Introduction to Sumber Alfaria Trijaya

Sumber Alfaria Trijaya, the undisputed leader in Indonesia’s convenience store market, operates an impressive network of approximately 23,000 stores nationwide. With renowned brands such as Alfamart, Alfamidi, Lawson, and Dan+Dan under its belt, the company continues to showcase robust growth potential.

Investment Recommendation

UOB Kay Hian initiates coverage of Sumber Alfaria Trijaya with a BUY rating, setting a target price of Rp3,400, reflecting a potential upside of 17.2% from the current share price of Rp2,900. The recommendation stems from anticipated store network growth and margin expansion.

Growth and Expansion Strategy

The company intends to bolster its footprint by opening 1,500-2,000 new stores annually, focusing on Java ex-Greater Jakarta and regions outside Java. This expansion strategy is coupled with expectations of a same-store sales growth (SSSG) of 4-6% per annum. The goal is to improve margins through the introduction of higher-margin stores and an expanded high-margin product portfolio, including ready-to-drink beverages and Bean Spot Coffee.

Financial Performance and Forecasts

Sumber Alfaria Trijaya’s financial outlook remains promising, with 2024 and 2025 net profit after tax (NPAT) projected to rise by 9.7% and 18.0% respectively, at a compound annual growth rate (CAGR) of 16.5%. In 2022, the company opened 1,750 stores, with 649 new stores added in the first half of 2024.

Segment Analysis and Margin Expansion

The company’s Outside Java segment demonstrates the fastest growth and ranks as the second highest in profitability, contributing Rp1,746.4 billion in segment income for the first nine months of 2024. The segment’s margin stood at 5.5%, outperforming the Java ex-Jabodetabek (5.9%) and Jabodetabek (2.7%) margins. Sumber Alfaria’s net margin expanded from 1.40% in 2020 to 3.20% in 2023, attributed to economies of scale and a higher-margin product mix.

Further margin expansion is anticipated through:

• Store network expansion for Alfamidi and Lawson, which offer higher gross margins compared to Alfamart.
• Broadened ready-to-drink beverage offerings, yielding over 20% gross margin.
• Bean Spot Coffee, a high-margin product contributing significantly to revenue.

Operational Efficiency Efforts

Efficiency improvements are underway, including reducing the number of employees per store from six to five and installing solar panels in 46 warehouses to cut costs. The company also conducts workload analysis to optimize the workforce per store.

Valuation and Conclusion

UOB Kay Hian’s valuation of Sumber Alfaria Trijaya uses a 31.8x PE (+1SD) applied to the 2025 forecasted earnings per share (EPS). The forecast assumes the opening of 1,750 stores per annum, 4-6% SSSG, and margin growth driven by higher-margin products and enhanced operating leverage.

The investment thesis remains compelling, with a BUY recommendation supported by strategic growth initiatives, robust financial forecasts, and operational efficiencies.