Sharp Corp. Long-Term Ratings Raised To #BB-# From #B+# On Vastly Improved Financial Outlook Positive

Stocks and Financial Services Press Releases Friday June 8, 2018 15:04
TOKYO--8 Jun--S&P Global Ratings

TOKYO (S&P Global Ratings) June 8, 2018--S&P Global Ratings today said it has raised one notch to 'BB-' from 'B+' its long-term corporate credit and senior unsecured debt ratings on Japan-based electronics maker Sharp Corp. We have affirmed our 'B' short-term corporate credit and commercial paper program ratings on the company. At the same time, we have also raised to 'BB-' from 'B+' the long-term corporate credit rating on Sharp International Finance (U.K.) PLC and affirmed the 'B' short-term corporate credit and commercial paper program ratings on the overseas subsidiary. The outlook on the long-term corporate credit ratings on both entities is positive.

The upgrade reflects our view that Sharp's earnings and cash flows are likely to continue to recover gradually in the next year or two thanks to the company's steps to stabilize earnings in its main liquid crystal display (LCD) business. In addition, key financial ratios for the company have improved far beyond our assumptions and are likely to keep improving, supported by Sharp's efforts to strengthen its ability to generate cash flows, in our view.

Sharp's main LCD business benefits from a strategic shift in product mix to medium-size LCD panels, which have relatively wider applications, and away from small panels, which rely heavily on the smartphone market. Sharp is likely to somewhat stabilize the business' ability to generate earnings, in contrast to peers struggling with flagging earnings in their respective LCD businesses. Nevertheless, the LCD business continues to face a potentially high risk of fluctuations in earnings because it is susceptible to short-term cycles of demand and supply in the market, competition with well-funded South Korean manufacturers and expanding Chinese makers is fierce, and organic electroluminescent displays might displace small LCD panels. Sharp can take full advantage of Taiwan-based parent Hon Hai Precision Industry Co. Ltd.'s (A-/Positive/--) supply chain, and it engages in relatively stable businesses, such as office equipment and home appliances. Still, it would be difficult for Sharp to absorb earnings fluctuations in its LCD business. In addition, its camera module and electronic device businesses, other areas of focus for Sharp, are also highly susceptible to market cycles. Accordingly, we continue to assess Sharp's business risk profile as weak.

Key financial ratios for Sharp improved far beyond our assumptions in fiscal 2017 (ended March 31, 2018) as its main LCD business recovered. We think the ratios are likely to continue improving, supported by its efforts to bolster its cash flows. The company's degree of capital intensity is likely to decline because use of Hon Hai's production sites has lessened the need for capital expenditures, in our view. As a result, we expect Sharp to divert funds toward small-lot business investments in the coming year or two, such as to enhance its brand and expand its marketing network. Even so, we believe Sharp can strengthen its financial standing while maintaining ample cash and deposits. We estimate its ratio of debt to EBITDA was about mid-5x as of March 31, 2018, a drastic recovery from 7.1x a year earlier. The ratio is likely to improve further to 4x-5x in fiscals 2018 and 2019. Accordingly, we assess Sharp's financial risk profile as aggressive.

We assess Sharp's liquidity as adequate. The assessment reflects our view that its financing has become less reliant on support from financial institutions as its operating performance has stabilized and its financial standing has improved.

The positive outlook reflects our view that key financial ratios for Sharp are highly likely to improve materially within a year if its ability to generate earnings stays on track to recovery and it buys back preferred shares with funds raised in a public offering of new common shares.

We might upgrade Sharp if its ability to generate earnings stays on track to recovery and we determine it can sustain debt to EBITDA of below 4x having pushed the ratio under that threshold using funds raised in a public offering of new common shares to buy back preferred shares, all of which we regard as debt. Conversely, we might revise the outlook to stable if we see a heightened likelihood Sharp's debt to EBITDA would remain at 4x or above. This could occur in the event it is unable to buy back preferred shares using a public offering or if its EBITDA plunges as a result of a steep decline in the market for LCDs.

We equalize our senior unsecured debt rating on Sharp with our long-term corporate credit rating on Sharp. We estimate the company's secured debt, which has higher priority than its senior unsecured debt, continues to account for a large proportion of more than 50% of Sharp's total debt. Accordingly, we notch down the senior unsecured debt rating one notch from the long-term corporate credit rating. Meanwhile, we believe the company is likely to receive a waiver for borrowings from major creditor banks while continuing to pay other debt in a timely manner. Consequently, we incorporate one notch of uplift in the senior unsecured debt rating.

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