Solid 1Q17 ResultsDriven by Strong Growth of Garment Division
Sri Rejeki Isman Tbk (SRIL) booked 6.8% YoY increase in revenue from USD168.7 mn in 1Q16 to USD180.2 mn in 1Q17, as the sales of garment products surged by 150% YoY. The 1Q17 revenue is inline within MNCS estimate, representing 24.06%/23.65% from MNCS/consensus estimates. The company also successfully managed an operational excellency and cost effiency since 2016, as the result operating margin increased from 16.9% in 1Q16 to 18.5% in 1Q17. Along with the good result at the top line, net profit grew by 7.8% YoY or 22.5% qoq to USD 17.7 mn in 1Q17. It was accounted for 27.06%/25.93% of MNCS/concensus estimates.
Key Growth Catalysts in 2017
We believe that the positive profitability trend in 1Q17 will continue throughout the year. It is supported by : 1) Aggressive expansion in production capacity by average of 32.5% for each of strategic business units (SBU) in FY17E; 2) More diversification in global customers portfolio where the export sales contribution is expected to increase from 49% in 1Q16 to 56% in FY17E; 3) Solid growth in company's profitability. We estimate the company revenue will potentially grow by 10.1% YoY to USD 748.89 mn in FY17E, while net profit is estimated to increase by 10.33% YoY to USD 65.5 mn; 4) Manageable debt exposure in the long run. We estimate the DER ratio of the company will potentially decline from 1.53x in FY16 to 1.3x/1.11x in FY17E/FY18F as stronger operating cash flow ahead.
Valuation and Recommendation : Maintain Buy with TP IDR468
We believe the strategic decision of SRIL to enlarge its production capacity and maintaining cost efficiency was bold decision in providing sustainable value adds for the shareholders. We maintain our Buy recommendation with price target (PT) of IDR468 per share for next 12 months, indicating 37.22% potential upside from current share price at Rp 340 (as of May 26th 2017). The calculation of PT is based on DCF model by using 8.06% of WACC, 0.74 of Beta and 6.4% of risk premium. Our valuation implies 10x/9.5xof PE17E/PE18F.
