Mitsubishi Electric Upgraded To #A+# On Improving Financial Outlook Stable

Stocks and Financial Services Press Releases Thursday May 31, 2018 17:59
TOKYO--31 May--S&P Global Ratings

TOKYO (S&P Global Ratings) May 31, 2018--S&P Global Ratings today said it has raised its long-term corporate credit rating on Japan-based diversified electronics maker Mitsubishi Electric Corp. one notch to 'A+' from 'A'. The outlook is stable. At the same time, we affirmed our 'A-1' short-term corporate credit and commercial paper program ratings.

The upgrade reflects our view that the company's profitability is on a stable trend in line with or slightly above its current level, supported by a strengthened business portfolio led by factory automation systems. We also base the upgrade on our expectation that the company will maintain very strong measures of cash flow for the issuer credit rating even as it continues to increase investments in growth areas.

The company's EBITDA margin is likely to be stable above 12% because of enhanced competitiveness across its business portfolio, in our view. Industrial automation systems, including factory automation systems, is a key component of the company's relatively diversified business portfolio that is driving improvement of its profitability. As appetites for capital investment grow across a wide range of industries in Japan and abroad, the company has been receiving increasing and sizable orders for such business. Accordingly, we expect industrial automation systems to support Mitsubishi Electric's profitability in the next one to two years. In its home appliances unit, which makes the second-largest contribution to the company's operating profit after industrial automation systems, Mitsubishi Electric's profitability may remain under pressure due to rises in raw material prices. However, its market position in the heating, ventilation, and air conditioning field is likely to strengthen further over the next two to three years, supported by an Italian subsidiary the company has acquired and a new joint venture in the U.S. Meanwhile, in its social infrastructure business unit, which consists of power, railroad, and utility systems, profitability has been recovering thanks to tighter project management for receipt of purchase orders and thorough process control after obtaining orders. In addition, the company is likely to maintain a certain level of profitability in its building systems unit, for which elevators and escalators are its main products, including joint venture operations with a local partner in China despite continued softness in that nation's new equipment market. Although the company still has slightly weaker profitability than global peers in the capital goods industry, its earnings stability has improved because of benefits of adequate diversification of business lines with some weight on factory automation systems and steady progress in enhancement of each business unit, in our view. Considering all these factors, we maintain our assessment of the company's business risk profile as strong.

The company's financial standing has improved materially in recent years, backed by steady operating performance. The company is concentrating its resources in areas with relatively light investment needs compared with domestic peers, and, as a result, it is limiting its exposure to large-scale projects. In addition, the company maintains a publicly stated policy of financial discipline as it pursues a growth strategy. Consequently, we expect the company to maintain its improving financial strength and a net cash position. We also incorporate in our analysis a view that the company has a stronger financial base than major overseas peers while also facing a risk of potential high volatility in cash flows of its factory automation systems and power device businesses during economic downturns. Considering all these factors, we maintain our assessment of the company's financial risk profile as strong.

The stable outlook reflects our view that the company's EBITDA margin is likely to remain stable on a moderately improving trajectory and that the company will maintain its improving financial strength for the rating. The company's business portfolio is adequately diversified, which is a positive rating factor in our assessment because it helps Mitsubishi Electric maintain stable profitability even when some units are under downward pressure. In addition, the company continues to focus on financial discipline while investing in growth areas. Stable profit generated by its diversified business portfolio also supports the company's financial base, in our view. Consequently, we believe the company's financial base will strengthen further.

We could consider a downgrade if we believe Mitsubishi Electric's profit will become less stable. This could occur if profitability declines in its main businesses, including factory automation systems, automotive equipment, air conditioning systems, and elevators and escalators, and, as a result, competitiveness of its business portfolio weakens. Specifically, we could lower the rating if we have a stronger view that the EBITDA margin will remain below 11% on a sustained basis. A downgrade is also possible if Mitsubishi Electric's financial standing declines. A view that the company is unable to maintain a net cash position could indicate such a scenario.

Conversely, we could consider an upgrade if Mitsubishi Electric expands its scale and the geographic diversity of its earnings, for example, in the U.S. and Europe, and it improves its EBITDA margin to over 15% by further strengthening its business portfolio while maintaining its strong financial status.


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