Sri_Rejeki_Isman._Tbk：Initiate_new_24s_with_Sell_and_downgrade_21s_to_Sell-Deutsche_Bank

Deutsche Bank Markets Research Asia Indonesia HY Corporate Credit HY Multi Sector Company Sri Rejeki Isman. Tbk Date 22 March 2017 Initiate new 24s with Sell and downgrade 21s to Sell ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Vikash Agarwalla, CFA Research Analyst (+65 ) 6423 5718 vikash.agarwalla@db.com Initiate new 2024s with Sell and downgrade 2021s to Sell Sritex issued USD150 million of 7NC4 bonds priced at 7% ytm with an order book in excess of USD750 million (as per Bloomberg). Bonds are rated B1/BB- (Moodys/Fitch) same as exiting 2021s. New 2024s ($99.75/100.25; bid G-spd of 462bps; bid ytm of 6.9%) offers 60bps pick-up versus the old 2021s ($107/107.5; bid G-spd of 440bps; bid ytm of 6.3%). 5yr-7yr UST curve is about 30bps which implies only ~15bps spread pick up for 3 years longer maturity. Spread curve is very flat, in our view. Comparatively Lippo 2022-2026 trades at ~60bps G-spd differential (yield differential of 110bps). We think fair value for spread pick up should be about 50bps implying ~35bps downside on a relative basis for 2024s. We do understand current strong technicals and small issue size, but valuation looks stretched to us. We are also concerned on reporting inconsistency for FY16 results (more details below). Thus, we initiate on new 2024s with Sell and also downgrade existing 2021s to Sell. Instead we prefer similar rated and shorter duration United Photovoltaics 2020s ($103.25/103.75; ask ytm of 6.7%; DB rating Buy) and Jain Irrigation 2022s ($98/98.625; ask ytm of 7.5%, DB rating Buy). Within Indonesia we prefer Indika 2023s ($92.375/93.375; ask ytm of 7.8%, DB rating Buy) and Pan Brothers 2022s ($103.125/130.875; ask ytm of 6.7%; DB rating Hold). Key upside risks to our recommendation are better than expected 2017 performance, improved working capital management and potential rating upgrade (by Moodys). Use of proceeds and what to expect in 2017 New bonds proceeds are expected to be primarily used for redeeming existing USD 2019 bonds (~USD89 million to be called at 104.5) and USD30 million of MTNs maturing in Oct, 2017 with the remaining proceeds to be used for other bank debt refinancing and general corporate purpose. Transaction is expected to be overall neutral or marginally increase total debt balance (depending on the exact use of excess proceeds). Looking ahead, given further ramp up in EBITDA in 2017 (guidance of USD160-170 million) along with low planned capex (USD20-25 million) we expect 2017 to be cash flow positive excluding any major working capital surprise. Potential M&A/downstream expansion is another concern given past headlines. However, company has maintained that there are no such plans in the near term. FY2016 results recap – Number revision overshadows export driven operational performance 