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Fitch Affirms LG Electronics Ratings with Negative Outlook
Published on:
Fitch Ratings has affirmed South Korea-based LG Electronics Long-Term Foreign- and Local-Currency Issuer Default (IDR) ratings at 'BBB' with Negative Outlook. Its senior unsecured rating has also been affirmed at 'BBB'.
The Negative Outlook reflects LG's recent poor operating results and Fitch's view that the company's credit profile is likely to remain weak in the short term despite ongoing improvements in its core businesses. In 2011, LG's revenue fell to KRW54.3trn with a 0.5% EBIT margin, from KRW55.8trn and 0.3% in 2010
Improvements at the company's mobile handset and flat display panel businesses in 2011 continued to be less than material. Continuing subdued economies, mainly in Europe and the US, are likely to lead to weak demand for LG's products. In addition, Fitch estimates that LG's leverage, measured as gross debt/operating EBITDAR, has risen to 4.3x at end-2011 from 3.8x at end-2010. The leverage ratio proportionally consolidates LG's two major operating subsidiaries, LG Display and LG Innotek.
However, Fitch expects LG's profitability and financial profile to slowly improve from 2012 onwards. LG's mobile handset business returned to profitability in Q411, albeit with a slim 0.4% EBIT margin, after six consecutive quarters of operating losses, due to an increased share of smartphones, especially the Long Term Evolution phones. Fitch forecasts that this trend will continue to boost the average selling price and market share of LG's handsets.
Fitch also notes that LG recorded strong TV sales while securing a sound EBIT margin of 1.9% in 2011 (2010: 0.6%) despite weak economic conditions in developed markets. This illustrates that LG has consolidated its position as one of top competitors in the global TV industry while Japanese TV makers continue to record losses. For its flat display panel business, manufacturing oversupply is likely to ease in 2012, leading to further price stabilisation as panel makers reduce investment.
Fitch may consider downgrading the rating if the company's overall EBIT margin remains below 1% and leverage is sustained above 3x with negative free cash flow. Conversely, Fitch may revise the Outlook to Stable if LG's EBIT margin improves above 2%-3% and leverage trends down towards 2.5x on a sustained basis. In its analysis, Fitch proportionally consolidates LG's two major operating subsidiaries, LG Display and LG Innotek.
Tags: [lg electronics] [fitch ratings] [Korea]
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