P H
Feb 09, 2016 11:03:32
Arwana Citramulia : More Clarity On Gas Price Cuts

The recent industrial gas price reductions in North Sumatra have provided more clarity on gas price cuts in other areas. Since almost all Indonesian ceramic tile producers – except Arwana – booked 3Q15 operating losses, gas price cuts are very crucial to help lift the ceramic industry out of financial difficulties. Assuming Arwana’s gas price cut could happen in 2017 at USD1/mmbtu, we raise FY17F earnings to IDR318bn (+17.6%) but kept our FY16F numbers. Maintain BUY with a higher IDR690 TP (24% upside) now based on DCF (from targeted P/E).

¨ More clarity on gas price reductions. Media reported that Perusahaan Gas Negara ($PGAS) and PT Pertamina Gas have collaborated to reduce industrial gas prices in the North Sumatra region while awaiting a presidential decree on lower gas prices. The recent industrial gas price reductions in North Sumatra have provided more clarity on gas price cuts in other distribution areas. We see that gas prices in other distribution areas – such as West Java, East Java and South Sumatra where Arwana Citramulia’s ($ARNA) plants are located – are likely to decline in the near term.

¨ Rising gas prices deal a heavy blow to earnings. 3Q15 was the worst quarter in which almost all Indonesian ceramic tile producers – except Arwana – booked operating losses. Industrial gas price jumped to ~USD10/million British thermal units (mmbtu) in FY15F from USD6.62/mmbtu in FY10. In the same period, Arwana’s energy cost doubled to IDR10,700/sq m (from IDR5,400/sq m). Gas price cuts are significant to Indonesian ceramic companies since gas prices contributed around 30-35% of cost of goods sold (COGS). Hence, lower industrial gas prices are very crucial to help lift the companies out of financial difficulties.

¨ Lifting FY17F earnings. The timeline and amount of gas price cut for Arwana’s plants are still unclear. However, based on our checks, Directorate General of Oil & Gas has confirmed that the ceramic and glass industry would have gas price reductions in the range of USD1-2/mmbtu. Assuming industrial gas price decline by USD1/mmbtu, we project that Arwana’s energy cost should decline to IDR9,200/sq m (-12.4%). To be conservative, we estimate that Arwana’s gas price cut could happen in 2017 at USD1/mmbtu. Hence, we increase our FY17F earnings to IDR318bn (+17.6%) but maintain our FY16F numbers.

¨ Maintain BUY with a higher TP. We have changed our valuation methodology to DCF (from targeted P/E base) as DCF is able to better capture Arwana’s long-term earnings post the potential gas price cut in 2017. Based on our DCF calculation (WACC: 9.8%, TG: 2%), we raise Arwana’s TP to IDR690 (from IDR475), which offers a 24% potential upside and implies 24x/16x FY16F/FY17F P/Es. We reiterate BUY on the counter. Key risk is a weakened IDR which should increase Arwana's production cost as around 50% of its cost is in USD, while its revenue is in IDR.
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