(The following statement was released by the rating agency)
Dec 12 -
Summary analysis -- Sika AG --------------------------------------- 12-Dec-2012
CREDIT RATING: A-/Stable/A-2 Country: Switzerland
Primary SIC: Adhesives and
Credit Rating History:
Local currency Foreign currency
02-May-2000 A-/A-2 A-/A-2
The ratings on Switzerland-based technical chemical producer Sika AG reflect
our of its "strong" business risk and "modest" financial risk profiles. Our
business risk assessment reflects the group's favorable profitability (as
measured by EBITDA minus maintenance capital expenditure and return on
capital), strong and strengthening market positions worldwide as a
manufacturer of technical chemicals for the construction sector, solid
long-term growth prospects, and established positions in adhesives and
sealants for the auto and transportation industries. Rating constraints
include Sika's sensitivity to the cyclical construction end market, raw
material expenses that equate to a sizable percentage of sales, competition,
and capital intensity to expand business.
In 2011, revenue reached Swiss franc (CHF) 4.6 billion (EUR3.8 billion), split
between two divisions: Construction (81% of sales) and Industry (19%). Europe
remained the main revenue-earning region (47%), followed by Asia-Pacific
(17%), and North America (14%).
Sika's strong market positions are supported by its value-added business
model, articulated around high-quality products, innovation, and customized
solutions to focus on the most demanding applications. This is a key
differentiating factor from lower-end competitors. We think Sika's
high-quality brand exemplifies this stance and further supports its market
positions. The industry's increased utilization rates and substitution that
favors Sika's engineered products should continue to result in favorable
demand prospects and strong growth in emerging countries, where penetration
rates remain lower than those in Western Europe.
That said, with construction continuing to make up most of its revenue, Sika
is exposed to swings in demand, although, we believe, less so than other
groups that depend on this end market. Demand for Sika's products in mature
markets is to a large extent for renovation and repair, which are more stable
areas. We understand that 40% of the Construction division's sales are tied to
infrastructure, 40% to commercial activities, and only 20% to residential
construction, which we view as the most cyclical.
Sika's Industry division--which manufactures industrial adhesives and
sealants--provides some diversity. It is mostly exposed to the cyclical
transportation industries: bus, truck, rail, and automotive OEM. It also sells
to the more stable aftermarket.
Sika also faces volatile raw material prices, which represent a substantial
share of revenue (49.6% in 2011), and may only be passed on to clients with a
three- to nine-month delay. About 70% of raw materials are oil-derived.
Sika's modest financial risk profile captures a long track record of, and our
expectations of continuing, supportive financial policies, strong credit
metrics, largely positive free operating cash flow (FOCF), and solid
liquidity. We view the company's majority family-ownership as supportive of
Sika's prudent financial policies.
S&P base-case operating scenario
Our base-case scenario points to EBITDA of more than CHF550 million in 2012
and 2013, compared with about CHF475 million in 2011, as acquisitions and
price increases improve earnings. EBITDA in the first nine months of 2012
neared CHF450 million.
The macroeconomic outlook for the fourth quarter of 2012 and 2013 is highly
uncertain, especially in Europe and North America where Sika will continue to
derive most of its revenue. However, as demonstrated in the 2009 financial
downturn, we believe Sika could display good resilience and much better
performance than other companies serving the construction end market. Sika
derives an increased amount of revenue from emerging markets; focuses on
infrastructure projects as opposed to residential activity; emphasizes
high-end, higher-growth applications; and should continue to make several
small acquisitions that boost its market positions and cross-sales
opportunities. We also note positively that South Europe contributes modestly
to Sika's revenue ("Europe South" in Sika's reporting includes more northerly
countries, namely France, the U.K., and Ireland).
We consider one of the main pressuring factors in emerging and mature
economies to be lower infrastructure spending as public authorities and
companies cut or postpone projects. Growth in Sika's Asia-Pacific markets
slowed considerably in the first nine months of 2012 to 3.4% (in local
currencies), mainly because infrastructure projects in China were put on hold
S&P base-case cash flow and capital-structure scenario
We expect Sika's credit metrics to remain strong for the rating in 2012, with
the ratio of funds from operations (FFO) to debt above 50% and very positive
FOCF. This compares with FFO to debt at 50% on June 30, 2012 and Dec. 31,
2011, and the 45% ratio that we consider rating-commensurate. On June 30, 2012
and Dec. 31, 2011, debt to EBITDA was a low 1.6x, indicative of Sika's
conservative financial policy. Sika's Standard & Poor's-adjusted debt was
moderate at CHF820 million on June 30, 2012.
As a result, Sika has leeway to continue with its acquisitions, which we
believe will remain focused on several small to midsize companies instead of
large ones. We assume in our base-case scenario annual cash outlays of CHF150
million, compared with CHF144 million in 2011.
One of the goals of the acquisitions is to access markets, rather than gain
technologies, given the very local nature of the business. Even for large
infrastructure projects, materials can be sourced locally from different
suppliers. Acquisitions also enhance the company's share of emerging
economies, access to clients, and product reach. We believe they are necessary
for Sika to achieve its long-term CHF8 billion revenue target, since organic
growth is unlikely to suffice.
The short-term rating is 'A-2'. We classify the group's liquidity as "strong,"
since we expect sources to surpass needs by above 1.5x in 2012 and 2013, among
Sika successfully issued in June 2012 two long-term bonds at very low rates,
which demonstrates in our view the company's strong liquidity and standing in
the capital markets. The six-year bond has a coupon of only 1%, while the
10-year bond bears 1.75%.
Our base-case credit scenario takes into account the following supportive
factors in the year from July 1, 2012:
-- Cash and cash equivalents of CHF390 million at the beginning of the
period, of which we consider CHF50 million to be tied to operations and thus
not netted from adjusted debt. Cash is the core liquidity source. We note
positively that almost all cash is held in Swiss banks in Switzerland and in
Swiss francs. We foresee no change to this policy;
-- Proceeds of CHF300 million from two long-term bonds issued in June
2012 and cashed in in July;
-- No financial covenants; and
-- Robust FOCF of about CHF200 million in 2012 and 2013. We factor in
capex nearing CHF150 million, of which CHF50 million is for maintenance, which
compares with less than CHF120 million in 2011.
We factor in the following needs:
-- A CHF250 million bond, maturing in February 2013, and refinanced with
the bonds issued in June 2012. The next maturity (a CHF300 million bond) is
due in 2014;
-- Small-scale bolt-on acquisitions, totaling CHF150 million annually; and
-- Dividends of about CHF120 million in 2012 and 2013, 5% higher than in
Given the group's high cash balances and its expectations for cash flow
generation, Sika has not renewed a CHF450 million committed revolving credit
facility, which matured in November 2010.
The stable outlook reflects our view that Sika will deliver positive FOCF in
the coming years, owing to robust EBITDA generation and commensurate capex,
while maintaining its conservative financial policy, and its balanced approach
to investments, acquisitions, and dividends. We consider FFO to debt of about
45% and FOCF to debt of 20%-25% through the cycle, which we believe Sika will
likely achieve or surpass, to be commensurate with the rating.
We could consider lowering the ratings if the group deviates from its
financial policy, for instance, by making large debt-financed acquisitions. We
might also downgrade if profits are less resilient to a downturn in 2012 than
we currently estimate.
We currently see no rating upside given Sika's exposure to cyclical segments,
its modest diversity by end market, and its size in comparison with its
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology and Assumptions: Liquidity Descriptors for Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business and Financial Risks In The Commodity And
Specialty Chemical Industry, Nov. 20, 2008