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Fitch assigns Sritex’s USD Notes final ‘BB-‘ rating


JAKARTA – Fitch Ratings has assigned Indonesia-based textile and garment manufacturer PT Sri Rejeki Isman Tbk’s (Sritex, BB-/A+(idn)/Stable) US$350 million 8.25 percent unsecured notes due in 2021 a final rating of ‘BB-‘. The final rating is in line with the expected rating assigned on 23 May 2016, and follows the receipt of final documents conforming to information already received.

The notes have been issued by Sritex’s wholly owned subsidiary Golden Legacy Pte Ltd and are guaranteed by Sritex and its operating subsidiaries. Sritex will use US$180 million of the proceeds to repay its US$270 million unsecured 9 percent notes due in 2019 following a tender offer for them, and the balance to refinance other working capital debt and for general purposes.

Fitch expects the new issue to be neutral for the company’s leverage, and Sritex will be able to maintain its net debt/EBITDA ratio below 3x over the medium term.

Key Rating Drivers

Strong Operating Cash Flow: Sritex’s operating cash flow margin improved to 9 percent in 2015 from 1 percent in 2014, supported by improved working-capital management and stable profit margins. We expect the company to continue to generate robust CFO margins of between 7-10 percent over the next three years. This should support healthy FCF and allow Sritex to deleverage, as its capacity expansion comes to a close this year.

Small, but Growing, Scale: Sritex has relatively small operating scale compared with its international peers in the competitive and fragmented textile sector. However, the company has significantly expanded its production such that we expect EBITDA to grow by more than 50% at the completion of the investment cycle. Sritex is vertically integrated despite its size, producing yarn, greige, finished fabrics and apparel, while many of its competitors produce only one or two of these products. This has helped Sritex to maintain higher and more stable profit margins than some of its international peers.

Vertical Integration, Growing Exports: Around 50 percent of Sritex’s sales stem from garments and finished fabric for which it sources yarn and raw fabric from its own factories. The company also sells its yarn and raw fabric to external customers and sells speciality garments, such as military uniforms, which support higher and more stable EBITDA margins and better economies of scale. In addition, about 15 percent of sales came from orders by foreign and domestic governments in 2015, which are less cyclical.

Sufficient Production Capacity: Sritex’s production capacity will increase to 30 million pieces of garments, 240 million yards of finished fabric, 180 million metres of raw fabric, and 654 thousand bales of yarn at the end of 2018. Much of this will be paid for by end-2016. The company expects this capacity to support demand through 2019. About 30 percent of yarn and 60 percent of greige production is used internally, so the company may require spinning capacity from 2018, subject to the level of external demand.

Currency Risk Mostly Hedged: Nearly half of Sritex’s sales in 2015 were exported directly, up from 39 percent two years ago. Most of its sales to domestic customers are also linked to the US dollar exchange rate, as much of this is exported as well. Consequently, the company has a significant natural hedge against its foreign-currency costs. This was evident in 2015 when Sritex’s EBITDA margin remained largely intact in the face of severe currency volatility.

Key Assumptions:

Fitch’s key assumptions within the rating case for Sritex include:
– Revenue growth of 9 percent in 2016 and 12.5 percent in 2017
– EBITDA margin to remain around 18 percent
– CFO margin to remain between 7-10 percent
– FCF to remain neutral to positive

Rating Sensitivities

Negative: Developments that may, individually or collectively, lead to negative rating action include:
– A sustained increase in net debt/EBITDA more than 3x (12 months to 1Q16: 3.0x)
– A sustained decrease in CFO margin to less than 7 percent

Positive: Fitch expects no positive rating action in the next 24 months because of Sritex’s scale of operations, which is still smaller than its higher-rated peers.

Sritex has robust liquidity, with cash and committed undrawn credit lines, respectively, of US$ 77 million and US$131 million at end-2015; expected FCF generation of around US$12 million in 2016; and its nearest significant debt maturity of US$ 270 million due in 2019. We expect Sritex to be able to generate positive FCF in the next two years, supported by waning expansionary capex and strong earnings growth. (*)


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Source: The Insiderstories
Fitch assigns Sritex’s USD Notes final ‘BB-‘ rating

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