(The following statement was released by the rating agency)
May 29 -
Summary analysis -- Ajinomoto Co. Inc. ---------------------------- 29-May-2012
CREDIT RATING: AA-/Stable/A-1+ Country: Japan
Primary SIC: Food
Mult. CUSIP6: 009707
Credit Rating History:
Local currency Foreign currency
28-Jul-1997 AA-/A-1+ AA-/A-1+
02-Dec-1996 A+/A-1 A+/A-1
The ratings on Japan-based food products maker Ajinomoto Co. Inc. (AA-/Stable/A-1+) reflect its excellent business risk profile and strong product competitiveness, backed by solid technological and product development capabilities and high brand recognition. The company has large shares of the global market for glutamic acid- and nucleotide-based seasonings and sweeteners and for amino acids for feed use (animal nutrition) and pharmaceuticals, backed by the company’s own fermentation and refining technology. It has a modest financial risk profile, featuring a low ratio of debt to EBITDA and stable cash flow from a diversified business portfolio. Partly offsetting these strengths are somewhat weaker profitability than other leading international food and beverage manufacturers, the sensitivity of the company’s earnings to external factors such as raw material and fuel prices and foreign exchange rates, and a competitive business environment.
Ajinomoto’s operating performance remained solid in fiscal 2011 (ended March 31, 2012), although sales fell 0.9% from a year earlier due mainly to the strong yen. The company’s consolidated EBITDA margin remained mostly intact at 10%, reflecting relatively weak profitability in its domestic food products business compared with major global peers and the susceptibility of its earnings to fluctuations in prices for raw materials and fuel and foreign exchange rates. Standard & Poor’s Ratings Services expects Ajinomoto’s EBITDA margin to remain stable and to slightly improve in the medium term, reflecting its ability to pass increased raw material costs to consumers and focus more on high value-added products than on commodity products. In addition, we view the company’s announcement that it will sell lactic acid drink maker Calpis Co. Ltd. to Asahi Group Holdings Ltd. as slightly positive for its credit standing. Calpis’ benefit to Ajinomoto in the development of new products is limited, but it has been profitable and has expanded into Asian markets on the back of Ajinomoto. In our opinion, Ajinomoto would best use the roughly JPY120 billion it stands to gain from the sale of Calpis (due to be completed Oct. 1, 2012) to further strengthen its market positions and profitability in the areas on which it is focused.
Ajinomoto faces setbacks in its overseas food business, mainly for taste enhancers, which it mostly sells to other food makers. Its operations for the manufacture of nucleotides, in particular, suffer price competition from Korean and other foreign makers that have expanded production capacity. In addition, the company has begun to increase production capacity for taste enhancers in Thailand and strengthen global production in North and South America, Europe, and Asia to counter fluctuations in foreign exchange markets that have depressed profits. In our view, Ajinomoto needs at least three years to significantly reduce the effects of currency movements on its bottom line.
Ajinomoto’s financial risk profile remains modest. We consider the plan the company recently announced to repurchase a maximum of JPY50 billion in shares in fiscal 2012, up from JPY20 billion in expenditure in fiscal 2011, as negative for the credit ratings on the company. However, in view of the company’s financial policy to restrict its use of excess cash (particularly after the sale of Calpis) and the strength of the company’s financial risk profile, we expect Ajinomoto to maintain a profile appropriate for the current credit ratings unless it makes large, debt financed business investments or mergers and acquisitions (M&A). The ratio of its funds from operations (FFO, before adjusting for working capital) to total debt was about 58% as of March 31, 2012, based on Standard & Poor’s assumptions about lease and pension liabilities, up from 52% a year earlier--favorable compared with those of major global peers. In the same period, total debt to EBITDA remained about 1.5x (after adjustments based on Standard & Poor’s assumptions of off-balance-sheet items), with steady earnings supporting progress in debt reduction and capital accumulation. Standard & Poor’s expects Ajinomoto to maintain its conservative financial policy despite plans to increase production of amino acids for feed use using both in-house developed fermentation processes that consume fewer resources and nonedible raw-material fermentation technologies.
Ajinomoto’s liquidity will likely remain exceptional, with sources of liquidity exceeding 2x uses (including capital expenditures, working capital, and dividends) for the next few years. It had JPY150 billion in cash and short-term investments as of March 31, 2012, more than enough to cover JPY127 billion in total debt (excluding off-balance-sheet items not yet disclosed). The company has diversified repayment periods for its long-term debt, and it has a variety of financing instruments backed by broad access to capital markets and favorable relationships with major financial institutions.
The stable outlook reflects Standard & Poor’s expectation that Ajinomoto’s ongoing efforts to reduce costs, enhance high value-added domestic food products, and aggressively expand its overseas food business should mitigate the effects of higher raw material and fuel prices and a strong yen. Furthermore, significant impairment of its financial position is unlikely in the next few years, given that we expect the company to maintain prudent management of its balance sheet and M&A activities.
Standard & Poor’s may consider downgrading the company if we see an increase in the probability of lower profitability or deterioration in the company’s financial risk profile, likely as a result of a shift to a less conservative financing policy and less conservative decision-making on M&A or capital expenditures. We may also consider a downgrade if the company’s total debt to EBITDA exceeds and will likely stay above 1.5x for an extended period.
We may consider upgrading Ajinomoto if it secures more stable earnings and protect itself from vulnerability to external factors. However, the challenging environment for Ajinomoto’s domestic food business is likely to limit the possibility of an upgrade for some time.