Will ARNA Still be Your Pot of Alpha?
1H22: Everything is set in line!
• ARNA IJ booked a revenue of IDR1.36tn in 1H22 or grew by +8.92% YoY (vs IDR1.25tn in 1H21), in line with ours and consensus, implies 48.47%/48.11% of FY22E estimates, respectively.
• We believe that the higher revenue was supported by its porcelain tile products which targeted the mid-high segment accompanied by Digi-Uno tiles.
• Gross Profit grew significantly to IDR552.99 (+25.39% YoY) in 1H22, in line with ours and consensus, implies 50.09%/48.97% of FY22E estimates, respectively. Thanks to flat COGS (-0.10% YoY) and modest gas prices of 6USD/MMBtu.
• Operating profit expand to IDR394.45bn (+39.46% YoY), implies 51.89%/50.96% of ours and consensus estimates in FY22E, lift the GPM to 29.05% (vs 22.68% in 1H21).
• Net profit surged to IDR305.80bn or up +38.42% YoY (vs IDR220.91bn in 1H21), implies 49.80%/48.50% of ours and consensus estimates, while NPM climb to 22.52% (vs 17.72% in 1H21).
Domestic Upturn, Buffers External Headwinds
• As we know the shipping shortage in FY21-FY22E period was a "blessing in disguise" for ARNA. This condition brought an impact of increasing logistics costs, especially China and India as ceramic importers in Indonesia. China had also implemented a policy of limiting the use of coal into gas for industry, where China's gas price ranges from USD7-8/MMBtu compared to Indonesia (USD6/MMBtu). The government also guaranteed that gas prices for industry will be maintained until FY24F which is favorable for ARNA.
• Furthermore, the gas shortage that had occurred in East Java since the end of FY21 will recover after the Jambaran Tiung Biru (JTB) and Husky-CNOOC Madura Limited (HCML) gas projects operate, with an estimated additional gas of +417 MMSCFD (current: 600 MMSCFD). ARNA is expected to receive full gas price incentives (USD6/MMBtu) in line with the normal amount of gas supply, which will have a positive impact on efficiency and drive higher margins (GPM: 39.40% in FY22E), especially Plant 5B which produces glazed porcelain tile which is the company's breakthrough to increase revenue.
• The government had also provided support through the extension of the safeguard (BMTP) for the next 3 years in the range of 13-17% for imported products through PMK No. 156/PMK.010/21, so that the circulation of imported goods could be suppressed (exhibit 02).
• ARNA also benefited as CSAP IJ (Not Rated) plans to expand to Sumatra and Ex Java in FY22E. Since FY17-FY21, average sales to the related party, CSAP, reached ~70% of the consolidated net sales. This is offset by ARNA which will increase its capacity for plant 5C (East Java) in FY23F and plant 4C (Sumatra) in FY24F by allocating capex worth IDR600bn to meet the needs in these areas.
• Given these catalysts, we project ARNA's top-bottom line growth in FY22E of +9.67% YoY/+30.41% YoY supported by: 1) sales volume increase of +7.74% YoY; 2) gas consumption efficiency -6.00% YoY and 3) mid-high tiles segment.
Next Target: Focus on Mid-High Segment
ARNA has been developing the 60x60cm segment which is a segment for high-rise and landed house needs. Along with the commodity boom, developers are aggressive in building new units, so ARNA will take advantage of the momentum. ARNA will transform 34k traditional outlets into multi-channel distribution. ARNA will also focus on distributing through modern outlets. So far, the 'Homogenous Tile' segment was dominated by imported products, yet ARNA was confident that it can compete in this segment with more competitive prices due to lower gas prices and after-sales service which cannot be done by imported products.
Maintain BUY with TP IDR1,450
We transfer our coverage on ARNA IJ from Victoria Venny to Raka Junico. We maintain our BUY recommendation for ARNA with a new TP of IDR1,450 (+50% upside) which implies PE/PBV 17.33x/5.52x in FY22E. Currently, ARNA is trading at -1 STD PE of its 3 year average. Key downside: 1) lower sales volume, especially in mid-high segment; 2) massive sales imported products and 3) unintended consequences of a weakening USD/IDR.
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