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RHB Indonesia - Arwana Citramulia - Revenue Remains Robust Despite Elevated Costs (Awana Citramulia, Surya Citra Media) Unknown Rabu, 18 Oktober 2017




Good morning,

Arwana Citramulia – Revenue Remains Robust Despite Elevated Costs

Downgrade to NEUTRAL (from Buy), as we cut our earnings estimates and trim our TP to IDR450 (from IDR550, 8% upside, 19x FY18F P/E). Arwana’s 9M17 earnings jumped 38% YoY, but 3Q17 net profit growth was flat QoQ due to its higher-than-expected COGS. Its ASP and sales volume were solid, despite intense competition. An upside risk to our call is the reduced industrial gas prices, which should lower its COGS. A key downside risk is the slower growth in the demand for ceramic tiles.


¨ 3Q17 earnings below expectations. Arwana Citramulia’s (Arwana) 9M17 earnings jumped 38% YoY to IDR84bn. However, 3Q17 earnings were flat, at IDR22bn (+0.8% QoQ) and below our estimate – being driven by higher-than-expected COGS. In our calculation, its COGS/sq m rose 5.9% QoQ to IDR26,945.
According to management, the main reason behind its higher-than-expected 3Q17 COGS/sq m was the low utilisation rate of its capacity in July due to the shorter working days during the Lebaran holiday. However, earnings improved significantly in September due to lower COGS/sq m and improved sales mix, as UNO sales contributions increased. 3Q17 sales volume was at 13.4m sq m (+17.5% QoQ) and ASP rose to IDR33,731/sq m (2.5% QoQ). Opex/sq m dipped to IDR4,313 (-1.6% QoQ).
¨ Lower earnings estimates. While we expect 4Q17 earnings to improve on the back of lower COGS/sq m, we cut our FY17F-18F earnings by 23% and 28% to IDR123bn and IDR171bn respectively due to its higher production costs. A key upside risk to our full-year earnings estimates is a reduction in the industrial gas tariff. This should lower Arwana’s production costs, since gas accounts for around 40% of such costs. Note that its listed peers Keramika Indonesia Assosiasi (KIAS IJ, NR) and Intikeramik Alamasri Industri (IKAI IJ, NR) reported operating losses that were partly driven by high gas tariffs.
¨ Lower industrial gas tariff? The Energy and Mineral Resources Ministry is preparing regulations related to the decline in industrial gas prices in areas other than North Sumatra. The Government had already lowered industrial gas prices in North Sumatra back in February. Note that Arwana’s plants are located in West Java, East Java and South Sulawesi. Our channel checks suggest that the draft for the regulations on lower gas prices has been finalised already, and is currently in the hands of the Law and Human Rights Ministry. However, we believe that the timeline for the new lower industrial gas prices to be implemented remains unclear. As such, we have not imputed the lower gas prices into our forecasts.
¨ Downgrade to NEUTRAL (from Buy) with a lower DCF-based IDR450 TP (from IDR550) premised on 19x FY18F P/E. Key downside risks to our call are slower demand growth for ceramic tiles and the IDR softening against the USD – since around c.58% of Arwana’s costs are denominated in USD. (Andrey Wijaya)

Link to daily report: Indonesia Morning Cuppa 181017

Company Update:

Surya Cipta Media (SCMA IJ, NR) company visit – Negative earnings surprise on 3Q17
We have visited Surya Cipta Media to get some updates on its 2H17-FY18F outlook. Company were conservative on its 2H17 outlook and guided a flat or negative YoY growth in 3Q17, which is below consensus estimates. SCMA is losing prime time audience share since April, which also coincides with the law suits on its subsidiary Sinemart that might have affected content quality, it has launched 4 new shows on 10 October 2017 to at least stabilise the decline.

FY18F ad revenue growth should improve due to pre-election spending, share price have corrected considerably (-25% from April), SCMA is currently trading at 18.5x FY17F PER consensus estimates, close to -2SD from its 5 years historical mean.

¨ SCTV Prime time audience share dropped to 3rd spot in September. Post-acquisition of Sinemart (now the in-house sinetron production house of SCMA), SCTV improved its prime time audience share. It went from 11.4% in Jan to 22.9% in April, but it went on a declining trend for 5 months thereafter, at 12.6% in September. Coincidentally, a law suit was filed by Media Nusantara Citra (MNCN IJ, NR) against Sinemart on April which might have affected their content quality. With the exception of “ Anak Langit ” (ranked 5th in September), SCTV has dropped and replaced many titles since April and introduced 4 new dramas in 10th October, aiming to at least stabilise the decline.
¨ Tough 3Q17, expect negative earnings surprises. With Lebaran season falling on 2Q17, SCMA managed to record YoY revenue/ net profit growth of 3.2/0.2% respectively in 1H17. 3Q17 might poses negative earnings surprises due to weaker seasonality, declining audience share and lower ad spends by its customers. Company guided flat or negative YoY/QoQ growth in the coming result release which means in the best cast scenario it will form only 68% of consensus estimates.
¨ Expect positive impact from pre-election spending. The company and the sector as a whole has been has been increasing their rate card this year, in which, expect a bigger swing back of revenue growth should ad spend increases. Recall that SCMA’s FY13-14 EBITDA grew 50% due to improvement in audience share and spillover effect of pre-election spending. The sector improvement aside, SCMA need to step up its game in competition. Company guided ad revenue growth CAGR of 7-8% from 2017-2022 with expectation of double digit in FY18F.
¨ Digitalisation a long term threat but the pie will get bigger. Management believed that some ad spending budget for TV will eventually be transferred into online advertising. That said, Indonesia TV ads rate card remains to be the cheapest in the world (also cheaper than online advertising) and has much wider coverage in Indonesia. Furthermore, fintech giants that entered Indonesia are increasing their budget on TV ads, replacing some losses of ad revenues in the sector.
¨ Undemanding valuation but downside risk on 3Q17 results. At 18.5x FY17F consensus PER, SCMA is currently trading at close to -2 SD from its 5-year historical PER band (28x). (Norman Choong, CFA)
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Best regards,

Andrey Wijaya
Senior Vice President
Research Analyst – Auto, Consumer, Cement
PT RHB Sekuritas Indonesia


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