RPT-Fitch: Affirms Honda at 'A'; Outlook Stable
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May 7 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Japan-based Honda Motor Co., Ltd's (Honda) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating at 'A'. The Outlook is Stable. Fitch has also affirmed the company's Short-Term Foreign- and Local-Currency IDRs at 'F1'.
KEY RATING DRIVERS
Strong Business Profile: Honda's ratings reflect its leading market shares in key markets, a competitive product line-up, competitiveness in hybrid vehicles, and a diversified business portfolio including the world's largest motorcycle business by unit sales.
Benign Operating Environment: Fitch expects global auto sales and production to rise in the low- to mid-single-digit range in 2014, driven by continued growth in the US and China. In Japan, we expect the rise in consumption tax in April 2014 to contribute to a contraction in overall vehicle demand in 2014. Chinese sales for Honda and the other major Japanese automakers are recovering well following political tensions between the two countries in September 2012. We expect Honda to post modest auto sales volume growth in the financial year ending March 2015 (FY15).
Profitability to be Steady: Honda's operations continued to improve in FY14 with solid contributions from the automobile and motorcycle divisions. Industrial operating profit (automotive, motorcycle and power products) increased to JPY568bn from JPY387bn in FY13, while EBIT margins improved to 5.1% from 4.1%. Honda's profitability was materially boosted by a weaker yen, which depreciated by around 20% against the US dollar during FY14. Fitch expects operating margins to remain steady, at or above 4% in FY15 and FY16, due to Honda's enhanced product portfolio, modest sales volume growth and cost control. Nevertheless, sluggish volume growth in key markets such as the US and China, an inability to realise sufficient cost reductions against continued high selling, general and administrative costs and R&D costs, and larger than anticipated negative FX effects, could temper profitability.
FX Effect: Fitch expects the positive effects on profitability of a weaker yen against the US dollar to diminish for all the Japanese automakers for the rest of 2014, as it does not anticipate further depreciation in the yen. Honda's management has guided for a negative FX effect on group operating profit in FY15 due mainly to currency fluctuations in emerging markets, which Fitch has factored into its forecasts. Over the medium term, Honda's effort to increase its overseas production capacity will reduce its overall FX exposure.
Stable, Strong Financial Profile: Fitch expects Honda's capex to remain elevated in FY15-FY16 due to investments to expand global production capacity, update its powertrains and enhance its product offerings. Nevertheless we expect free cash flow to be zero, or modestly positive for the industrial business in FY15 and FY16. We expect Honda's financial profile to remain stable, with FFO adjusted leverage below 1.0x (FY14: 0.8x) and CFO adjusted debt above 90% (FY14: 119%).
Robust Liquidity: Honda continues to maintain a solid net cash position, backed by ample liquidity. At end-FY14, Honda's industrial business had net cash of JPY584bn (FY13: JPY640bn). While almost 70% of total debt (which consists primarily of domestic Japanese bank loans) was short term, it was more than covered by cash and cash equivalents of JPY1,149bn (FY13: JPY1,180bn).
Negative: Future developments that may collectively or individually lead to negative rating actions include:
- Market share erosion in key markets
- Substantial deterioration in global auto demand leading to significant decline in operating profit
- Sustained negative FCF
- Industrial FFO adjusted leverage above 1.0x on a sustained basis
Positive: A near term upgrade of Honda's ratings is unlikely. Typically, the inherent cyclicality and potential financial pressures of the auto manufacturing industry result in a soft cap on IDRs at the 'A' level, although in rare cases a manufacturer with very strong business profile and unusually strong credit protection metrics could be considered for the 'A+' category.
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