Dec 16, 2016 11:43:11

Arwana Citra Mulia ($ARNA), Improved Efficiency Likely Boost 4Q16 Earnings

We recently met with Arwana Chief Financial Officer and the management revealed that there are significant positive developments in 4Q16, on the back of: i) improved operating efficiencies, ii) better sales mix, iii) higher sales volume. Finished goods inventory days also declined significantly in November. Arwana expect this good performance to continue in 2017.
The meetings key takeaways:
¨ Lower cost per unit. Underpinned by higher capacity utilisation, the company can achieve better economic of scale through higher efficiency in gas usage, and has managed to reduce production costs per unit. Arwana said that its new plant-5 which located in Mojokerto, East Java has run at its maximum capacity. In addition, the company has been able to reduce product defect significantly. As a results, gross profit margin (GPM) is expected to improve.

¨ Higher UNO sales. By increasing its presence on middle-end ceramic tiles segment, Arwana is likely to register better sales mix in 4Q16. UNO sales contrbution increased to 38% in November (3Q16: 31%), while Best Buy sales contribution – which provides the lowest GPM – declined to 26% in November (3Q16: 51%).
¨ Better sales volume. Arwana indicated 4Q16 sales will likely to reach 12.7m sqm (+16% QoQ, 11% YoY). Hence, FY16F sales volume would reach 47m sqm (+19% YoY), in line with our expectation. In addition, Finished Good inventory days declined to 22-23 days in November (from 31 days in 3Q16).

¨ Promising 2017. Arwana management believes that 4Q16 good performance to continue in 2017 which driven by:
i) Higher sales volume which is estimated to reach 52-55m sqm (+11% YoY to +17% YoY),
ii) Better sales mix: UNO and Regular sales contribution to increase to 40% each, while Best Buy sales contribution to decline to 20%.
Main threats are weakening IDR which will increase production costs and higher diesel fuel price which should lift transportation costs.
In term of lower gas tariff, the Indonesia Ceramic Association is still waiting the government decision on lower gas tariff on ceramic industry which is stated on Presidential Decree No. 40/2016. Notably, in our forecast, we have factored USD1/mmbtu lower gas tariff starting 2017.
Maintain BUY on Arwana with DCF based IDR635 TP (27% upside), implying 25x/17x FY16/17F P/Es. (Andrey Wijaya)