Singapore, April 16, 2018 -- Moody's Investors Service has upgraded the corporate family rating
(CFR) of Sri Rejeki Isman Tbk (P.T.) (Sritex) to Ba3 from
B1.
At the same time, Moody's has upgraded to Ba3 from B1 the
ratings on the $350 million senior unsecured notes due 2021 and
$150 million senior unsecured notes due 2024, issued by Golden
Legacy Pte. Ltd. and unconditionally and irrevocably guaranteed
by Sritex and its subsidiaries.
The rating outlook is stable
RATINGS RATIONALE
"The upgrade of Sritex's CFR to Ba3 reflects its established
track record of high organic growth rates, margin expansion and
Moody's expectation for robust demand for its textile and garment
products in 2018 and 2019," says Brian Grieser, a Moody's
Vice President and Senior Credit Officer.
Sritex grew its EBITDA organically to $165 million in 2017 from
$92 million in 2014 and expanded its margins to around 22%
in 2017 from 20% in 2013, well ahead of Moody's expectations.
The EBITDA growth and margin expansion were driven by Sritex's debt-financed
capital expenditure program completed in 2016, and ramp-up
of its production facilities to close to full capacity in 2017.
Sritex doubled the capacity of its weaving and finishing businesses,
while increasing its highest-margin garment business by 150%
to 30 million garments from 12 million in 2013.
Despite a substantial increase in debt to fund its expansion, Sritex
has maintained adjusted debt/EBITDA between 3.75x and 4.25x
over the past three years. Moody's expects leverage to be
maintained between 3.5x and 4.0x in 2018, as working
capital and capacity investments moderate going forward.
Working capital fluctuations will remain highly volatile and unpredictable
given the seasonality of the garment industry and the size and delivery
timeline of customers' orders. As such, Moody's
expects material quarterly volatility in cash flows from operations.
Sritex has largely financed large inventory purchases with short-term
debt provided by a broad group of banks.
"Moody's views Sritex successful track record of managing
the volatility of its working capital, coupled with its improved
business profile, as consistent with the Ba3 rating,"
added Grieser.
Sritex's liquidity is adequate given its high reliance on short-term
funding and material working capital fluctuations. However,
Moody's notes that Sritex typically carries high cash balances and
that its inventory and receivables typically provide over 3.0x
coverage of short-term debt. Moody's expects capital
expenditures to be $30-$40 million in 2018,
focused mainly on maintenance and improving utilization levels.
In February 2018, Sritex acquired PT Bitratex Industries and PT
Primayudha Mandirijaya (PM) for $85 million in cash and the assumption
of roughly $55 million of debt. The cash component was partially
funded with a $50 million equity issuance.
Moody's expects Sritex's EBITDA margins will compress between 100
to 200 basis points in 2018 given the two new companies' focus on
lower-margin yarns, compared with Sritex's higher-margin
garment and fabric businesses. However, the acquisitions
provide Sritex with new capacity, access to a broader product line,
and new customers.
The stable outlook reflects Moody's expectation that strong demand
from both domestic and international customers will continue in 2018 and
2019, supporting solid earnings growth and margin stability.
Moody's expects working capital and capital investments to moderate
in 2018, which will in turn support positive free cash flow and
an improved liquidity profile.
The ratings could be upgraded if Sritex maintains its growth trajectory
while funding capital expenditure and working capital with internally
generated cash flows and lowering debt.
Financial metrics that would support an upgrade include: (1) debt/EBITDA
maintained below 3.00x even during periods of high working capital
investment; (2) EBITA/interest rising above 5.0x; or
(3) RCF/net debt consistently above 20%.
The ratings could be downgraded if Sritex embarks on large debt-funded
capital expenditure programs or acquisitions. Further, any
signs of moderating customer demand or its relationship with related party
businesses weighs on margins, could pressure the ratings.
Financial metrics that would support an downgrade include: (1) debt/EBITDA
rising above 4.5x; (2) EBITA/interest expense falling below
2.5x; or (3) RCF/net debt maintained below 10%.
The principal methodology used in these ratings was Global Manufacturing
Companies published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Sri Rejeki Isman Tbk (P.T.) (Sritex), located in Central
Java, Indonesia, is a vertically integrated manufacturer of
yarn, greige (raw fabric), finished fabric and apparel,
including uniforms and retail clothing. The company's operations
are spread across 25 factories, consisting of nine spinning plants,
three weaving plants, five finishing plants and eight garment plants.
Net revenue generated by the company's four divisions were around $759
million for the year ended 31 December 2017.
Sritex is majority owned by the Lukminto family (60.06%).
Iwan Setiawan Lukminto, son of the founder H.M Lukminto,
has been the president director since 2006. The family has day-to-day
control of operations. The remaining 39.94% share
of the company is publicly traded on the Indonesian Stock Exchange.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Brian Grieser
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
