Bareksa.com - Indonesian retail stocks are all trading at big premiums to the broader market but investors are increasingly differentiating between those which make their money mainly in Jakarta and favouring those which are expanding outside of the capital.

Rising wages and rental costs in Jakarta are making doing business there more expensive and eating into retailers' profits. By contrast, retailers pursuing growth outside of Jakarta and the main island of Java are booking fast-growing profits.

Shares in PT Mitra Adiperkasa (MAP), a leading retailer and the franchise holder for about 150 foreign brands in Indonesia, tell the story investors are looking to avoid. It gets 70 percent of its revenues from Jakarta.

While MAP still trades at a robust 21.4 times its estimated 2014 earnings, its shares have plunged more than 20 percent from a six-month high of 7,000 rupiah on Feb 21 to 5,175 rupiah on May 30. By comparison, the broader Jakarta stock market has surged 16 percent so far this year.

Its share price slump mirrors a slump in revenue. Net income fell 24 percent in 2013 and is down 28 percent in first quarter this year versus the same period last year, thanks to rising wage and rent costs, a weaker rupiah and higher borrowing costs.

Investors are more interested in the likes of retailer PT Matahari Department Store, which targets lower-middle income customers across the archipelago. Its shares have surged 30 percent so far this year.

Matahari plans to spend 500 billion rupiah ($43 million) this year opening 15 new outlets, after adding nine new outlets last year, and half of these new stores will be outside of Java.

At the end of 2013, the company had 125 stores, which helped it post a 50 percent rise in net income in the first quarter.

"Expanding outside Java means pursuing growth and indicates logistic capability. I like such companies," said Jeffrosenberg Tan, a director at Sinar Mas Asset Management, which has six trillion rupiah under management.

"Bargaining power on rental space is weakening for MAP as there is a lot of competition entering Indonesia through Jakarta," Tan said.

"Competition is getting tougher in Jakarta with the entrance of brands like H&M, Uniqlo and Forever 21 that are also aiming for MAP's target market."

The contrasting performance of MAP's and Matahari's shares reflects the fact that consumer demand is a major driver of Indonesian growth and that consumption in cities outside of Java has surpassed that in Java, according to Nielsen Indonesia, a research company.

Matahari Department Store is not alone in exploiting this trend.

Supermarket operator Matahari Putra Prima's shares are up 52 percent so far this year. It plans to open up to 20 of its flagship Hypermart stores this year and up to 250 new stores over the next five years as it enters six new cities.

Tan said demographics were driving the change and the "sweet spot" was the rising number of lower-middle income earners, many of them outside of Jakarta.

Years of solid economic growth have raised the number of consumers in the middle income bracket to 70 million people and that is expected to double to 140 million people by 2020, according to the Boston Consulting Group.

Matahari Department Store is trading at 23.14 times its future earnings and Matahari Putra Prima is at 32.73 times its futures earnings, but Harry Su, head of research at Bahana Securities, said such valuations were justified.

"Growth is becoming a scarce commodity this year so lofty valuations could be warranted given their above-market growth rates," he said.

Indonesian retailers are also facing increased competition from foreign competitors, with Swedish furniture giant Ikea and Malaysian department stores operator Parkson Retail Asia planning to open stores in Indonesia this year. ($1 = 11,618.50 rupiah)

(Source : Reuters)