Fitch: Panasonic Recovery Slow; Challenges Remain

Mon May 13, 2013 12:19am EDT

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(The following statement was released by the rating agency) HONG KONG/SEOUL, May 12 (Fitch) Fitch Ratings says Panasonic Corporation's (Panasonic, BB/Negative) on-going restructuring effort will continue to contribute to the improvement of its financial profile in the financial year ending March 2014 (FYE14). However, the agency believes that any significant turnaround in the company's struggling TV/panel business is unlikely and currency benefits by themselves will not bail the company out of its difficulties. The weaker Japanese yen will only be modestly positive for the company's profitability, despite Panasonic generating close to 50% of revenue abroad. This is because the benefits of a cheaper yen are offset by foreign currency costs of its overseas manufacturing plants, mainly in China, particularly as some of these products are imported to be sold back in Japan. The company forecasts that the weaker yen will only add JPY5bn EBIT contribution in FYE14 (FYE13: JPY3bn). Fitch believes that weak demand will continue to threaten Panasonic's efforts to turn around the TV/panel business segment in FYE14. In addition, company will struggle to catch up with Korean rivals in product competitiveness due to a lack of investment as it continues its lengthy restructuring. For FYE13, the company's audio, visual, and communication (AVC) network division recorded an EBIT loss of 1.7% as sales of LCD and plasma TVs declined by 3% and 49% yoy, respectively. In Fitch's opinion, the company's overall EBIT margin target of 3.5% in FYE14 will be a challenge, due to weak demand and intense competition. Further Panasonic's net debt reduction may be short-lived without a proven ability to generate consistent cash flow from operations (CFO) from product sales; improved cash flow in FYE13 was largely driven by asset sales. The company's continued recovery in the financial profile over the medium- to long-term will hinge on its ability to improve operational fundamentals in its core businesses. Fitch may downgrade the ratings if Panasonic's FFO-adjusted leverage rises above 4.5x with its EBIT margin falling below 2% on a sustained basis. However, Fitch will consider revising the Outlook to Stable if leverage falls below 4x and EBIT margin improves above 2.5% on a sustained basis. In FYE13, Panasonic was able to reduce its net debt by JPY319bn to JPY645bn due to improved CFO to JPY339bn (FY12: 2bn), and proceeds from asset sales amounting to JPY342bn. Fitch estimates funds flow from operations (FFO)-adjusted leverage to have improved below 4x at FYE13 from 14x at FYE12. EBIT margin improved to 2.2% from 0.6% during the same period. Contact Alvin Lim, CFA Director +82 2 3278 8371 Fitch Ratings Limited, Korea Branch 9F Kyobo Securities Building 26-4 Youido-Dong, Youngdeungpo-Gu Seoul Steve Durose Senior Director Head of APAC TMT Ratings +61 2 8256 0307 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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