RPT-Fitch: Sony's Turnaround, Return to Investment Grade Still Distant

Thu May 15, 2014 3:37am EDT

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May 15 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that Sony Corporation's (Sony; BB-/Negative) continuing weak performance reiterates our belief that the company's turnaround will be slow at best and that a return to an investment-grade rating is unlikely in the medium term. As Sony's ratings headroom remains low, if results over the next quarter or half-year indicate future performance will be weaker than our expectations, the ratings may be downgraded.

Sony is forecasting a net loss of JPY50bn for the year ending 31 March 2015 (FYE15). Excluding Sony Financial Holdings (SFH) - which given its regulated nature, does not support Sony's credit profile - the company expects an operating loss of JPY24bn for FYE15, principally due to higher restructuring charges.

However, Fitch believes Sony's ex-SFH profitability will remain low and fragile in FYE16, too, due to the highly competitive consumer electronics industry and saturation in developed markets for smartphones. Even excluding restructuring and impairment charges, ex-SFH operating EBIT margin target for FYE15 is 1.6%, (FYE13: 3.1%), which is incommensurate with an investment-grade rating. However, even this margin calculation flatters as restructuring and impairment charges have become too regular at Sony to be considered one-offs.

Sony's restructuring focus in FYE15 will centre on cost reduction in its electronics distribution companies and headquarters, and the exit from unprofitable segments. However, Sony has yet to make the difficult decision on its TV business, which has accumulated JPY790bn losses in the past 10 years.

Sony's non-PC restructuring budget of JPY100bn for FYE15 is too small for a TV exit plan. Total PC exit costs are estimated to reach JPY94bn, but its PC business is significantly smaller in scale than its TV operations.

Sony is relying on 4K ultra-high definition TVs and the upcoming FIFA World Cup in Brazil to bolster its TV profitability in FYE15. However, we think that Japanese companies, including Sony, will struggle to make a meaningful profit in the TV business as long as their Korean rivals Samsung Electronics Co., Ltd. (A+/Stable) and LG Electronics Inc. (BBB-/Stable) combine product leadership with attractive pricing, and low-cost Chinese manufacturers, such as Hisense, Haier and TCL, expand overseas.

Fitch believes that more aggressive reform to revamp Sony's product and business portfolio is overdue. Persistent losses at its electronics business already invite unfavourable comparison to rivals like Panasonic Corporation (BBB-/Stable) and Sharp Corporation, which have recovered from heavy losses. Even with the JPY89bn of benefits from Japanese yen devaluation, Sony still recorded an operating loss of JPY95bn for the electronics business in FYE14. However, with the currency now stabilising, further forex benefits may be limited.

Fitch may downgrade the rating if Sony's EBIT loss continues and funds flow from operations (FFO)-adjusted leverage rises above 5.0x (both excluding SFH) on a sustained basis. However, Fitch may revise the Outlook to Stable if positive EBIT margins are sustained and FFO-adjusted leverage falls below 5.0x (both excluding SFH).

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