Erajaya Swasembada raised TP from IDR 3125 to IDR 3875

Erajaya Swasembada: Hidden value (ERAA, Buy, Rp3,275, TP: Rp3,875)

We raised our TP on ERAA from Rp3,125 to Rp3,875, and reiterated our BUY call for another 18% upside. Higher proportion of retail business makes ERAA’s valuation attractive as compared to the other high-flyer retailers that continue to book record-high P/E multiples. Management expects sales contribution from the retail business to rise to 28% this year, from 18% last year. ERAA’s retail business would also earn better margins this year.

To derive our new TP, we now assigned 20% weighting on the retail business with 25x P/E multiple and 80% weighting on the distribution with 16x P/E multiple. This leads to a weighted average target P/E of 17.8x for ERAA, justified by its 30% EPS CAGR in FY12-15F. Strong market dominance and extensive distribution network also justifies the premium that we assigned for ERAA.

The next catalyst, in our view, is the black market clamp down. As we all know, the new handset importation rule became effective on March 15, after being delayed from January 1. Management revealed that the implementation has led to a substantial reduction in black market share of BlackBerry handsets from 30% to 5%, thus implying additional 25% volume to be captured. This benefits ERAA as the largest distributor of BlackBerry with about 50% distribution share in Indonesia.