December 7, 2017 / 1:09 AM / 12 days ago

Fitch Assigns Sritex's US Dollar Notes 'A+(idn)' Rating

(The following statement was released by the rating agency) JAKARTA, December 06 (Fitch) Fitch Ratings has assigned a National Long-Term Rating of 'A+(idn)' to Indonesia-based integrated fabric and garment manufacturer PT Sri Rejeki Isman Tbk's (Sritex; BB-/A+(idn)/Stable) USD10 million domestic medium-term notes due 2020. The notes add to the USD30 million issuance in October 2017, which are part of Sritex's total issuance plan of USD80 million. The company plans to issue the remaining USD40 million in February 2018. Proceeds from the issuance will be used to refinance Sritex's bank debt. Sritex's ratings reflect the company's profile as Indonesia's largest integrated fabric and garment manufacturer, its increasing operating cash flows, and its moderate financial profile. We expect Sritex to reduce its leverage (defined as net adjusted debt/EBITDAR) to around 3.0x by end-2017 from 3.9x at end-2016 as it completes its new production capacity. Leverage fell to 3.2x at end-September 2017 from a peak of 3.7x at end-June 2017 as working capital needs returned to normal after new capacity increased sufficiently to ease a production bottleneck in its finished fabrics division. The domestic medium-term notes are rated at the same level as Sritex's 'A+(idn)' National Long-Term Rating because they represent the senior unsecured obligations of the issuer. 'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Working Capital Normalising: We expect Sritex's cash conversion cycle to normalise to less than 190 days by end-2017, from a high of 217 days as of end-June 2017, and 181 days at end-2016. The working capital increase in 1H17 was temporary and driven by the production bottleneck at the company's finished-fabric division because new production capacity in the division took longer to be commissioned, even though spinning and weaving production, key raw materials for finished fabrics, had already increased. Sritex's cash conversion cycle may ease more than we expect if the new capacity is fully operational before the company's planned completion by end-2017. Improving Operating Cash Flows: We expect Sritex's EBITDA to increase to USD150 million in 2017 and USD170 million in 2018 from USD130 million in 2016, led by growing sales volume as the company expands production capacity. We expect the company to generate neutral to positive free cash flows in the next two years due to improving operating cash flows and a drop in capex to levels required to maintain its current operations, which we expect will range from 2.5%-3.0% of revenue annually over the same period. Vertical Integration, Growing Exports: We expect around 55%-60% of Sritex's revenue to come from the export of finished fabric and garments over the next two years, up from around 50% in 2016. Sritex sources yarn and raw fabric from its own mills and produces speciality garments, such as military uniforms, which have higher profit margins. The company is a nominated supplier to several of its main buyers, which is a key credit strength, and is supported by its record of delivering to customers' required quality and cost and on time. Sufficient Production Capacity: Sritex is Indonesia's largest vertically integrated fabric and garment manufacturer. The company has an annual production capacity of 654,000 bales of yarn, 180 million metres of greige cloth, 240 million yards of finished fabric and 30 million pieces of garments. DERIVATION SUMMARY Sritex compares well with peers such as PT Pan Brothers Tbk (B/A(idn)/Stable) and PT Sumber Alfaria Trijaya Tbk (Alfamart, AA-(idn)/Stable). Pan Brothers is a smaller garment manufacturer, when compared with Sritex, with high leverage due to the aggressive expansion of its production capacity over the last two years. Sritex has considerably larger operating scale and a stronger financial profile than Pan Brothers, which justifies Sritex's one-notch higher National Long-Term Rating. Alfamart operates the second-largest network of mini-market retail stores in Indonesia. Its rating is underpinned by its solid market share, strong competitive position over larger format retail stores, and the non-discretionary demand for most of its products. Alfamart's stronger business risk profile explains the rating differential on the National Long-Term Ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 12% in 2017 and 10% in 2018 - EBITDA margin of 20% in 2017 and 2018 - Capex/revenue of 2.9% in 2017 and 2.5% in 2018 - Cash collection cycle to drop to less than 190 days by end-2017 from 217 days at end-June 2017 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - We do not expect positive rating action for the next two years as Sritex's leverage, measured by net adjusted debt/EBITDAR, is likely to remain high for its ratings as it ramps up sales to fill its new production capacity. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Inability to lower leverage to around 3.0x by end-2017 (2016: 3.9x; 2017F: 3.3x; 2018F: 2.9x) - A sustained weakening in EBITDA margin LIQUIDITY Comfortable Liquidity: At end-September 2017, Sritex had a cash balance of USD114 million and approved but undrawn credit lines of USD334 million, compared with the USD30 million of domestic medium-term notes it issued in October 2017 and a USD18.4 million bank loan maturing in 2018. Aside from these, the earliest significant debt maturity is in 2021, when USD350 million in unsecured notes fall due. Given the completion of its expansionary capex, we expect Sritex to generate neutral free cash flows in the next 12-18 months. Contact: Primary Analyst (National Ratings) Olly Prayudi Director +62 21 2988 6812 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta, Indonesia 12940 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Date of Relevant Rating Committee: 9 March 2017 Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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