POSCO Outlook Revised To Stable On Modestly Improving P #BBB+# Rating Affirmed

Stocks and Financial Services Press Releases Thursday February 16, 2017 16:49
HONG KONG--16 Feb--S&P Global Ratings

HONG KONG (S&P Global Ratings) Feb. 16, 2017--S&P Global Ratings said today that it had revised its outlook on POSCO to stable from negative. At the same time, we affirmed our 'BBB+' long-term corporate credit rating on the Korea-based steelmaker and our 'BBB+' long-term issue ratings on the company's senior unsecured notes.

"We revised the outlook to stable because we expect POSCO will modestly improve its operating and financial performance over the next one to two years," said S&P Global Ratings credit analyst Jun Hong Park.

We attribute the improvement in operating performance mainly to the company's good profitability in its mainstay steel business largely stemming from growing high value-added product sales and good operating efficiency. Despite the volatility in the steel industry, we view that the oversupply in the regional steel market has somewhat declined mainly because of ongoing capacity restructuring in China. We estimate that POSCO will maintain about 20% EBITDA margin in its steel segment, which is substantially higher than that of most similar-sized global peers.

The performance of POSCO's engineering and construction segment is likely to stabilize in 2017, given the company's tightened cost management. This is even though POSCO's engineering and construction subsidiaries incurred significant losses in 2016 mainly due to cost overruns in major overseas projects.

"We expect POSCO will sustain disciplined financial policies, resulting in a gradual improvement in its financial metrics with steady free cash flow generation over the next two years," said Mr. Park.

The company has made various restructuring efforts, including non-core asset disposals, over the past several years, and, as a result, improved its adjusted debt-to-EBITDA ratio to about 2.9x in 2016, from 3.8x in 2014.

We expect POSCO to increase its capital expenditure modestly to about Korean won (KRW) 3.5 trillion in 2017, from about KRW2.8 trillion in 2016, mainly to strengthen its premium product competitiveness. Still, we believe the company will keep disciplined investment policies without aggressive acquisitions or dividend payouts over the next one to two years. Under our base case, we estimate that POSCO will improve its debt-to-EBITDA ratio modestly to 2.5x-3.0x over the next 24 months on the back of stable free cash flows and modest debt reductions. Reflecting this, we revised the company's financial risk profile assessment to intermediate from significant.

The stable outlook reflects our expectation that POSCO will maintain stable profitability over the next one to two years. This is primarily due to the company's product competitiveness and ongoing cost management efforts, which will enable it to weather volatile conditions in the steel industry. The outlook also reflects our view that POSCO will maintain disciplined capital investments without aggressive acquisitions, resulting in stable free cash

flows in the period.

We may lower the ratings if POSCO's profitability and cash flows weaken significantly possibly due to: (1) a severe downturn in the global steel industry; (2) a deteriorating competitive position; or (3) higher-than-expected raw material costs with difficulties in increasing selling prices. An adjusted debt-to-EBITDA ratio approaching 3.5x for a prolonged period would indicate such a weakening. Also, the ratings could come under pressure if POSCO's growth strategy and financial policy become significantly more aggressive than we factor into the current rating.

Prospects of an upgrade seem unlikely for at least the next 12 months. Still, we may raise the ratings if the company improves its debt-to-EBITDA ratio well below 2.0x on a sustainable basis, possibly as a result of muchstronger-than-expected operating performances with significant deleveraging.

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