Brief company description: PT Arwana Citramulia Tbk manufactures ceramic construction material for flooring. Through its subsidiary, the Company also distributes its products. The Company's factory is located in Tangerang, Banten.
ARNA share price exploded in 2012, topped in 2014, and crashed.
No surprise here. EVA grew sharply during 2011-2014, and crashed in 2015.
Good news is ARNA EVA has recovered ever since.
It is important to understand the changes in what drives ARNA value. Prior to 2015 crash, growth contribution to value creation (EVA momentum) is significant. It is not true today. Productivity (changes in EVA margin) has become even more important.
ARNA EVA margin is mostly affected by NOPAT margin. In turn, NOPAT margin is largely driven by changes in gross margin.
Around 50% of ARNA COGS is tied to USD (30% for gas & 20% for glass). This company obviously could not pass on higher raw materials to its customers. When IDR weakened versus USD, ARNA took a big hit.
To make things worse, imported ceramics reported growth is 20% on average since 2013 (RTX news). These foreign competitors apparently have lower gas price. Malaysian gas price is about USD 6/mmbtu, while Indonesian gas price is USD 9.5-10/mmbtu. No wonder why ARNA export sales only contributes 1% of its total sales. It simply could not compete with outsiders.
The threat of cheaper outside competitors is being acknowledged by the management. You could read from the confusing statement from the management in this year. In the beginning of this year, the management speaks to target middle-low segment. By the end of this year, the management switched its talk to target middle-up segment. The common thread is competitors.
I believe the negative impacts of low-priced competitors are here to stay. There are two important developments relating to this.
First, it is unlikely we will see double digit sales growth in the future. The average sales growth rate after 2015 crash is significantly lower than during its boom period in 2011-2014 (13.4% vs 20.4%). The last 12 months of Q3 2019 sales growth is only 8.5%.
Second, the growing presence of cheap ceramic imports means lower gross margin.
As you can see, prior to 2015 slump, ARNA gross margin was consistently above 30%. 4 years after the big slump, and we are still far below that level. I do not think it could reach the good old days now that foreign competitors are here to stay.
It means, it is highly likely, in my opinion, that ARNA could no longer make above average EVA growth. EVA momentum is likely only less than 0.5% starting next year, driven by sales growth of 10% (still an optimistic projection, in my view). Keep that number in mind.
At current price of 450/share, ARNA both EV/Invested Capital and FGR looks low enough historically.
But that price still implies that investors are expecting ARNA EVA momentum to reach 1.6% per year in the future. In the last twelve months, ARNA managed to get EVA momentum of 2.5%. However, I do not think ARNA could reach even 1% of EVA momentum next year for the reasons I have explained.
My take:
It is an interesting stock and definitely a good company, but the price is unattractive. I think it is quite likely the share price would reach a point where expected EVA momentum is less than 0%. That would be somewhere below 270/share. I think the possibility is high. After all, ARNA investors were highly optimistic in 2014 (MiM was 8.4% at the peak of 2014. Its actual EVA momentum? Only 0.6%...that is overtly overvalued). I am a believer in market cycle. Investors’ mood moves from highly optimistic to depression, and vice versa. At current price (450/share), MIM is 1.6%. It is still pretty optimistic.
Climate Focus
Another fantastic video from 'Just Have a Think' to close this year. A brief summary of important climate events happening in this year from around the globe.
For the first time, environmental activists have become public movements happening around the world. They have one unified demand: real policies so that
Comments