PBRX:Sunrise Industry - Mandiri Sekuritas

Pan Brothers Tex is an example of the revival in the garment industry. PBRX is embarking on an ambitious expansion projects which the company expects to boost its revenue in 2011. After the expansion, it will become the biggest garment manufacturer in Indonesia. Our own rough estimate expects PBRX's revenue to grow 91.4% yoy to US$300.5mn (from 2010E of US$157.0mn), and net income of US$8.9mn, 128,2% yoy increase from 2010E of US$3.9mn. This will translate into EPS of Rp90 (using Rp/US$ = 9,000) or an FY11F PE of 18.2x.&nb sp; PBRX itself has more ambitious FY11F target of US$437.0mn revenue, and US$20.3mn net income. The material difference lies in (1) planned 2011 acquisitions, which we exclude from our forecast, and (2) operating margin assumed. PBRX assumes 7.2% operating margin, while Mandiri uses 4.9% (2010E : 3.9% operating margin).

Organic growth. PBRX manufactures products for Adidas, Nike, Calvin Klein, Perry Ellis, Liz Claiborne, Speedo, JC Penney, and others. In 2010, the company produced 24.6mn pieces, and it expects to produce 42mn pieces in FY11. PBRX employed 11,222 people, with 8,400 sewing machines in 4 cities (Tangerang, and Sukabumi in West Java, and Solo, Boyolali in Central Java). In 2011-2012, PBRX plans to expand by adding another 4,800 sewing machines in the expanded Boyolali plant and Srage n facili ty. The expansion is focused in Central Java to take advantage of the relatively lower minimum wages in the province. Minimum wage in Tangerang for 2011 is Rp1,243,000/month, while in Boyolali is Rp800,500/month. Wages comprise of 14.3% of COGS. Around 51.1% of the current machines are located in West Java, and therefore at the fully- run new expansion in Central Java, we can expect the margin to increase 1.15%.

Inorganic growth. Armed with the cash from the rights issue PBRX has also acquired 51% stake in Hollit Int., a buying agent garment company, which engages in raw material sourcing and production of collections of high quality garment to its customers. Hollit Intl FY10 revenue was estimated at US$60mn with profit before tax margin at 4.5%-5.0%. PBRX expects to tap Hollit expertise in raw material sourcing and improve its costs. Raw materials contribute 67.9% to the COGS. PBRX also has plans to acquire garments plants.

Strong support from shareholders. Post the December rights issue, 22.5% of PBRX is owned by Ganda Sawit Utama, one of the founding members of Wilmar Corp. Another 26.5% stake is owned by Trisetijo Manunggal Utama, local owner of Hana Indonesia. Valuations at this moment is expensive, however using FY11F from the management, EPS FY11F is Rp239, or a PE of 6.7x, and P/BV of 2.1x (using Sept 30 equity and rights issue proceeds).