall, ACES offers attractive growth prospects.

Financial performance of the company, and its shares

I've watched ACES since years ago, precisely since its stock price is still at the position of 4,000 (before stocksplit, equivalent to 400 at this point). At the time I came to the conclusion that despite its good performance, but the stock price are too expensive, with the PER of more than 25 times. In addition, if based on my own experience, I rarely buy anything at Ace Hardware, only the wall clock has been described above, approximately a year ago. This is different from regular retail stores such as Carrefour, Hero, Ramayana, Hypermart, until minimarket of Alfamart, where I quite often shopping there. So at the time, I concluded that ACES would have difficulties if Indonesia is experiencing a slowdown in its economic growth or such, which will have an impact on the decline of consumer’s purchasing power. Because, once again, the average price of goods sold at Ace Hardware is anyway too expensive for most Indonesian people.

But in fact, until the First Half of 2013, ACES performance is so far the best in retail sector, with a ROE of 22.3%. The company’s growth record in the last three years (since 2010) is also outstanding, with its net profit nearly doubled annually. If you notice, this rapid growth is also driven by the property boom in Indonesia in the last 3 years, where there are many new malls built in Jakarta and its surrounding areas, not including malls that established in other regions in Java, so that ACES have a lot of new places to open new outlets. In essence, if the property sector is still like it is until the next two or three years, then ACES would also still likely to record rapid growth as in previous years. Recently, ACES opens its 85th outlet in the city of Solo, Central Java , that is its second outlet in the city. And guess what? The new outlets could stand because of the new mall in Solo, the Hartono Mall , which became operational this year. While ACES previous outlet (in the same city) is located in Solo Square Mall.

But if later there are no more new malls opened, what would happen? Of course ACES will still growing, but would not as fast as before. But considering that ACES also have Toys Kingdom, which has only six stores so far, then the growth rate in the past three years would likely to be maintained, if the new venture is successful. Of the total revenue of Rp1.8 trillion in the first semester of 2013, Toy Kingdom accounted for only Rp73 billion, but that number is grew significantly compared to the same period in 2012 (55.7%), which was only Rp47 billion.

In conclusion, here are some things that might be used as justifications of why this stock of ACES is expensive (its PER and PBV are 34.3 and 7.8 times respectively in the price of 740):

1. The industry is unique, and the company is currentl the market leader in the industry. The brand of ‘Ace Hardware’ is also popular to the public
2. ACES financial performance has been very good for the size of retail companies
3. The prominent name of Kawan Lama Group as the manager of the company. Since the first, Kawan Lama is already very well known as a distributor of hardwares and utensils in Indonesia
4. While the brand of 'Ace Hardware' itself is a famous global brand, almost as famous as Walmart, The Home Depot, or IKEA. Ace Hardware Corporation had a total of 4,077 stores worldwide by the end of 2012, including through ACES in Indonesia
5. The company has an opportunity to maintain its momentum of growth, in line with the development of property sector, the increasing number of middle class population, and because of the new venture in the field of toy products (Toys Kingdom), and
6. ACES is the only retail company of home improvement products in the Stock Exchange, so you can not invest in other stocks if you are interested to get into this sector.

On the other hand, here are some things you should also consider before deciding to invest in this stock:

1. The price is overvalue anyways, even though it had dropped from its peak (1,120) due to the weakening of Jakarta Composite Index. In this case I become remember to the stock of Mitra Adiperkasa (MAPI), which despite its good fundamentals, but its shares is also overvalue since the beginning (MAPI is a retail company as well). And for some reason of this high valuation or others, MAPI became one of the top loser in the exchange lately, where the stock was down nearly 40% from its peak position.
2. Although ACES performance so far so good, but the performance of Ace Hardware Corporation (AHC) is actually declining since its peak in 2007.
3. The amount of ACES royalty paid to AHC is fairly small. If it is raised at any time later, then it is possible that the stock of ACES would down such as the case of Unilever Indonesia (UNVR), or Holcim Indonesia (SMCB), who immediately fell when the announcement about the royalties is released. Although it is actually an opportunity to buy the stocks at undervalue prices, but it would be a risk if you buy ACES at its current price.
4. The growth of new outlets is almost entirely dependent on the construction of new shopping malls. If we look at Jakarta and the surrounding region, the new shopping malls are keep popping up like mushrooms in the rainy season. But honestly, I never know when the 'rainy season' is going to end, because the mall is not a kind of property that can be built in mass quantities, such as housing, apartments, office buildings, or factories in industrial area. Of course it is unusual if in one location, there are several malls rather than just a single mall.

So what is your recommendation? Well, I have submitted all the things I thought you should know about this ACES, so the conclusion is up to you. If according to my own opinion, it is a bit late if you buy this stock at the current price, if the purpose is for investment. Unless, of course, if you can get in at a lower price, let say 550 or below.

PT. Ace Hardware Indonesia, Tbk.

Performance rating in first semester of 2013: AA

Stock rating on 740: BB

Original article was written at August 12, 2013