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.
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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):
- 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
- ACES financial performance has been very good for the size of retail companies
- 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
- 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
- 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
- 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:
- 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.
- Although ACES performance so far so good, but the performance of Ace Hardware Corporation (AHC) is actually declining since its peak in 2007.
- 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.
- 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
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