Trimegah (LG) 30 Jul 2018 : ERAA BUY Upgrade TP 4700 (From 3200)
Erajaya Swasembada
Continuous Improvement in Fundamentals
Ever heard of Kaizen? It is a Japanese business philosophy meaning “continuous improvement”. Posting “way-above consensus” results for the past three quarters, ERAA is the epitome of a successful turnaround, experiencing Kaizen in fundamentals particularly in 2018. Poised to book 164% 2018F NPAT growth, 120% better margins and 3% higher market share as the biggest player in a fast growing largely untapped industry, this is the Kaizen story..
Glimpse on a strong 2Q18
2Q18 NPAT came in at IDR 230bn (+12% q-q, +230% y-y), with 1H18 coming at 67% of our previous 2018F estimate, implying an annualized PE of 11x. Topline still grew (IDR 8.8trn, +6% q-q, +50% y-y) indicating a strong Lebaran season, bringing op. leverage with EBIT margins improving by +50bps q-q to 3.9% (1Q18: 3.4%) and net margins improving by 10 bps q-q to 2.6% (1Q18: 2.5%). ERAA’s 1Q18 earnings was the strongest quarter ever, but widely beaten by their impressive 2Q18 results by 12%. Despite impressive results, in terms of valuation, ERAA is still currently trading (11x PE) at 64% discount compared to peak levels (30x PE), and thus warrants a re-rating especially as ERAA has been delivering (1) strong earnings and better visibility (three consecutive strong quarters of an average 162% NPAT growth), (2) 14% margins improvement (+50bps q-q) and (3) being the biggest player and beneficiary in a fast consolidating industry. We reiterate our multiples target at 15x and upgraded our earnings for 2018-19F by +38%/+35%, the highest in the street coming at 60% above consensus.
Xiaomi’s second place in market share getting firmer by the day…
According to a research done by Statcounter, Xiaomi’s June market share came in at 18.5% (+0.6% m-m), second to Samsung at 27% (-2% m-m), and well ahead of Oppo at 13% share (flat m-m). We reiterate our bullish thesis on Xiaomi as they are poised to gain higher market share especially in the entry-level segment from local players and global players (Advan, Evercross, Samsung, Oppo), on the back of its (1) competitive “value for money” product offering by offering better quality at 50% price discount and (2) aggressive ramping up in offline and online presence.
Reiterate our high-conviction pick – street high TP and earnings (again)
At current valuation (11x 12 month fwd PE), we are still consistent with the view that it is still a big bargain, given ERAA’s significant margin improvements, 164% 2018F NPAT growth and a consolidating industry (re-rating potential to 15x PE). We reiterate our BUY rating on ERAA, our high conviction pick in retail space, with revised TP of 4,700 (implying 15x 12-month fwd earnings). Our TP is 82% above consensus.
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