Global and domestic pressure has hurt the future prospects of the Indonesian paint industry. The spike in inflation (+5.71% YoY in October) severely affected people’s purchasing power. This, coupled with the slowdown in property sales (-15 bps QoQ), led to a -20.7% QoQ drop in AVIA’s sales volume in 3Q22. We expect the slump to continue well into FY23F, which prompted us to lower our projection for AVIA’s FY22F net profit by -26.1%, and downgrade our recommendation to HOLD with a TP of IDR 790.
Hurt by inflation. Inflation surge has dealt a heavy blow to all industrial sectors, including housing materials, since it severely affected people’s purchasing power. As a result, people are starting to be more selective in spending their money, prioritizing daily necessities over secondary and tertiary needs. The decline in purchasing power was reflected by the -16.5% YoY drop in national cement consumption. Aside from affecting purchasing power, inflation surge also indirectly led to interest rate hikes, which put pressure on the property sector (property price index dropped -15 bps QoQ in 2Q22).
Sales volume dropped -20.7% QoQ in 3Q22. There was a buildup of inventory at retailers, as reflected by the -20.2% QoQ drop in sales volume per customer in 3Q22. The buildup was mainly caused by the upward trend in ASP at the end of the year (approx. 3-8%), which prompted retailers to stock up and wait for the peak of the trend to gain more revenue. This condition pushed down AVIA’s sales volume considerably to 35,727 mton (-20.7% QoQ, -24.9% YoY) in 3Q22.
Future strategies. In 3Q22, AVIA launched two new products; No Drop Anti Panas and AVITEX Gold. Both products are architectural solutions products (the segment contributes 80.7% of the company’s total sales). Following the rather unimpressive 3Q22, AVIA will continue to innovate by introducing more economical products to solve the inventory buildup problem. Aside from introducing new products, the company also continues to expand its distribution network; it currently has 140 distribution centers (DC) (105 wholly-owned DCs, 35 third-party DCs), and it plans to open 40 new distribution centers by the end of FY26F.
HOLD, TP IDR 790. We downgraded our recommendation for AVIA from BUY to HOLD with a TP of IDR 790 (33.8x FY23F PE). Risks: declining sales volume, massive drop in people’s purchasing power.