We reiterate Buy on ERAA with TP Rp1,850 (+10% from previous), based on 13.0x FY14F P/E, following JCI valuation rerating from 13.0x in November 2013 to 15.5x P/E currently. The stock price has surged +31% in four months, outperforming JCI by ~17%. The stock currently trades at 10.7x FY14F P/E, undemanding despite the recent upsurge.

FY13 results within expectations, though below guidance. FY13 revenue came in at Rp12.7tr (-1% YoY), forming 95% and 98% of ours and consensus, a bit short of the guidance (94%). FY13 gross margin expanded +30bp YoY to 9.2%. The operating profit came in line, forming 97% and 105% of ours and consensus. FY13 earnings came in at Rp349bn (–19% YoY), forming 88% and 99% of ours and consensus estimates. In 2H13, earnings jumped +70% compared to 1H13, on par with 2H12.

Android OS and mobile phones to dominate in 2014. Gartner estimates that Android would grow 26% YoY and would be in 45% of all new devices in 2014 (vs. 38% in 2013). Gartner expects mobile phones to dominate device shipments, with 1.9bn units shipped in 2014 (+5% YoY). The tablet market would grow 47% YoY with lower ASP attracting new users. These are positive for ERAA as leading distributor & retailer.

More assertive guidance set for 2014. ERAA has guided for 2014 revenue of Rp15tr (+18% YoY) and earnings of Rp400bn (+15% YoY). We have lowered our revenue forecast by 6.8% and 6.3% for 2014-15F and downgraded 2014-15F earnings by 14.7% and 16.2%. Our numbers are largely in line with the consensus.

Reiterate Buy. We maintain our positive stance due to: 1) ERAA succeed in turning the business around in 2H13 2) ERAA to gain momentum and should be able to focus in expanding retail 3) Reliance on Blackberry is likely replaced by Samsung and Apple 4) The management remains committed with growth-oriented strategy 5) Undemanding valuation.

FY13 Financial Performance
In 4Q13, the revenue came in at Rp3.17tr (-12% QoQ, -2% YoY), higher than those in 1Q13 and 2Q13. FY13 revenue came in at Rp12.7tr (-1% YoY), forming 95% and 98% of ours and consensus, hence within expectation but a bit short of the guidance (94%). FY13 gross margin expanded to 9.2%, up from 8.9% for FY12. ERAA management appeared to manage the Opex well in 4Q13, which fell by 24.8% QoQ and 5.4% YoY. In 4Q13, the operating margin expanded to 5.0%, the highest during 2013. The operating profit came in line, forming 97% of our estimate and 105% of consensus estimate. The earnings came in at Rp349bn (–19% YoY), forming 88% and 99% of our estimate and consensus. The difference with our estimate was due to higher than expected income tax expense. In 4Q13, the net margin expanded to 3.5% bringing FY13 net margin to 2.7%, higher than those in 1H13. The earnings jumped +70% in 2H13 as compared to 1H13, on par with 2H12 (YoY).

Business Segments Performance

In terms of revenue, the largest contribution came from cellular and tablet (87.5%), followed by vouchers (8.4%), computer and other electronic devices (2.3%) and lastly accessories (1.7%). In terms of gross profit, cellular and tablet accounted for 89.8%, followed by accessories (5.1%), computer and other electronic devices (2.6%) and lastly vouchers (2.5%).

Cellular and Tablets

Revenue and gross profit of cellular and tablets segment fell by 6% YoY and 4% YoY respectively. This is due to several headwinds the company faced in 2013, including flooding and new importer/distributor regulation introduced in 1Q13, increased competition from black market BB products and IDR depreciation in 2H13. Nevertheless, the gross margin expanded +20bp to 9.4% in 2013. We expect more significant contribution coming from Samsung and Apple products such as smartphones and tablets, as well as whitebox (lower-end smartphones) such as Venera which has a higher gross margin (~30%).

Vouchers
Revenue and gross profit of vouchers segment increased by 25% YoY and 10% YoY respectively. The gross margin decreased by 40bp to 2.8% in 2013

Computer and Other electronic devices

Revenue and gross profit of computers and other electronic device segment jumped by 202% YoY and 209% YoY respectively. The gross margin of this segment expanded by 20bp to 10.4% in 2013.

Accessories

Revenue and gross profit of accessories segment jumped by 201% YoY and 213% YoY respectively. The gross margin of this segment expanded by 100bp to 26.9% in 2013.

Android OS to Surpass One billion Users in 2014

Devices sold world-wide powered by Android operating system (OS) including smartphones and tablets will surpass one billion users in 2014, according to Gartner (IT research and advisory firm). Gartner estimates that Android will reach 1.1bn users in 2014, or +26% jump over 2013 (Exhibit 5). Gartner forecasts worldwide combined shipments of devices (PCs, tablets, ultramobiles and mobile phones) to reach 2.5bn units in 2014, +7.6% YoY. Android would be in 45% of all new devices in 2014, up from 38% in 2013. By 2017, over 75% of Android's volumes will come from emerging markets. According to Gartner, there is a volume versus value equation, with Android users also purchasing lower-cost devices compared to Apple users. Android holds the largest number of installed-base devices, with 1.9bn in use in 2014, compared with 682m iOS/Mac OS installed-base devices. RIM continues on downtrend.

Mobile phones to dominate device shipments , tablets to grow 47% in 2014

Gartner expects mobile phones to dominate overall device shipments, with 1.9bn mobile phones shipped in 2014, +5% YoY(Exhibit 6). Ultramobiles, which include tablets, hybrids and clamshells, will take over as the main driver of growth from 2014, with a growth rate of 54%. In 2014, Gartner forecasts that the worldwide tablet market to grow 47% YoY with lower ASP attracting new users. Consumers continue to buy tablets as an additional device that they carry everywhere. According to a recent consumer study that Gartner conducted in 3Q13 across Brazil, China, France, Germany, Italy, the U.K., the U.S. and Japan, over two-thirds of tablets were used outside the home for activities such as vacation. This is a similar pattern to that of smartphones as smaller form factors are driving more portability outside the home. These developments are positive for ERAA as leading distributor and retailer.

Forecast Revision

ERAA management has guided for 2014 revenue of Rp15tr (+18% YoY) and earnings of Rp400bn (+15% YoY). Following FY13 results (which were below the management target) and 2014 management guidance, we have lowered our revenue forecast by 6.8% and 6.3% for 2014-15F, largely in line with the consensus. We have downgraded 2014-15F earnings by 14.7% and 16.2%. Our 2014F earnings are largely in line with the consensus.

Valuation and Recommendation

We reiterate Buy on ERAA with higher TP Rp1,850 (+10% from previous Rp1,680), based on 13.0x FY14F P/E, following JCI valuation rerating from 13.0x in November 2013 to 15.5x P/E currently. ERAA stock price has surged by 31% in the past four months (our previous report dated 21 November 2013), outperforming JCI by ~17%. The stock currently trades at 10.7x FY14F P/E, which is still undemanding relative to JCI valuation despite the recent stock price upsurge, in our view.

We maintain our positive stance on ERAA business outlook due to the following:
- As per our prior prediction, the company appeared to succeed in turning the business around in 2H13. In fact, 2H13 earnings (Rp219bn) was nearly double of 1H13 earnings (Rp129bn) and almost equal to 2H12 earnings (Rp221bn).
- We expect ERAA to gain momentum after a challenging and difficult year and should be able to focus in expanding retail business (Erafone, Megastore, etc).
- Going forward, ERAA reliance on Blackberry is likely replaced by Samsung, Apple, Android-based smartphones and tablets, in line with Gartner research.
- The management remains committed with growth-oriented business strategy through more assertive guidance in 2014.
- Undemanding valuation, offering ~24% discount to our stock universe.

*Franky Kumendong are PT Buana Capital's equity analyst. This article is part of the Equity Research of PT Buana Capital