Sharp Corp. Outlook Revised To Stable From Positive On Cancellation Of Public Offering And Ratings Affirmed

Stocks and Financial Services Press Releases Wednesday July 4, 2018 17:30
TOKYO--4 Jul--S&P Global Ratings

TOKYO (S&P Global Ratings) July 4, 2018--S&P Global Ratings today said it has revised to stable from positive its outlook on Japan-based electronics maker Sharp Corp. We have affirmed our 'BB-' long-term issuer credit and senior unsecured issue ratings and the 'B' short-term issuer credit and commercial paper program ratings on the company. At the same time, we have also affirmed our 'BB-' long-term issuer credit rating and the 'B' short-term issuer credit and commercial paper program ratings on overseas subsidiary Sharp International Finance (U.K.) PLC.

The outlook revision follows Sharp's announcement last Friday that it has cancelled a planned buyback of preferred shares and an accompanying public offering. The cancellation produces a reduced likelihood, in our view, that key financial ratios for the company will improve materially within a year. Nevertheless, we maintain our view that Sharp's earnings and cash flows are likely to continue to recover gradually and that key financial ratios for the company are likely to keep improving. Therefore, we have affirmed our ratings on Sharp.

We have not substantially changed our view of Sharp's business and financial risk profiles since we raised our long-term issuer credit rating on the company to 'BB-' from 'B+' on June 8, 2018. We assess Sharp's business risk profile as weak. This assessment reflects Sharp's status as a major producer of liquid crystal display (LCD) panels and flat-panel TVs as well as the likelihood that a strategic shift in Sharp's LCD product mix can somewhat stabilize the business' ability to generate earnings. But we also believe the LCD business continues to face a potentially high risk of fluctuations in earnings. Sharp's non-LCD businesses will have difficulty absorbing the earnings fluctuations of the LCD business, because they contribute a small share of overall company earnings. In addition, Sharp's camera module and electronic device businesses, other areas of the company's focus, are also highly susceptible to market cycles.

Sharp has an aggressive financial risk profile, in our view. Key financial ratios for the company have improved significantly in tandem with a recovery in its main LCD business. Still, we believe it remains highly dependent on debt. Even though it has cancelled its public offering, Sharp's ratio of debt to EBITDA, which we consider a key financial metric, is likely to continue its gradual improvement toward 4x-5x within a year. We think Sharp can do this with cash flows from its businesses and efficient capital expenditures, making use of the production sites of Taiwan-based parent Hon Hai Precision Industry Co. Ltd. (A-/Positive/--).

The outlook is stable. We had assumed a public offering of common shares and a buyback of preferred shares would materially improve Sharp's key financial ratios. But cancellation of these initiatives leads us to expect these metrics to recover only gradually thanks to cash flows from its businesses and efficient investments.

We might consider an upgrade if Sharp acquires JPY / CNY200 billion in preferred shares and significantly reduces its debt on an S&P Global Ratings-adjusted basis while continuing to improve its ability to generate earnings through a better product mix in its LCD business and an expansion of non-LCD business. Specifically, we could consider upgrading Sharp if we determine that its debt to EBITDA will fall to and stay below 3.5x on a sustained basis while the company retains ample cash on hand. We might consider a downgrade if we determine that Sharp's EBITDA margin will fall to and remain below 6%, likely owing to a drastic deterioration in the LCD business environment. We might also consider a downgrade if Sharp substantially increases capital expenditures amid a slow recovery in earnings, causing debt to EBITDA to exceed 5x.


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