POSCO Outlook Revised To Positive On Robust Operating Performance, Prudent Financial #BBB+# Rating Affirmed

Stocks and Financial Services Press Releases Tuesday June 26, 2018 12:45
HONG KONG--26 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 26, 2018--S&P Global Ratings today revised its outlook on POSCO to positive from stable. At the same time, we affirmed our 'BBB+' long-term issuer credit rating on the Korea-based steelmaker and our 'BBB+' long-term issue rating on the company's senior unsecured notes.

We revised the outlook to reflect our expectation that POSCO is likely to maintain strong operating performance and positive free cash flows over the next 12-24 months.

POSCO is likely to generate strong and stable operating cash flows from its steel business over the next 12-24 months. We expect the company to maintain an EBITDA margin of around 20%, substantially higher than that of similar-sized global peers. We attribute POSCO's higher margin to the company's growing high value-added product sales mix, good operating efficiency, and stabilizing steel and raw material prices. We also anticipate stable performance in the company's non-steel businesses over the next 12-24 months.

We believe POSCO's financial policies will remain disciplined and result in stable positive free cash flows over the next 12-24 months. POSCO's annual capital expenditure is likely to increase to about Korean won (KRW) 4 trillion in 2018 and 2019, from about KRW2.7 trillion in 2017, mainly to strengthen its premium product competitiveness and invest in new businesses such as upstream battery material, lithium and cobalt. Despite the higher capital expenditure, the company's operating cash flows will likely be more than sufficient to cover its investments and dividends, in our view. We therefore expect a gradual improvement in financial metrics during the period.

We expect balanced global demand and supply to result in stable earnings and improving credit metrics for the Asia-Pacific metals and mining sector for the next one to two years. Slower demand from China than we expected remains a key risk that could disrupt the market and lead to volatility in commodity prices.

We estimate that POSCO will improve its ratio of adjusted debt to EBITDA to 1.6x-1.9x over the next 24 months. The ratio improved to around 2.0x in 2017, from 3.8x in 2014. We attribute the improvement to stable operating conditions, and the company's business restructuring, which included disposal of non-core assets, and tight cost controls for the past few years.

The positive outlook on POSCO reflects our view of a more-than-one-third likelihood we will raise the rating on the company over the next 12-24 months. This could happen if POSCO has stable operations, reduces debt, and manages costs, such that its credit metrics improve.

The outlook also reflects our view that POSCO will maintain disciplined financial policies without aggressive investments or acquisitions, resulting in stable positive free cash flows.

We may raise the ratings if POSCO's adjusted debt-to-EBITDA ratio approaches 1.5x on a sustainable basis. This could happen if the company has strong operating profitability and cash flows, maintains a prudent financial policy, and lowers debt.

We may revise the outlook to stable if POSCO's profitability and cash flows weaken, possibly due to: (1) an unexpected downturn in the global steel industry; (2) higher raw material costs with difficulty in increasing selling prices; or (3) larger-than-expected capital investments. A ratio of adjusted debt to EBITDA ratio close to or above 2.0x would indicate such weakening.

The ratings could also come under pressure if POSCO's growth strategy and financial policy become significantly more aggressive than we have factored into the rating.

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