PT Erajaya Swasembada Tbk (ERAA) - 1Q Operating profit in li
Bareksa • 06 May 2014
People shop ahead of Christmas at Gallerian mall in Stockholm (Reuters/Henrik Montgomery)
Buana Capital maintain Buy on ERAA with TP of Rp1,850, based on 13.0x 2014F P/E
Bareksa.com - 1Q operating profit in line, earnings below expectations on interest expense. ERAA reported 1Q revenue of Rp3.1tr (+6%YoY, -2% QoQ), broadly in line, representing 21% of our FY14 forecast, consensus and the company guidance. The gross margin is in line at 9.3%. The operating profit came in line, however the earnings was below at Rp80bn (+7% YoY), representing 19% and 21% of ours and consensus estimates, primar-ily due to higher interest expense (+102% YoY, +16% QoQ).
Proposed luxury tax on smartphones causing concerns. The government plans to introduce 20% luxury tax on imported smartphones. This new development has triggered a negative sentiment on ERAA being the leading handset distributors and retailers (32% market share according to Frost and Sullivan, 2012). The proposal has received many pushbacks from the industry associations and players. The implementation of new luxury tax should only affect demand temporarily, in our view. Moreover, higher tax will eventually be passed on to end-users.
The stock has experienced a sell-off recently. ERAA stock has fallen 20% in the past 4 weeks, despite FY13 earnings being in line with the consensus expectation. The stock has pared most of the return in the prior 4 months (i.e. ~31%, outperforming JCI by 17%).
Maintain Buy. We maintain Buy on ERAA with TP of Rp1,850, based on 13.0x 2014F P/E. We remain positive and believe the company is capable to face another challenging year, considering: 1) The decentralization of regional warehouses in 5 locations should strengthen its distribution capability and efficiency 2) We believe the current valuation has not priced in the expansion in retail with net opening of 58 outlets (+15% YoY) in 2013. Retail contribution has increased from 18% to 30+% in 2013 3) Stable gross and operating margins 4) The stock is attractively priced at 8.5x 2014F P/E, which offers a good buying opportunity, in our view.
*Franky Kumendong is Analyst of PT Buana Capital. This article is part of the Equity Research of PT Buana Capital