ERAA posted good result with RP329bn net proﬁ t in 3Q12, which represents 72% of our FY12E earnings of Rp454bn (net margin: 3.4%). Our FY12E top line stands at Rp13.2tr, which is driven by Rp12tr on mobile phone sales while the rest is contributed by vouchers, accessories, notebooks, and iBox. The Company indicated to us that iBox’s 23 stores in 2012 (19 existing plus 3 to be opened in 4Q12) should generate about Rp300bn (Rp3bn/store/month) in revenues. We deem that the sum is achievable considering Apple products have high ASP (averaging Rp12.6m). New 60 erafone, 35 iBox, 6 Megastores , and 3 Android Nation outlets are planned in 2013.
Bottom-line uplift from retail business
While ERAA’s revenue growth will be boosted by volume growth (2013E: 12.2m units, +21% YoY), ASP increase (2013E: Rp1.3m/unit, +13% YoY) from swelling smartphone adoption, and from iBox high-ASP sales (Rp1.6tr from 44 outlets in average times Rp3bn/outlet/month), its bottom line should continue to improve as retail business grows and contributes more into the Company. For 2013, departing from moderate gross margin assumption of 9.4%, we deduce distribution business to yield net margin of 3.1% while retail business would generate an additional of 1.5% onto it, bringing combined net margin estimate of 3.5% (18% retail business contribution to total revenues). ERAA’s management is aiming for 25% - 30% contribution from retail in 2014, hence improving margin. We expect its proportion to expand gradually every year toward 33%-35% in 2017.
The franchise initiative
One of the key competitive edges ERAA has over other retailers is its continuous pursuit for going out of the box. After Android Nation stores, franchise system is introduced. The Company is aiming for 100 franchise stores in 2013. This is how it works: Each franchise (per store) is sold for Rp500m (USD 52,000) which includes license, furnishings, deposit, and franchise fee of Rp50m for ﬁ ve years.
Erafone will get 0.25% of revenues on top of regular distribution margin. However, the key advantages are that each store will carry 100% of ERAA’s products which otherwise be 30% - 50% for 3rd party outlets, and it will be able to sell across territory for Nokia (normally restricted: Jakarta, West Java, Sumatra, Kalimantan) and Samsung (normally exclusive only at: Central & East Java, Bali, NTT).
Franchisee BEP is about 3 years.
Leading merchant of social gadgetries – BUY
In Indonesia, individual identity quite often needs to be deﬁ ned by communal expression, by whom we are connected with, and by which social class we are perceived to be in. Mobile technology satiates all of the above. ERAA holds 28% market share of Indonesia’s market and the largest distributor for Blackberry and Samsung, whom are the leaders of social gadgetries. We have reﬁ ned our earnings expectations and rolled-over to 2013 as our base year, which bring our target price to Rp3,100/share, denoting 2013 PE of 13.6x with ample upside of 26.5%. BUY.