JAKARTA (TheInsiderStories) - Moody’s Investors Service has affirmed the B1 corporate family rating (CFR) of PT Sri Rejeki Isman Tbk (Sritex) and the B1 rating on the senior unsecured notes due 2019 and 2021, and issued by Golden Legacy Pte. Ltd. and guaranteed by Sritex.
The outlook on all the ratings is positive, the rating agency said.
“The affirmation of Sritex’s B1 CFR reflects the company’s robust revenue and EBITDA growth in 2016, and our view that the recent completion of its capacity expansion project positions it for solid earnings and cash flow growth in 2017,” Brian Grieser, a Moody’s vice president and senior analyst said.
Despite the strong earnings growth, debt is expected to increase in 2016, as the company finished its three-year expansion project and invested in
raw materials to support the ramp up of its new capacity in the garment business. As a result, leverage — as measured by debt-to-EBITDA — likely rose to over 4.0x on Dec 31, 2016 from 3.8x on Dec 31, 2015; tempering upward ratings momentum, Grieser said.
Sritex’s B1 CFR continues to reflect its: (1) solid EBITDA margins, approaching 20%; (2) track record of revenue and earnings growth; (3)
completion of its large, debt-funded capital spending program on time and on budget in 2016; (4) customer and geographic sales diversification; and (5) solid liquidity profile.
“The positive outlook on Sritex’s CFR continues to reflect our expectation that the company’s earnings will benefit from strong demand
for its textile and garment products in 2017, and that garment sales will represent a greater proportion of Sritex sales; thereby supporting margin
expansion,” adds Grieser who is also the Lead Analyst on Sritex.
Moody’s expects Sritex’s free cash flow to turn positive in 2017, due to a combination of higher EBITDA generation and materially lower capital
expenditures. We expect this to reduce Sritex reliance on incremental debt in 2017, for the first time since the start of the three-year
expansion project.
The ratings could be upgraded within the next 12 months if Sritex maintains its stable operating and financial profile, with cash flows
exceeding capital spending.
In particular, debt-to-EBITDA levels approaching 3.5x and EBITA-to-interest expense above 3.5x would be supportive of an upgrade.
The company would also need to maintain its good liquidity profile, supported by high cash balances and committed bank facilities.
A near-term downgrade of the ratings is unlikely, given the positive outlook. However, the outlook could return to stable if any of the
following occur:
(1) Rising wages and other input costs reduce Sritex’s cost competitiveness, such that its EBITDA margins fall below 15% on a
sustained basis;
(2) Sritex expands its business through debt-funded acquisitions or capital expenditures, such that debt-to-EBITDA exceeds 4.0x on a sustained basis; (3) Related-party transactions weigh on margins or weaken cash flow prospects; or
(4) Liquidity deteriorates due to either falling cash balances or a loss of access to its credit facilities.
PT Sri Rejeki Isman Tbk (Sritex), located in central Java, Indonesia, is a vertically integrated manufacturer of textiles and textile products.
Its operations are spread across 25 factories, consisting of nine spinning plants, three weaving plants, five finishing plants and eight
garment plants. Net revenues generated by its four divisions totaled approximately S499 million for nine months ending 30 September 2016. (*)