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Equity Research

Erajaya Swasembada BUY


ERAA IJ / ERAA.JK (Unchanged)

Company Update | BCAS Virtue | Telco Sector


15 April 2019

Slow but sure Aditya Eka Prakasa


1Q19 preview: Softer YoY demand for smartphones aditya.prakasa@bcasekuritas.co.id
Following strong YoY growth in 1Q18 (+60.3% YoY), we foresee 1Q19 results +6221 23587222 ext 182
coming in more slowly (+10%-15% YoY). While seasonality has been one
major factor on the softer demand, additional factors impacting sales growth: Achmad Yaki Yamani
 Soft 2019 iPhone sales: iPhone X and 8, launched in style for end-2017 achmad.yamani@bcasekuritas.co.id
(near Christmas 2017) received favorable demand during the launch, +6221 23587222 ext 127
despite carrying a lofty price tag (IDR12.6mn-IDR20.8mn), which caused
a spillover demand into 1Q18. Against this, the current iPhone series
launched mid-December with a higher price tag should translate to soft Current Price: IDR1,630
1Q19 demand. Target Price: IDR2,650
 Political year risks: While we believe impact of the political year does not (Previous TP: IDR2,500)
directly affect sales volume, with the election nearing, we foresee risks that Upside potential: 62.6%
the government to loosen the crackdown on illegal handset circulation.
However, we note that despite a greater risk, illegal handset should not
flood the market in the same volume as several years back, and impact 12M PRICE PERFORMANCE
should be temporary as the government will implement an IMEI control in (IDR) (%)
September 2019. 3,500 200.0
Despite having several popular new high-end launches (Samsung Galaxy S10 150.0
series) and lower end as well (Redmi Note 7 & Samsung M20) by the end of 2,500
100.0
1Q19, strong sales should be reflected in 2Q19 & 4Q19.
50.0
1,500
Aggressive store openings to cover smaller cities -
Following addition of 212 outlets in 2018, ERAA is planning to add another
500 (50.0)
330 stores in 2019. Focus will remain on Java, continuing their expansion into ERAA IJ (LHS) Rel. to JCI performance (RHS)
second tier cities, where multi-brand stores are rarely seen. Given the
aggressive expansion, we expect EBIT margins to be slightly pressured to 100
Vol (mn)

3.7% in 2019. On the flip side, with higher 2 nd tier city exposure, we expect 50
revenue to reach IDR39.9tn (+14.8% YoY), before further growing 8.2% to -
Apr-18 Aug-18 Dec-18 Apr-19
IDR44tn in 2020.
Source: Bloomberg
Softer 2019 sales growth expected, but still a BUY
We are still of the view that ERAA’s main sales driver will be C-phones, which
STOCK PERFORMANCE
we see are very aggressive in launching new models, from the higher to the
YTD 1M 3M 12M
lower end of the spectrum. Additionally, with Huawei beginning to expand into
Absolute -25.9% -17.9% -34.8% 27.3%
the Indonesian market should complete ERAA’s brand portfolio. Following their
JCI Return 3.4% 0.8% 0.7% 1.5%
FY18 result release, we fine-tuned ERAA into a 7.3%-7.8% earnings changes
Relative -29.3% -18.7% -35.5% 25.8%
on higher promotional support income. We maintain our BUY call on ERAA
Source: Bloomberg
and raise our TP to IDR2,650 (based on 2019F PE of 8x), in line with higher
earnings assumptions. Risks include the rise in black market items.
MARKET DATA
Exhibit 1. Financial Summary 12M price range (IDR) : 1,205 - 3,280
YE to 31 Dec (IDRbn) 2017 2018 2019F 2020F 2021F 12M PE range (x) : 4.1 - 11.2
Revenue 24,230 34,744 39,913 44,003 47,371 Outstanding shares (mn) : 3,190
EBITDA 597 1,407 1,567 1,749 1,856
Market cap (IDRbn)/(USDmn) : 5,200 / 368
EV/EBITDA (x) 10.2 6.2 4.4 3.3 2.9
Avg daily turn. (IDRbn/USDmn) : 61.1 / 4.3
Net profit 339 850 957 1,101 1,180
BCAS/consensus (%) - - 105.8 106.9 98.9 Source: Bloomberg
EPS (IDR) 117 293 330 380 407
EPS growth (%) 28.7 150.4 12.6 15.0 7.2 SHAREHOLDERS
DPS (IDR) 38 95 107 123 132 PT Eralink International : 54.5%
PE (x) 13.9 5.6 4.9 4.3 4.0 Others : 45.5%
Dividend Yield (%) 2.3 5.8 6.6 7.6 8.1
Source: Bloomberg
BVPS (IDR) 1,251 1,612 1,847 2,119 2,403
PB (x) 1.3 1.0 0.9 0.8 0.7
ROE (%) 9.7 20.5 19.1 19.1 18.0
Net gearing (%) 38.2 85.9 39.7 16.9 9.1
Sources: Company, BCA Sekuritas estimate
Exhibit 2. Financial Summary
Income Statement
2017 2018 2019F 2020F 2021F
Year-end 31 Dec (IDRbn)
Revenue 24,230 34,744 39,913 44,003 47,371
Cost of revenue 22,071 31,575 36,225 39,914 42,958
Gross profit 2,159 3,169 3,689 4,089 4,414
EBITDA 597 1,407 1,567 1,749 1,927
Depreciation 74 90 98 98 99
EBIT 523 1,318 1,469 1,651 1,828
Interest income 3 5 15 19 0
Interest expense (143) (349) (240) (222) (182)
Forex gain/(losses) (34) (6) (30) 0 0
Other income/(expense) 131 236 135 95 75
Pre-tax profit 480 1,203 1,348 1,543 1,721
Taxes (133) (314) (352) (402) (449)
Minority interests (8) (39) (39) (39) (39)
Net income 339 850 957 1,101 1,233
EPS (IDR) 117 293 330 380 425
Balance Sheets
2017 2018 2019F 2020F 2021F
Year-end 31 Dec (IDRbn)
Cash and equivalents 366 272 878 1,160 1,274
Accounts receivables 1,759 1,875 1,999 2,133 2,276
Inventories 3,388 6,795 5,434 4,989 5,262
L-T invest & receivables 5.3 16.6 16.9 17.3 17.6
Fixed assets 486 554 606 607 611
Other assets 2,869 3,171 3,386 3,521 3,630
Total assets 8,874 12,683 12,319 12,428 13,070
S-T liabilities 1,748 4,286 3,000 2,200 1,850
Other S-T liabilities 3,300 3,455 3,669 3,755 3,818
L-T liabilities 5 2 2 2 2
Other L-T liabilities 113 115 127 142 158
Total liabilities 5,167 7,857 6,797 6,099 5,829
Minority interests 78 151 166 183 220
Equity 3,707 4,826 5,522 6,329 7,241
Total liabilities and equity 8,874 12,683 12,319 12,428 13,070
Cash Flow Statement
2017 2018 2019F 2020F 2021F
Year-end 31 Dec (IDRbn)
Net income 339 850 957 1,101 1,233
Depreciation 74 90 98 98 99
Change in working capital (1,379) (3,646) 1,218 262 (444)
Operating cash flow (966) (2,706) 2,274 1,462 888
Capital expenditure (103) (170) (150) (100) (103)
Others (22) (22) (0) (0) (0)
Investing cash flow (125) (192) (150) (100) (103)
Dividend Paid (58) (110) (276) (311) (358)
Net change in debt 948 2,533 (1,284) (800) (350)
Others (46) 381 42 32 36
Financing cash flow 843 2,804 (1,518) (1,079) (671)
Change in cash (248) (94) 606 282 113
Beginning cash flow 615 366 272 878 1,160
Ending cash flow 366 272 878 1,160 1,274
Key Ratios 2017 2018 2019F 2020F 2021F
Gross margin (%) 8.9 9.1 9.2 9.3 9.3
EBITDA margin (%) 2.5 4.1 3.9 4.0 4.1
EBIT margin (%) 2.2 3.8 3.7 3.8 3.9
Pretax margin (%) 2.0 3.5 3.4 3.5 3.6
Net margin (%) 1.4 2.4 2.4 2.5 2.6
ROAE (%) 9.7 20.5 19.1 19.1 18.7
ROAA (%) 4.2 7.9 7.7 8.9 9.7
Current ratio (x) 1.3 1.3 1.4 1.6 1.8
Acid ratio (x) 0.4 0.3 0.4 0.6 0.6
Gearing (%) 47.3 88.8 54.4 34.8 25.6
Net gearing (%) 38.2 85.9 39.7 16.9 8.2
AR turnover (days) 24 15 15 15 14
Inventory turnover (days) 56 79 55 46 45
AP turnover (days) 32 30 27 26 26
Major Assumptions 2017 2018 2019F 2020F 2021F
ASP (IDRk) 1,395 1,674 1,758 1,846 1,901
Sales volume (k units) 12,508 18,103 19,009 19,959 20,757
Sources: Company, BCA Sekuritas [estimate]
Erajaya Swasembada, 15 April 2019 2
Exhibit 3. Earnings changes
Year-end Dec 31 2018 2019 2020
(IDRbn) Old New Δ (%) Old New Δ (%) Old New Δ (%)
Revenue 34,744 34,744 - 40,321 39,913 (1.0) 45,346 44,003 (3.0)
Gross profit 3,169 3,169 - 4,119 3,689 (10.4) 4,551 4,089 (10.2)
EBIT 1,318 1,318 - 1,499 1,469 (2.0) 1,653 1,651 (0.1)
Net profit 850 850 - 888 957 7.8 1,026 1,101 7.3
EPS 293 293 - 306 330 7.8 354 380 7.3

Gross margin (%) 9.1 9.1 10.2 9.2 10.0 9.3


Operating margin (%) 3.8 3.8 3.7 3.7 3.6 3.8
Net margin (%) 2.4 2.4 2.2 2.4 2.3 2.5
Sources: BCA Sekuritas estimate

Exhibit 4. Revenue growth. 2017-2018 - A softer Exhibit 5. EBIT and margins, 2016-2020F – We expect
revenue growth in 1Q19 given a high base last year and margin to be slightly pressured this year as ERAA
soft iPhone sales aggressively increase their number of stores

(IDRbn)
(IDRbn) (%)
10,000
1,800 4.0
60%
3.8 3.8
3.7
8,000 1,500
50%
3.5
9,411

40% 1,200
6,000

900 3.0
8,812

30%
8,280

8,241

1,651
7,576

4,000
1,469
1,318
5,891

600 2.2
5,597

20%
5,166

2.4
2.5
2,000
10% 300
484 523

0 0% - 2.0
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2016 2017 2018 2019F 2020F
Contribution to FY (RHS) Revenue (LHS) Quarterly revenue YoY gwt. (RHS) EBIT EBIT margin

Source: Company Source: Company

Exhibit 6. 1Q18 vs. 1Q19 launching – Despite more Exhibit 7. ERAA PE band – Our TP is based on ERAA’s 5
launches occurred in late 1Q19, we expect strong sales to year mean PE of 8x
be booked in 2Q19
(x)
1Q18 1Q19 25.0

Xiaomi Redmi 5 Oppo R17 pro 20.0

Samsung S9 Samsung M20 15.0

Samsung S10 10.0

Oppo F11 5.0

Vivo V15
-
Sep-14

Sep-15

Sep-16

Sep-17
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Mar-14
May-14
Jul-14

Nov-14

Mar-15
May-15
Jul-15

Nov-15

Mar-16
May-16
Jul-16

Nov-16

Mar-17
May-17
Jul-17

Nov-17

Mar-18

Redmi Note 7
(5.0)

Realme 3 Forward P/E +2.0sd +1.0sd mean -1.0sd -2.0sd

Sources: Companies, BCA Sekuritas Sources: Company, BCA Sekuritas

Erajaya Swasembada, 15 April 2019 3


Equity Research Division Institutional Equity Market Division Sales Equity Market Division
research@bcasekuritas.co.id ecm@bcasekuritas.co.id sales@bcasekuritas.co.id

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Erajaya Swasembada, 15 April 2019 4