Apr 26, 2016 15:51:52
Erajaya Swasembada (ERAA): Mobile Major
-  Beneficiary of industry data growth and strong performance of Taiwan and China brands: During our recent visit to ERAA, we learned that the company's higher 2016 targets with sales of IDR22tn, +10% y-y, and IDR264bn net profit, +16.8% y-y, both up 10% from its initial 2016 guidance, was mainly driven by higher-than-expected 2015 results. Backed by the industry's strong data growth trend, 2015 sales reached IDR20tn, +38.4% y-y (8% higher than our estimate and 21% above consensus), as cellular phone revenue, which contributed 88% of total, jumped 39% y-y to IDR17tn on higher-than-expected sales volumes (106% of our estimate), helped by continued strong growth in brands from Taiwan and China. This note marks a transfer of analyst coverage.

-  Market share expansion on strong bargaining position: Looking ahead, we expect ERAA’s market share expansion in cellular phones, having reached 40% in 2015, up from 32% in 2014, to be well supported. However, we expect a slower pace due to higher base effect and TRIO’s recent debt restructuring. Given favorable strategic partnership with Huawei, we believe its ability to gain market share looks bright with the expected of 8-10% growth of the cellular phone sales in 2016-17F, particularly as ERAA strengthens its bargaining position with brand partners.

-  Higher gross margin on the cards with retail expansion: ERAA plans to continue its retail expansion from 556 outlets in 2015 to 596 outlets in 2016, adding 40 outlets across Indonesia and pushing up retail-to-sales contribution from 34% in 2015 to 36-38% in 2016. In addition, the sell-down of +120-day inventory back in 2015 should help ERAA boost its gross margin from 7.5% last year to 7.7%-7.8% in 2016-17F.

-  Lower interest rate to cushion bottom line: We expect earnings support to stem from lower interest rates, which the management conservatively expect to fall by 25 bps from 10.5% in 2015 to 10.25% in 2016. This is despite the possible additional loans required to refinance working capital. Assuming a 25% effective tax rate and lower interest rates, we forecast 2016-17 net profit margin to increase to 1.2-1.3%.

Outlook: Solid 2016-17F earnings growth of 16-19% EPS growth
Overall, we expect ERAA to maintain its No.1 position in mobile phone distribution in Indonesia. On the top line, we raise our 2016-17F revenues by 10% to IDR21.8tn-23.5tn (exhibit 5). On the cost front, greater retail presence and lower interest charges should result in net profit growth of 16% y-y to IDR262bn in 2016 and 19% y-y to IDR311bn in 2017.

Recommendation: Maintain BUY with TP of IDR850
ERAA is currently trading at a 2016F PE of 8.3x, a 25% discount to regional peers, which we view as attractive (exhibit 7) relative to its growth profile. At this stage, we retain our BUY call and 12M DCF-based TP of IDR850 (2016F PE of 9.5x, around 15% discount to regional peers), although its 3M market outperformance (exhibit 4) translates to just 14% potential upside. Risks to our call include higher working capital capitals.