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Arwana Citramulia (ARNA IJ) (Buy) - Setting the stage for a robust recovery

Arwana Citramulia (ARNA IJ) (Buy) - Setting the stage for a robust recovery

Plantation MW EP GH 620 30th Oct, 2024

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Setting the stage for a robust recovery

Maintain Buy with a lower TP of IDR940/sh

Triple tailwind for the ceramic industry

The ceramic industry is currently benefiting from three significant tailwinds, in our view. Firstly, Indonesia has imposed anti-dumping duties on ceramic tile imports from 32 Chinese companies, with fees ranging from IDR 13,446 to IDR 94,544 per square meter. This regulation is to take effect at the end of October 2024 and will last for five years. Secondly, Indonesia’s government has extended a regulated gas price program of USD6/mmbtu, limiting the cost risk for the ceramic industry. Lastly, we expect higher government spending to improve grassroot demand in the ceramic industry, especially under the 3mn housing per year program by the new president, which we have yet to factor in as we await further details.

Performance to bottom out this year, setting the stage for margin expansion

We cut earnings by 45% for FY24F considering lower utilization and sales vol (see Fig. 7). Despite this, we think this is already priced in, and we expect ARNA to have a CAGR earnings of 15% over the next 3 years supported by: 1) ASP improvement due to the recent anti-dumping tariffs; 2) a recovery in sales volume, and 3) an increasing share of higher-margin white body products. We expect the white body product mix to grow from 12% of total sales this year to 17% by 2026F (Fig. 2), further supporting margin improvement. Additionally, increased plant utilization should to lift ARNA’s GPM from 34% in FY24F year to 36% in 2025F, with long-term margin likely to approach 2022 levels of 38-40%.

Maintain Buy on ARNA with TP of IDR940, implying 23% upside

We maintain our Buy rating with a DCF-based TP of IDR940, assuming a WACC of 12% (previouslyy 10%). Our TP implies 13.8x/11.9x FY25F/FY26F P/E, at +1 stdv 5Y average P/E of 14x and is favorable relative to the industry average of 25x FY25F P/E (). The stock is trading at 11.2x FY25F P/E. ARNA’s prudent management and resilience in maintaining profitability amid challenging market conditions justify a premium valuation, in our view. Furthermore, the stock provides a 5.3% dividend yield for FY25F and a robust ROE of 24.6%, nearly double that of its peers. Risks to our call are: 1) sudden changes in government regulations (i.e. gas price and safeguard import duties), 2) fierce product competition, and 3) slower demand recovery.

Year-end 31 DecFY23FY24FFY25FFY26F
Currency (IDR)ActualOldNewOldNewOldNew
Revenue (bn)2,4473,2582,62102,90303,238
Reported net profit (bn)44577242505010580
Normalised net profit (bn)44577242505010580
FD normalised EPS60.66105.1157.8668.1879.05
FD norm. EPS growth (%)-22.720.1-4.617.815.9
FD normalised P/E (x)12.6–13.2–11.2–9.7
EV/EBITDA (x)7.9–7.8–6.7–5.9
Price/book (x)3.1–2.9–2.6–2.4
Dividend yield (%)7.1–5.6–5.3–6.2
ROE (%)24.636.122.624.625.7
Net debt/equity (%)net cashnet cashnet cashnet cashnet cash
Source: Company data, Verdhana  estimates

Key data on Arwana Citramulia

Income statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Revenue
2,587
2,447
2,621
2,903
3,238
Cost of goods sold
-1,534
-1,543
-1,716
-1,861
-2,048
Gross profit
1,053
904
905
1,042
1,190
SG&A
-310
-341
-354
-392
-437
Employee share expense
0
0
0
0
0
Operating profit
742
563
551
650
753
EBITDA
839
676
679
787
909
Depreciation
-96
-113
-128
-138
-156
Amortisation
0
0
0
0
0
EBIT
742
563
551
650
753
Net interest expense
-8
-11
-15
-15
-15
Associates & JCEs
0
0
0
0
0
Other income
11
23
13
12
12
Earnings before tax
746
576
549
647
750
Income tax
-165
-127
-121
-142
-165
Net profit after tax
582
449
428
505
585
Minority interests
-5
-4
-4
-4
-5
Other items
0
0
0
0
0
Preferred dividends
0
0
0
0
0
Normalised NPAT
576
445
425
501
580
Extraordinary items
0
0
0
0
0
Reported NPAT
576
445
425
501
580
Dividends
-329
-401
-312
-297
-350
Transfer to reserves
248
44
113
203
230
Valuations and ratios
Reported P/E (x)
9.7
12.6
13.2
11.2
9.7
Normalised P/E (x)
9.7
12.6
13.2
11.2
9.7
FD normalised P/E (x)
9.7
12.6
13.2
11.2
9.7
Dividend yield (%)
5.8
7.1
5.6
5.3
6.2
Price/cashflow (x)
14.2
10.4
8.9
9.8
8.9
Price/book (x)
3.1
3.1
2.9
2.6
2.4
EV/EBITDA (x)
6.3
7.9
7.8
6.7
5.9
EV/EBIT (x)
7.1
9.4
9.6
8.1
7.1
Gross margin (%)
40.7
36.9
34.5
35.9
36.8
EBITDA margin (%)
32.4
27.6
25.9
27.1
28.1
EBIT margin (%)
28.7
23.0
21.0
22.4
23.3
Net margin (%)
22.3
18.2
16.2
17.2
17.9
Effective tax rate (%)
22.1
22.0
22.0
22.0
22.0
Dividend payout (%)
57.0
90.1
73.4
59.4
60.4
ROE (%)
34.4
24.6
22.6
24.6
25.7
ROA (pretax %)
39.3
26.1
24.5
26.8
27.6
Growth (%)
Revenue
1.2
-5.4
7.1
10.8
11.5
EBITDA
19.7
-19.4
0.4
16.0
15.5
Normalised EPS
22.0
-22.7
-4.6
17.8
15.9
Normalised FDEPS
22.0
-22.7
-4.6
17.8
15.9
Source: Company data, Verdhana  estimates
Cashflow statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
EBITDA
839
676
679
787
909
Change in working capital
-264
-64
75
-71
-113
Other operating cashflow
-178
-72
-121
-141
-163
Cashflow from operations
397
539
633
575
633
Capital expenditure
-269
-173
-275
-275
-375
Free cashflow
127
366
358
300
258
Reduction in investments
0
0
0
0
Net acquisitions
0
0
0
0
0
Dec in other LT assets
0
0
0
0
Inc in other LT liabilities
0
0
0
0
Adjustments
-6
-1
0
0
0
CF after investing acts
121
365
358
300
258
Cash dividends
8
-2
0
0
0
Equity issue
0
0
0
0
0
Debt issue
31
61
0
0
0
Convertible debt issue
0
0
0
0
0
Others
-324
-422
-311
-296
-349
CF from financial acts
-286
-363
-311
-296
-349
Net cashflow
-164
2
48
4
-91
Beginning cash
603
438
441
488
493
Ending cash
438
441
488
493
402
Ending net debt
-388
-330
-378
-382
-291
Balance sheet (IDRbn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash & equivalents
438
441
488
493
402
Marketable securities
0
0
0
0
0
Accounts receivable
734
856
830
967
1,052
Inventories
258
255
259
204
267
Other current assets
172
23
25
27
31
Total current assets
1,602
1,574
1,602
1,691
1,751
LT investments
0
0
0
0
0
Fixed assets
945
1,007
1,154
1,292
1,510
Goodwill
0
0
0
0
0
Other intangible assets
0
0
0
0
0
Other LT assets
32
40
42
47
52
Total assets
2,579
2,620
2,798
3,030
3,314
Short-term debt
50
111
111
111
111
Accounts payable
312
306
345
331
337
Other current liabilities
324
235
252
279
311
Total current liabilities
686
652
708
721
759
Long-term debt
0
0
0
0
0
Convertible debt
0
0
0
0
0
Other LT liabilities
60
113
121
135
150
Total liabilities
746
765
829
856
909
Minority interest
29
32
33
34
35
Preferred stock
0
0
0
0
0
Common stock
98
98
98
98
98
Retained earnings
1,733
1,776
1,889
2,092
2,322
Proposed dividends
0
0
0
0
0
Other equity and reserves
-27
-50
-50
-50
-50
Total shareholders' equity
1,804
1,824
1,937
2,140
2,370
Total equity & liabilities
2,579
2,620
2,798
3,030
3,314
Liquidity (x)
Current ratio
2.34
2.41
2.26
2.34
2.31
Interest cover
96.9
51.9
36.9
43.5
50.4
Leverage
Net debt/EBITDA (x)
net cash
net cash
net cash
net cash
net cash
Net debt/equity (%)
net cash
net cash
net cash
net cash
net cash
Per share
Reported EPS (IDR)
78.49
60.66
57.86
68.18
79.05
Norm EPS (IDR)
78.49
60.66
57.86
68.18
79.05
FD norm EPS (IDR)
78.49
60.66
57.86
68.18
79.05
BVPS (IDR)
245.75
248.40
263.80
291.48
322.80
DPS (IDR)
44.75
54.65
42.46
40.50
47.73
Activity (days)
Days receivable
99.9
118.5
117.7
113.0
113.8
Days inventory
49.5
60.6
54.7
45.4
41.9
Days payable
70.9
73.1
69.3
66.3
59.5
Cash cycle
78.5
106.0
103.1
92.0
96.2
Source: Company data, Verdhana estimates
Company profilePT Arwana Citramulia Tbk (Arwana) is a public company listed on the main board of the Indonesian Stock Exchange (IDX) traded under the "ARNA" stock code. ARNA is dedicated to producing cost-competitive ceramic tiles to serve the low- and middle-end market segments nationwide. ARNA products are sold under the ‘Arwana’ brand, a brand name that signifies quality and affordability. In 2011, a new product line with better quality was introduced to capture the upper-middle market segment, marketed under the brand name ‘UNO’.
Valuation MethodologyOur target price of IDR940 is based on a DCF methodology, assuming a risk-free rate of 6.5% ,a terminal growth rate of 1%, and a calculated WACC of 11.5%. Our TP implies 13.8x/11.9x FY25F/FY26F P/E, at +1 stdv 5Y average P/E of 14x and is favorable relative to the industry average of 25x FY25F P/E. In our view, valuing ARNA close to its 5-year-mean is conservative, considering it will likely be able to increase its ASP gradually and expand its market share in the high-end segment. The benchmark index is JCI.
Risks that may impede the achievement of the target priceRisks to our call are: 1) Sudden changes in government regulations (i.e., gas price and safeguard import duties), and 2) Slower demand recovery to pre-pandemic level.
ESGArwana is an eco-conscious company that has been awarded the Green Industry Award by Indonesia’s Ministry of Industry for seven consecutive years (from 2011 to 2017).  Arwana is also the first company in Indonesia to obtain ISO 14001 certification for its environmental management system. The company’s factories are specifically built and its operations prioritize sustainability as it is committed to creating value for its stakeholders.

Fig. 1: ARNA capacity and production trend

Source: ASAKI, Verdhana research
Fig. 2: ARNA product mix – White body product to grow in the future

Note:  Red body product include Best Buy, Reguler, and Digi Uno. White body product include ARNA.
Source: Company data, Verdhana research

 

Fig. 3: ARNA ASP increase scenario

2025F ASP (RP/sqm)2025F ASP growthGPMOPMNPM
             40,4912%36%22%17%
             40,8863%37%23%18%
             41,2814%38%24%19%
             40,4915%39%26%20%
             42,0726%42%28%22%
Source: Company data, Verdhana research
Fig. 4: ARNA’s white body and red body price comparison with China imported tiles after antidumping

Source: Company data, Verdhana research

 

Fig. 5: GPM, EBITDA margin and NPM

Source: Company data, Verdhana research
Fig. 6: ARNA ASP and GPM trend

Source: Company data, Verdhana estimates

 

Revise earnings guidance on the back of lower sales and prices

We cut earnings by 45%/30% for FY24F/FY25F to factor in possible lower utilization, a result of likely lower sales volumes. We expect sales volumes to decline 13%/9% in FY24F/FY25F to 66.3/71.7 mn sqm (vs previously at 76.0/79.2 mn sqm). Furthermore, we expect ARNA to have a lower ASP resulting from increased competition with Chinese imported brands. As opposed to our previous blended ASP assumption of IDR42,846- IDR45,456 per sqm for FY24F-FY26F, we now see a significantly lower blended ASP range of IDR39,519-IDR41,711 for the same period. Overall, more challenging market conditions will result in lower utilization and selling power for ARNA, and we revise FY24F/25F earnings estimates to USD425/USD501.

 

Fig. 7: Assumption changes

Source: Company data, Verdhana estimates

 

 

Fig. 8: ARNA DCF Valuation

IDRbn 20232024202520262027202820292030
EBITDA (excl. minority interest)             676             679             787             909          1,022          1,085          1,158          1,237
Change in WC             (64)               75             (71)           (113)             (37)             (32)             (18)             (28)
Other operating cash flow             (72)           (121)           (141)           (163)           (189)           (205)           (216)           (227)
Capex           (173)           (275)           (275)           (375)           (275)           (150)           (150)           (150)
Free Cash Flow             366             358             300             258             520             698             775             832
Terminal Value          7,469
FCF + Terminal Value             366             358             300             258             520             698             775          8,301
Discount factor            1.00            0.89            0.79            0.71            0.63            0.56
PV                -                  -            300.2          230.2          412.7          493.3          488.1       4,657.6
Enterprise Value                      6,582
Net debt (cash)                       (378)
Equity Value                      6,960
Minority                         (33)
Shares Outstanding (mn)                      7,341
Target Price (IDR/share)                         944
Rounded TP                         940
Current price                         765
Upside/downside22.9%
Source: Company data, Verdhana estimates

 

Fig. 9: ARNA 5Y PE band

Source: Company data, Verdhana research

 

Fig. 10: ARNA peer comparison

Note:  Rated stocks using Verdhana’s forecast, not rated stock using Bloomberg’s consensus. Pricing as of 25 October 2024
Source: Company data, Verdhana estimates

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.


This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.


RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Rating Table

Rating
Remains
Buy
Target price
Reduced from IDR 1,300
IDR 940
Closing price
29 October 2024
IDR 765
Implied upside+22.9%
Market Cap (USD mn)356.5
ADT (USD mn)0.2

Relative performance chart


Source: LSEG, Verdhana

M cap (USDmn)
356.5
Free float (%)
47.6
3-mth ADT (USDmn)
0.2
(%)
1M
3M
12M
Absolute (IDR)
12.5
8.5
15.0
Absolute (USD)
8.0
12.1
16.4
Rel to Jakarta Stock Exchange Composite Index
13.7
4.2
2.5

Research Analysts

Michael Wildon (michael.wildon@verdhana.id)

Edward Prima (edward.prima@verdhana.id)

Gerald Hugo (gerald.hugo@verdhana.id)

Tags: Construction Materials, ARNA, ARNA JK, ARNA IJ, Michael Wildon, Edward Prima, Gerald Hugo
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