Company update:
Arwana Citra Mulia (ARNA IJ, BUY, TP: IDR550)
Building a Path To Recovery
Arwana Citra Mulia (ARNA IJ, BUY, TP: IDR550)
Building a Path To Recovery
Arwana’s
sales volume has risen despite the slow growth in Indonesia’s demand for
ceramic tiles. This is due to its successful penetration into the higher-income
market, seen in the growing contribution of UNO sales to total sales.
Its production cost is likely to decline, driven by lower fixed costs per unit
and lesser product defects. It secured a lower gas tariff for its Palembang plant,
which took effect this month. It will also upgrade two production lines at its
Gresik plant to manufacture UNO tiles. As such, we maintain BUY, with a
IDR550 DCF-based TP implying 25x FY17F P/E.
¨ Higher volume and a
better sales mix.
Arwana Citra Mulia’s (Arwana) 2M16 sales volume is likely to reach 8.6m sqm
(+7% YoY), in line with our estimate. We expect 1Q17 sales to be slightly level
with that of 4Q16, which were at a new record high, before accelerating in
2H17. Its sales mix continues to improve, as UNO tiles’ sales
contribution rose to 42% in February (4Q16: 36%).
UNO tiles have a higher GPM of 28%, vs Regular
(23%) and Best Buy (18%).
¨ Lower production
costs.
It expects production costs to decline, driven by lower fixed costs per unit
and a lower incidence of defective products (to around 1% in Dec 2016, vs 5% in
1Q16). Despite this significant decline, Arwana believes there is still room to
lower its rate of defective products this year. It also reduced its gas
consumption per unit, especially for its new plant in Mojokerto.
¨ Palembang plant’s gas
tariff has decreased.
Starting March, the gas tariff imposed on its Palembang plant has declined by
8%. The Palembang plant accounts for 14% of Arwana’s total production capacity.
Note that Arwana is a pioneer ceramic tiles manufacturer in South Sumatra. It
purchases gas from Pertagas for its Palembang plant.
¨ UNO capacity to
increase.
Arwana is upgrading two production lines at its Gresik plant to be able to
produce UNO ceramic tiles. In our calculation, the two upgraded lines –
expected to start producing UNO tiles in June – would increase UNO
production capacity by around 20%. In addition, UNO production from the
Gresik plant should lower transportation costs since Arwana would not need to
deliver UNO products from its Banten facility to the East Java market.
Since ceramic tiles are bulky, transportation costs are high – transportation
costs accounted for 77% of the company’s 9M16 marketing expenses.
¨ Maintain BUY, with a DCF-based
TP of IDR550 (29% upside) implying 25x FY17F P/E. A key downside risk to our
call is the cancellation of the national gas tariff cut – which
has been regulated via a presidential decree – since we have factored in a
USD1/mmbtu national gas tariff cut into our forecasts. However, current
positive developments such as the decrease in its fixed costs per unit, lower
gas consumption and a decreased rate of defective products are likely enough to
offset the higher-than-estimated cost risk from the cancellation of the gas
tariff reduction. Going forward, we expect its ROE to improve, driven by wider
EBIT margin.
Kindly click the following link for the full report: Arwana Citra Mulia : Building a Path To Recovery
Best regards,
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
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