Arwana Citra Mulia, Standing Tall Amid Macro Uncertainties
Despite rising interest rates, ARNA does not expect monthly sales to slow down as most customers pay cash. There is minimal impact from higher financing cost as the bulk of its capex has been paid for while a mid-September selling price hike will offset some cost increases. ARNA is trading at 18.5x FY14F earnings, and we think the stock deserves a premium to its peers given its high EPS growth and ROE. Maintain BUY.
Monthly sales still robust
ARNA does not expect monthly sales to slow down despite the increase in interest rates. In addition to higher output from its new Palembang plant, the company started selling 9m sq m (equivalent to 8.6% of its FY13F sales) of ceramic tiles in September.
We believe that the higher interest rate environment may not significantly impact ARNA’s sales, as 95% of its sales involve direct selling to end-users via its Catur Sentosa (CSAP IJ, NR) distributor – with payments in cash. The company has diverse end-user demographics, including farmers, blue collar workers, wet market merchants, miners and Indonesians working overseas.
Passing on a portion of cost increases
The weakening IDR will result in an increase in ARNA’s production costs due to USD-related cost components. In our sensitivity analysis, for every IDR1,000/USD decline in exchange rate, the company’s production costs will increase by IDR700 per sq m. ARNA increased its selling prices in mid-September 2013 to pass on some of its cost hike to end-users and is likely to raise selling prices further to fully pass on all the cost increase in early 2014.
Minimum impact from higher financing costs
ARNA said that 95% of the machinery purchased for its Palembang plant was fully settled before the IDR weakened. Only a mere USD1m capex for machinery has yet to be paid for. It is worth noting that debt financing for its Palembang plant only makes up IDR30bn of its IDR200bn total capex. This is mainly due to ARNA’s strong cash flow generated from its operating activities.
