Sri Rejeki Isman (Sritex)

As you know, currently about 90% of listed companies on the Indonesia Stock Exchange has released their financial statements for the period of First Quarter 2015. The bad news, most of them had an unsatisfactory performance. Even reputable companies like Astra International (ASII) recorded a decline in profits of more than 15%, the worst in the last 10 years. Seeing these facts, no wonder that in the past several days the Jakarta Composite Index (JCI) fell by almost 7% (although it later rebound). Because I myself, if I own ASII or other stocks whose company had a poor performance, I would certainly going to sell it.

The good news, of about 500’s companies in the IDX, of course not all of them had a poor financial performance. Take a deep research, and you will be able to find some stocks that the valuation is still quite low, and the company's performance is also good.

And one of these stocks is Sri Rejeki Isman (SRIL). SRIL recorded an increase of 12.3% of net profit in the first quarter of 2015, with annualized ROE of 24.0%. With PER of only 7.3 times at the price of Rp296 per share (using the exchange rate of Rp13,158 per US Dollar), then of course the stock is relatively inexpensive especially when the investors have no choice but to allocate their funds in stocks that still had a good performance in the beginning of 2015, and SRIL is one of them. Anyway, let us learn this SRIL since the beginning.

SRIL is currently the largest textile manufacturer in Indonesia, or even the largest in Southeast Asia (in terms of sales turnover) which is headquartered in Sukoharjo, Central Java Province. The company's history began in 1966 where’s the company's founder, the late Haji Muhammad Lukminto, opened a textile shop in Pasar Klewer (Klewer Market), Solo, Central Java. Two years later, HM Lukminto built his first fabric factory in Jalan Baturono No.81A, Solo. Ten years later, in 1978, PT Sri Rejeki Isman, or abbreviated Sritex, officially established.

In the subsequent years, the company continues to grow. In 1982, Sritex opened its first weaving factory. In 1992, Sritex reached one of its milestones by become an integrated textile company, which controlling four production lines of spinning, weaving, dyeing, and garment. In 1994, Sritex gained contract from the Government of Germany to produce military uniforms for the German Armed Forces, and since then Sritex later built its reputation as one of the most reputable manufacturers of military uniforms in the world.

In 2006, HM Lukminto retired, and his position as chairman of Sritex replaced by his first son, Iwan Setiawan Lukminto. In the hands of second generation of the company, the business developments of Sritex even went faster in a relatively short time, where in 2013 the company officially went public, acquired one of its competitors, PT Sinar Pantja Djaja (thus increasing the production capacity of the company), and doubled its garment production capacity to 12 million garments per year. Today, Sritex is a supplier of military uniforms for more than 30 countries worldwide. The company also making uniforms for employees who work at several big companies in Indonesia, making clothes and other fashion products to be sold to retail stores, producing yarn, raw fabric, and fabric. From only a small textile shop in Pasar Klewer, Solo, Sritex is now have a large cluster of textile factory covering an area of ​​52 acres in Sukoharjo, not including the 18 hectares of factory cluster in Semarang, Central Java, and employs a total of 16,800 employees in the end of 2014.

Now, if you learn the textile business in Indonesia, then you will find the following facts:

First, beyond the commodities such as coal and crude palm oil (CPO) that had been booming a few years ago, Indonesia also has the textiles as one of the main products for export. Based on data from the Central Statistics Agency (Badan Pusat Statistik/BPS), in 2013, Indonesia exported non-knitted-apparel (not including other textile products) valued at US$ 3.9 billion. The export value, although much smaller than the export value of coal and CPO which more than US$ 40 billion in total, but still bigger than the export value of other main export products, such as shoes and plastics. In 2013, based on data from Statista.com, Indonesia was also one of the ten largest textile exporters in the world.

Secondly, like the oil and gas industry, the majority of the textile industry in Indonesia is controlled by foreign investors, mainly from Japan, China, and South Korea, or at least that’s the case if we look at the composition of shareholders of 19 listed textile companies (while overall, Indonesia has about 500’s textile companies). SRIL is one of few textile companies in Indonesia which is still controlled by local owners, and fortunately it is also the largest textile company in the country.

And third, whether it's due to transfer pricing, difficulties in obtaining raw materials of production, or other causes, from nineteen textile companies listed on the Indonesia Stock Exchange, most of them recorded poor financial performance in the long term. If we take the example of two main competitors of SRIL, namely Pan Brothers (PBRX), and Apac Citra Centertex (MYTX), then PBRX have had a very small profit margin (less than 3%) so that its ROE did not reach 10%. While MYTX? It is even worse, where the company continues to lose money since 2008 until today. If you look at the fact that Indonesia is one of the largest textile manufacturer in the world, including in the City of Bandung I could see that there are many wealthy businessmen in the field of textile or clothing, then I wonder: What are those textile companies doing? Making money for the owners but not for the company itself?

However, different thing happens to SRIL. Between 2010 – 2014, the company had profit margins of between 5 – 8%, and the profit itself continues to rise from year to year. And in the early 2015's, the rising trend continues in which, as already mentioned above, in the first quarter of 2015, the company’s net profit rose 12.3% over the same period in 2014, and recorded 24.0% of ROE. If we look at the fact that equity value of SRIL soared in 2013 because of the additional capital of Rp1.3 trillion (about US$ 110 million) from its IPO, the ROE of 24.0% is fairly good, because it means that the company could quickly use the proceeds from its IPO (it only took a year) to conduct the business developments.

And what about the future prospects of the company?

As a company, we may say that SRIL is currently in its golden period, especially since the leadership of the company was taken over by Iwan Setiawan Lukminto, and also his younger brother, Iwan Kurniawan Lukminto (Iwan S. became president commissioner, while Iwan K. became president director). Since 2006, SRIL did several work of expansions such as constructing new plants to increase production capacity, improving the efficiency, expanding the diversification of products, and increasing the network of customers. And so far the expansions has been successful thus SRIL became the largest textile company in Indonesia. Back in 2006, SRIL was not as large as today.

However, the expansion itself is far from end. In fact, the company still has plans to increase its production capacity until the year 2016, including targeting that the garment production will reach 30 million garments in 2016, an increase of 150% compared to 2013.

Then how about the capital requirements? Well, after successfully earned US$ 110 million from its IPO on the Indonesia Stock Exchange in 2013, a year later SRIL issued US$ 270 million of bond in Singapore, of which US $ 110 million were used to repay bank debts (refinancing, the bank debts with interest rate of 11 – 12% per annum were replaced with a bond debt with lower interest, which is 9% per annum), while the rest is used for capital expenditures.

Because of the bond, SRIL total liabilities was reached US$ 433 million in the first quarter of 2015, or 1.7 times of its equity of US$ 247 million, and I think this is a ‘lil bit risky for a relatively young and growing company (if counted from 2006 as when the company began its expansions). Its bond that is denominated in US Dollar also made SRIL’ financial performance to be vulnerable to the risk of Rupiah exchange rate towards the USD, where the Rupiah is still impairing until today. However, because the expansion process of the company is already on process since few years ago, and so far everything has been well-done, I am optimistic that the management will be able to use the debt optimally. The impairment of Rupiah also should not have a negative impact because the majority of revenue of the company also denominated in USD. In fact, if there are companies in IDX that benefited from the impairment of Rupiah as the national currency, then SRIL is one of the companies because SRIL pay the cost of materials and labor in Rupiah (SRIL’ position as an integrated textile company from upstream to downstream, causing it to not depend on imported raw materials), but gained its income in US Dollar. And unlike the prices of coal and CPO that are continue to fall in the last three years, the price of textile products of the company is fairly stable.

So if there is no obstacle in the way or particular extraordinary events (force majeure), the positive financial performance as well as significant growth in assets generated by SRIL so far should be maintained at least until the year 2016. And by that I pointed to you, private equity guys, 'coz you do like prospect, eh?

Then how about the shares?

Since its first listing on the Indonesia Stock Exchange in June 2013 at the price of Rp240 per share, SRIL has had a volatile movement which although it rose to 300 in January 2014, but it then fell, and continue to fall to as low as 120 in October 2014, or tumbled exactly 60% from its peak, probably because investors were concerned with the company's bond debt amounted that is denominated in USD, because its value in Rupiah would be increased if the Rupiah itself is weakened towards the USD.

However, as already discussed above, the impairment of the Rupiah should not have a negative impact on the company. I was interested in this stock when it is in a position Rp150’s per share, because its PBV was only 1.1 times while the company's performance is fairly no problemo. Plus, SRIL has a status as the leader in its field, and also offers long-term growth prospects, as already discussed above. Although the shares were still in a severe downtrend to as low as Rp120 per share, but after several considerations, in no way the price would stuck at bottom price of Rp50 per share. If the company successfully recorded a profit increase in the first quarter of 2015, the shares would surely rise back!

And the good news, SRIL was successfully recorded a positive performance in the first quarter of 2015. But the bad news, the shares are already flying high since two months before. After a long sideways in a price range of 150 – 160 from November 2014 until February 2015, since early March the stock began to rise, and continue to rise until successfully scoring a new high. But in terms of valuation, the price of Rp296 per share is reflecting 7.6 times of PER and 1.7 times PBV, or relatively low. And by looking at the company’s outlook that is quite bright, then the chance of further gains for SRIL might still be open. Conservatively, considering that the reasonable PBV for SRIL is 2.0 times, then target is around Rp350 per share. The fluctuations of JCI do not seem to affect the price movement, that although the JCI fell sharply in the last week, but instead SRIL continued to rise, and the increase was underpinned by the company’s good fundamentals.

However, based on the pattern of movement of this stock in the past, SRIL tends to fluctuate where it could quickly rise, but also can quickly go down. The increase of almost 2-fold (from 150’s to almost 300) in just two months is of course too fast, that in the future there may be investors who taking the profit from the stock, causing it to fall back. Technically, the strong support for the next several months for SRIL is at the level of 225’s, or pretty far below the current price position (so you better accumulate this SRIL in the price of around 225’s).

Therefore, if you are interested in this stock then the strategy is as follows: 1. Make SRIL as an investment for a period of at least three to twelve months, where the target of 350 was probably only be achieved, without the case of force majeure, in a year from now. Forget about the short-term trading let alone swing, because SRIL is too good for that, and 2. From now on until the next year, it is likely that this SRIL can go down first, perhaps to as low as 225 which mentioned earlier. That's why you should buy this SRIL little by little while 'testing the ground', ie, to know that if the stock goes down then the decrease would stop at what price. Whatever the reason, do not spend all of your cash at once, especially because of the position of JCI are also still vulnerable to further corrections. If there are some people who bought this SRIL using margin money and forced to sell it when the market collapsed, then SRIL still would be dragged down even if there is nothing wrong with its fundamentals.

Okay, I think that's all. Any comments?

PT. Sri Rejeki Isman, Tbk (SRIL)

Rating of Performance in First Quarter 2015: A

Rating of Share Price on 296: A

Disclosure: When this article was published, Avere Investama (Teguh Hidayat & Partners) is in a position of holding SRIL at an average purchase price of Rp274 per share. This position can change at any time without prior notice.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.