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2 years ago
Fitch Upgrades Panasonic to 'BBB'; Outlook Stable
February 12, 2016 / 7:02 AM / 2 years ago

Fitch Upgrades Panasonic to 'BBB'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/HONG KONG, February 12 (Fitch) Fitch Ratings has upgraded Panasonic Corporation's (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and local-currency senior unsecured ratings to 'BBB' from 'BBB-'. The Outlook is Stable. Its Short-Term Foreign- and Local-Currency IDRs are simultaneously upgraded to 'F2'. The upgrade reflects Fitch's expectations of improved margins and reduced debt, which continues to bolster its credit profile. Panasonic's strength in its core products, lower exposure to the volatile consumer electronics businesses, streamlined cost structure, lower gross leverage and net cash position make its financial profile more resilient to deteriorating macro conditions. KEY RATING DRIVERS Generating Stable Earnings: Panasonic's improved business structure will contribute to stable margins and cash generation in the medium term. We believe earnings stability has improved in its electronics business as a result of a strategic shift to business-to-business (B2B) solutions and a streamlined cost structure. Reduction in restructuring charges and impairment losses should also result in more stable margins. We feel Panasonic should be able to produce an EBIT margin of around 5% over the rating horizon (FYE15: 4.95%). Further Deleveraging: Improved cash generation, controlled working capital and modest capex spending will lead to a conservative balance sheet in the medium term. We expect the company to maintain positive free cash flow (FCF), with operating cash flow sufficiently covering rising capex requirements. We expect FFO-adjusted leverage to fall to around 2.0x by FYE16 (FYE15: 3.0x). Seeking Growth: We remain cautious on Panasonic's growth initiatives, as this will involve substantial upfront investment and expansion in overseas operations. Management is currently pursuing a growth strategy in the businesses where it is dominant, including automotive-related products, and plans to boost its overall sales to JPY10bn by FYE19 (FYE15: JPY7.7trn). The company's ability to maintain its current financial profile while undertaking investment activity related to its growth strategy will be among the key factors monitored by Fitch Macro Threats: We believe Panasonic's momentum in boosting profitability and cash flow generation could be challenged by slower economic growth in China, weaker housing-related demand in Japan, and lower gasoline prices. Slow sales in China and Japan affected Panasonic's 3QFYE16 results, although the negative impact was offset by the benefits of cost-cutting measures. Lower gasoline prices may also reduce the appeal of plug-in vehicles, affecting the demand for the company's lithium-ion batteries. Rising Investment: We expect Panasonic's capex to increase over the next three to four years, driven mainly by its investment in Tesla Motors, Inc.'s Gigafactory. In addition to regular capex, the company plans to spend JPY1trn - which includes a budget for M&A and R&D expenditure. We believe Panasonic will still be able to maintain a conservative capital structure, but further improvement in post-M&A FCF is likely to ease off. KEY ASSUMPTIONS - Revenue to decrease by the low-single-digits in FYE16, due mainly to the weak air-conditioner business in China and slow recovery in domestic housing-related segments. - EBIT margin to stay around 5% - similar to the previous year (FYE15: 4.95%) - as most business segments are generating stable margins. - Capex to increase to around JPY280bn, as indicated by management, and is likely to increase further in the medium term. - FCF to remain positive for the next few years, although higher capex may reduce the FCF margin to 2% in the medium term (FYE15: 3%) RATING SENSITIVITIES Positive Rating Guidelines: Developments that may, individually or collectively, lead to positive rating action include: - operating EBIT margin sustained above 5.5% - FFO-adjusted leverage sustained below 1.5x. Negative Rating Guidelines: Developments that may, individually or collectively, lead to a stabilisation of the Outlook include: - operating EBIT margin sustained below 4.5% - FFO-adjusted leverage sustained above 2.0x. FULL LIST OF RATING ACTIONS The full list of rating actions is below: Long-Term Foreign- and Local-Currency IDRs upgraded to 'BBB'; Outlook Stable Local-currency senior unsecured rating upgraded to 'BBB' Short-Term Foreign- and Local-Currency IDRs upgraded to 'F2'. Contacts: Primary Analyst Shelley Jang Associate Director +82 2 3278 8370 Fitch Ratings Limited, Korea Branch 9F Kyobo Securities Building 26-4 Youido-Dong, Youngdeungpo-Gu Seoul Secondary Analyst Kelvin Ho Director +852 2263 9940 Committee Chairperson Matt Jamieson Senior Director Head of APAC Research +61 2 8256 0366 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=999428 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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