Ready to Take Off!
Significant Financial Performance Recovery in FY16-FY17 and 1Q18
ARNA's FY15 financial performance bottomed out, and since then has exhibited steady recovery, through FY16-FY17, supported by an appropriate product mix strategy and cost efficiency. This recovery is documented by a revenue increase of 17.03%/14.62% YoY and net income growth of 29.67%/33.56% YoY for FY16/FY17. ARNA booked a 12.06% YoY increase in revenue, from IDR441.48 billion in 1Q17 to IDR495.71 billion in 1Q18 as its Uno-Digi type products were at 50% level and ASP growth of 3.26% YoY. This 1Q18 revenue is in line, representing 26.49%/24.48% of MNCS/Consensus estimate. ARNA also successfully managed operational excellence and cost efficiency, and as a result operating margins peaked at 11.32%. Along with a satisfactory top line result, net profit grew by 6.64% QoQ to IDR39.45 billion, which reflects 26.83% of MNCS estimate.
2018: Time to Take Off
We believe that the positive trend evinced in FY17 will continue throughout the year, supported by several catalysts, as follows: 1) Upgrading of ‘Sejuta Rumah’ program development, with a realization target of 906 thousand units in FY18E; 2) Production capacity increased to 63.37 million sqm/year with IDR150 billion in capex available; 3) Development of appropriate product mix composition, where the UNO-DIGI product composition trend rises from 15% in FY15 to 41% in FY17, predicted to be at a 43%/45% level by FY18E/FY19F; 4) A reset downward by the Government for gas prices has the potential to increase profitability, since gas added 29.50% to total Company production expenses in FY17.
Massive Product Influx from China Becomes a ThreatThe ASEAN-China Free Trade Agreement (ACFTA) will impact local ceramic producers as imports of ceramics from China increase, following a cut in the import duty on ceramics, from 20% in FY17 to 5%, based on Regulation of Minister of Finance 06/PMK.010/2017.
Recommendation: Initiation BUY at TP IDR450We recommend BUY for ARNA with TP: IDR450, which implies PE/PBV 22.72x/3.17x on FY18E and 17.95x/3.03x on FY19F. The Company is currently trading at a level of -1 STD (average 3-year P/E) with P/E of 20.01x. We thus conclude that a appropriate product mix development strategy, supported by efficiency in gas usage, can boost ARNA margins.
