(The following statement was released by the rating agency)
Fitch Ratings-Jakarta-May 08: Increasing orders for Indonesia-based garment manufacturer PT Pan Brothers Tbk’s (B/Stable) medical personal protective equipment (PPE), and the company’s strong customer profile and moderate product diversity, should cushion it against the downturn in its traditional garment sales caused by the coronavirus pandemic, Fitch Ratings says. The apparel sector has felt the brunt of the economic impact, but the pandemic has also caused a shortage in medical PPE.
Pan Brothers’ sales may decline, however the company’s exposure to a strong portfolio of brands, the moderate diversity within its product segment and also its capacity to cater for increasing orders for medical PPE should provide some sales buffer, although risks remain, especially in a prolonged pandemic.
Fitch expects the pandemic-related impact on sales in the global consumer discretionary sector, including apparel, to be significant due to the temporary closure of retail stores in “non-essential” categories. However, we believe the impact should be less for larger multinational apparel brands with strong customer brand loyalty and a wide range of price points within their portfolios, such as Uniqlo and Adidas - two of Pan Brothers’ top customers. This should reduce demand volatility during this period. Fitch also believes these global brands tend to have strong omnichannel presence, which should partially offset the effect from the temporary closures of some of their physical stores.
The pandemic-related impact on sales should also vary by sub-sector, ranging from more significant for fashion garments to more neutral for basic apparel and performance sportswear. Pan Brothers’ sales to its top five customers - around 50% of total sales in 2019 - are predominantly within the basic apparel and functional sportswear segment. Therefore, we expect sales to be less affected relative to fashion garments.
Fitch also expects the increasing demand for medical PPE in Indonesia to provide some support towards Pan Brothers’ sales in the next six-nine months. Pan Brothers’ position as the largest publicly listed garment manufacturer in the country - by production capacity - allows the company to meet the current supply chain constraints to cater for the surging demand for medical masks and jumpsuits. This should alleviate some of the risks around the near-term sales outlook.
Nevertheless, Fitch believes risks remain, particularly on the company’s working capital cycle. Fitch expects Pan Brothers’ trade payable days to shorten slightly as its suppliers may request faster payment terms and inventory days may also lengthen given delay risks in delivering goods. However, we believe these risks should be partially offset by the shorter payment terms stemming from the sales of medical PPE. We expect Pan Brothers’ net working capital days to be around 213 days by end-2020 (9M19: 205 days) and its leverage - measured by net adjusted debt/ EBITDA - is expected to remain below our negative rating sensitivity level of 4.5x.
Fitch also sees some risks in the medium term: the length of the pandemic; the timeframe for a full reopening of retail locations and the speed at which it is achieved; the economic conditions exiting the pandemic, including unemployment and household income trends; the impact of government support of business and consumers; and the impact the crisis will have on consumer behaviour. Fitch believes these increase the risks to our forecasts in the medium term.
Apparel brands post the pandemic may also shift their focus towards a more flexible supply chain, and apparel companies may decide to onshore or nearshore their production as a flexible supply chain may appeal over a low-cost one. However, we believe Pan Brothers’ increasing importance in its customers’ supply chain, together with its established record and its longstanding relationships with global brands, improve customers’ dependency and the company’s overall bargaining power with its clients. We expect these to support the company’s business risk profile in the medium to long term.
Pan Brothers has adequate liquidity to cover its working capital requirement and maturing short-term loans, barring the USD138.5 million syndication loan due in February 2021. The company is in discussions with banks to refinance this upcoming maturity, and we expect the company to continue to have comfortable access to credit markets through the downturn, supported by its strong banking relationships and strong customer portfolio, although failure to secure the refinancing in the near term may lead to a negative rating action.
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