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P H
Jun 04,2016 18:41:01
Arwana Citra Mulia (ARNA), Mojokerto Plant a New Growth Engine

During our site visit to Arwana’s new Mojokerto plant – which fully produces UNO ceramic tiles – we noticed that the company is ready to increase the production of its medium-end ceramic-tiles. It aims to increase UNO – the products have higher selling prices and EBIT margins – sales’ contribution to 27% of total sales at end-2016, from 17% in 2015. In addition, the Mojokerto plant’s gas tariff is lower than that of its other plants. Maintain BUY, with a DCF-based TP of IDR690 (19% upside, 26x-17x FY16F-17F P/Es).

$ARNA

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P H
May 30,2016 09:13:14
Govt Finally Cut Gas Price ,Big positive impact on ARNA’s earnings



Arwana (ARNA):  Good progress on sales and margin improvement

The company expect to see sales growth of +25% to IDR1.6trn this year as added capacity, April sales saw +30% yoy. Utilization has increased to full capacity  and expect net profits margin to reach 8-9% translating into NP of IDR130bn in FY16, net margin last year was 6.25% with NP of IDR70bn, the NP guidance is more conservative than consensus of IDR192bn.

 The company is benefiting from lower rm prices despite weak IDR and difficult to increase its ASP.  The company has been waiting for government decision to reduce the gas prices, which could boost its profitability due to high sensitivity US$1=3% gm.

The company has increased dividend payout ratio to 52% from 35% of last year as no longer major expansion

$ARNA


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P H
May 19,2016 23:41:27
Arwana’s Earning Growth Should Accelerate on Lower Gas Tariff

Indonesia President Joko Widodo just signed presidential decree to regulate industrial gas price to be maximum USD6/MMBtu which is effective on 1 January 2016. Steel, ceramic, and glass manufacturers are among industries which benefit from industrial gas tariff reduction.
 
Arwana Citra Mulia ($ARNA) is one of the most beneficiaries from this industrial gas tariff reduction. Arwana currently purchase gas at USD9-10/MMBtu in which gas accounted for around 30% of COGS. The government is to reduce gas tariff by 33-40% (by USD3-4/MMBtu) to USD6/MMBtu. Hence, this tariff reduction impact to Arwana earnings should be significant. In our forecast, we have not factored gas tariff reduction for FY16F earning, while we assumed lower gas tariff by USD1/MMBtu in 2017. Hence, our current earnings estimates are likely too low because of this lower gas price.
 
By having lower production costs, Arwana should be easier to expand its export market since its selling price (in addition to delivery expense) would be competitive to that of regional ceramic producers. High Indonesia gas cost - which is USD9-10/MMBtu - is the main constraint for local ceramic-tiles producers to enter export market since they could not compete with regional peers which purchase gas at around USD6/MMBtu.
 
We maintain BUY on Arwana.

$ARNA

Bull
P H
Apr 29,2016 10:28:49
Arwana Citra Mulia : Higher Volume, Lower Costs To Boost 2Q16 Earnings

Maintain BUY with a DCF-based TP of IDR690 (15% upside, 26x/17x FY16F-17F P/Es). Arwana’s earnings growth this quarter is likely to accelerate, driven by higher sales volume from its new production lines, an improved sales mix (from higher UNO sales), and lower fixed costs per unit. Last quarter’s net profit, which fell YoY, was not as bad as it first seemed as it also jumped 38% QoQ. We think the current share price decline provides a better entry point to accumulate the stock at lower price levels.Indonesia:

¨ Higher volume and better sales mix from new plant. Arwana Citra Mulia’s (Arwana) Mojokerto plant (P5) produces only UNO ceramic tiles, which have higher selling prices and EBIT margins. With the additional production of UNO tiles from P5, we expect the contribution of UNO sales to rise to 27% of revenue in the second half of the year (1Q16: ~20%). Line-1 and line-2 at the new plant have commenced operations in Jan and Apr 2016 respectively, while line-3 will begin production in July. Management said that the demand for its ceramic tiles – especially UNO products – is robust although production capacity is limited. Hence, we are optimistic that the utilisation rate of the new plant will likely reach close to its maximum capacity soon after its new production line-3 begins operations.

¨ Lower fixed costs per unit. In 1Q16, while P5’s production was still low (merely 33% of its capacity), Arwana accrued depreciation expenses and fully booked general and administrative (GA) expenses. This caused P5’s fixed costs per unit to be thrice that of other plants. Management said that the new plant still booked operating losses in the first quarter. However, we expect its fixed costs per unit to sharply decline in the following quarters, since P5 has started production of line-2 – which should lift its utilisation rate to 67%.

¨ Transportation costs likely to further decline. As P5 is in East Java, ie near to its market, the higher production volume should help reduce transportation costs as Arwana would not need to send its UNO products from its Western Java plants to supply the East Java market. This would help pare down its logistics cost. Transportation expenses accounted for ~65% of the company’s 1Q16 operational expenses. So far, its transportation costs have declined to IDR2,500/sq m (-14% QoQ), thanks to the shorter distance.

¨ Hitting Still a BUY, at a better entry point. Last quarter’s net profit – which fell YoY – was not as bad as it seemed since it also jumped 38% QoQ on the back of a wider EBIT margin. We think the current decline in its share price provides a better entry point to accumulate the stock at lower price levels. Maintain BUY with a IDR690 TP (15% upside, 26x/17x FY16F-17F P/Es). Key risks to our call include a weakening of the IDR and intensifying competition in the industry.

$ARNA
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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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