The ‘Ikea indicator’ says buy Indonesia

Back in November, I asked: What does flat pack furniture have to do with 6,480% returns?

The gist was that Ikea, the giant Swedish furniture retailer, has a knack of calling consumer markets well ahead of the rest of us. When Ikea sets up shop in a country, it’s a pretty good sign that a big consumer spending boom is on its way.

Back then, I wrote, “The Ikea Asian new list store ‘index’ is as follows: Japan (1974), Hong Kong (1975), Singapore (1978), Taiwan (1994), Malaysia (1996), China (1998), Thailand (2011).”

Their timing looks pretty good to me. If you’d invested in consumer stocks in those markets, at those times, you’d have made an awful lot of money.

Those crafty Swedes come from a part of Sweden, Småland, which is famous for its frugality. They’re not the type of people who’d invest a lot of money on the opposite side of the world without first doing their homework on that market.

I wrote in November that Indonesia would be the next country on Ikea’s list. Well, last week an Indonesian friend drove me by a huge blue and yellow box which is being built in a retail park just outside Jakarta. This new Ikea will cost $100m and will open in September.

And it could be just the beginning. 250 million people live in Indonesia – that’s a lot of people, by any standard. And a huge amount of money will be made as their spending catches up with other Asian nations.

The Boston Consulting Group says that the proportion of middle class and affluent people is set to double to 141 million by 2020. And the consulting group McKinsey & Co believes that 90 million Indonesians will belong to the ‘consuming class’ by 2030.

Two ways to play it

Clearly, there’s a huge potential market in Indonesia. And Ikea believes that now is the time to start investing there. So how can you take advantage?

PT Hero Supermarket Tbk (JK: HERO) is a local joint-venture partner with Ikea. It runs hypermarkets, supermarkets, health & beauty and convenience stores. It is part of the Jardine Matheson Group (SP: JM), the Singapore-listed conglomerate which is controlled by Brits who have been involved in Asia for almost 200 years.

Hero is trading at 18 times historical price/earnings (p/e – versus five-year average of 29 times) with limited liquidity. At its peak, Hero traded at more than 130% higher than its current value, presumably due to initial euphoria when the Ikea deal was announced. Its recent poor performance is linked to soft earnings, a result of stiff competition in the retail sector.

The contribution from Ikea is expected to begin in 2015. There will be a few more details on how the retailer is doing at its next interim earnings announcement slated for end of July.

Another idea is to buy a property company with land/houses adjacent to the Ikea store. Most Asians love to buy houses or condominiums close to shopping malls or retail complexes, because those areas are well connected, safe and offer good amenities.

Sutera Realty TBK PT (JK: ASRI) has a large chunk of land near to the Jakarta Ikea and many property projects. The stock is trading at prospective p/e of seven times (versus a five-year average of 14 times), with good liquidity and at a share price level which has been basing for quite some time.

At its peak the stock traded 115% higher, so the market isn’t attaching an ‘Ikea premium’ to it yet. So the question is, how long before it does?