Sri Rejeki Isman: Textiles

The Company

Indonesia’s largest integrated textiles manufacturer, Sri Rejeki Isman (SRIL), popularly known as “Sritex”, is currently enjoying the benefit of demand displacement from China as companies relocate to South-east Asia due to cheaper labour costs. The upstream segment of spinning and weaving operated by SRIL is more capital-intensive compared to the company’s downstream segment (printing and garments), which has the propensity to be more labour-intensive. SRIL is predominantly an export-based company (around 60% of its revenues are to the overseas markets) with South Korea, China and the US as the company’s largest export destinations.

SRIL is globally competitive as it can secure Deutsche Post DHL procurement through world bidding. Additionally, SRIL is the only company outside of Europe that has obtained certification from the German army procurement department. We note that SRIL is well known for its high-tech military uniform production capability with orders from various countries that require immediate production and delivery. Apart from the German military (since 1994), SRIL also has longterm and notable overseas clients, who depend on SRIL’s quality consistency and timely delivery. New customers include Uniqlo in 2013, when SRIL managed to obtain an order of $25m. By 2015, Uniqlo’s order could reach $100m-150m, or up to 46% of SRIL’s 2013 top line, providing rapid growth ahead. On the local front, SRIL should benefit from added military uniform orders on improved government policy.

Development Strategy

In 2013-15, faster than expected growth should materialise from SRIL’s Rp723bn ($72.3m) purchase of Sinar Pantja Djaja (SPD), an affiliated spinning company. Priced at 10 times the 2014 PE, the SPD acquisition should see enhanced earnings. This should expand spinning capacity by 210,000 spindles to 530,000. An acquisition is more efficient than via a greenfield investment (at the cost of $800 per spindle), and allows SRIL to fast track its expansion plans. SRIL has allocated $15m from its IPO proceeds to double garment capacity by the first half of 2014 from 8m pieces per annum to 16m, to produce both fashion and army uniforms. Domestically, army uniforms (100% of orders to SRIL) should be boosted by government plans to increase soldiers’ quota from one uniform to two uniforms per annum, starting as early as 2014. We expect total garment capacity to reach 24m pieces by the end of 2015. To facilitate this process, SRIL plans to add more weaving and dyeing printing machines, to be operational in 2015, costing $200m with the source of funding to come from either bank loans or a rights issue at the start of the project. SRIL expects to maintain net gearing at a maximum of 50% (9M13: 44%). Helped by its long track record and experience in the industry, SRIL is confident it has the expertise to run all of the new capacities coming on stream as efficiently as possible.

On its overseas sales, SRIL is seeing strong demand for fashion garments on companies relocating away from China and the global economic recovery.

In 2014, SRIL plans to expand its export markets, and we expect 2014F overseas revenue to contribute 58.5% of total revenues. Given high-dollar incomes from exports, SRIL will emerge relatively unscathed in spite of the recent IDR depreciation adversely impacting the company’s predominantly dollar-based costs (some 80% of COGS are dollar-linked).

Forecast

We expect SRIL to record net revenue and net profit of Rp4.8trn ($480m) and Rp467bn ($46.7m), respectively. This would pave the way for top and bottom line CAGR of 27.6% and 42.5%, respectively, in the 2011A-2014F period.

On valuation, the stock currently trades on 2014 PE of 9.8x, 18% discount to the market. Our target price of Rp310 ($0.03), with 27% upside potential, is based on re-rating to average regional peers’ 2014 PE of 12x on the back of the company’s rapid growth ahead. It is also worth noting that the management has mentioned its intention to distribute interim dividends in the first half of 2014, subject to shareholders’ approval.