R&I upgrades Taiheiyo to BBB+

Rating and Investment Information Inc (R&I) has upgraded Taiheiyo Cement to to BBB+ from BBB. The outlook is ‘Stable’.

The ratings agency notes that after seeing demand plummet in key markets of Japan and the US in FY09 (ended March 2010), Taiheiyo Cement has since improved its cost structure by slashing fixed expenses through the streamlining of its production and supply structure and reducing variable expenses through the use of recycled raw and fuel materials.

“This, coupled with an upturn in the business environment due partly to growing demand for reconstruction projects after the Great East Japan Earthquake, has helped enhance earning and cash flow generating capacities. Under such circumstances, operating income reached JPY70.4bn in FY13, a level not seen since FY06,” R&I states.

With reduced capital investment and the sale of assets contributing to positive free cash flow, net debt decreased to slightly over JPY410bn at end-FY2013, down more than JPY180bn from the most recent peak at end-FY08. As a result, the balance between debt and cash flow is currently adequate for the BBB rating category.

For domestic businesses, trends in fuel prices including the effect of exchange rate fluctuations continue to be a risk factor, warns R&I. It adds that another concern is the cost impact of changes in types of waste the company deals with. In overseas businesses, US operations are yet to restore the earning capacity they used to have. Prospects for demand and the competitive environment in China are also uncertain. “Nevertheless, cement demand in Japan and the US.are likely to remain firm for some more time. Thanks to this, along with contributions from non-cement businesses, the company as a whole should achieve certain levels of profits and cash flow,” R&I expects.

Accordingly, debt levels will most likely keep falling. Driven by further progress in the accumulation of equity capital, which was eroded seriously during the recession after Lehman Brothers' collapse, Taiheiyo Cement is expected to have a debt-equity structure that is commensurate with the BBB rating category in the foreseeable future.

Going forward, R&I forecasts that: “From a relatively long-term perspective, domestic cement demand will be almost certainly back on a downward trend. Because the industry's production capacity has been reduced on the assumption of a little over 40Mt demand, the bottom level recorded in FY2010, it is unlikely that the domestic cement market will move into oversupply in the near future. If an oversupply occurs, however, weak pricing power will directly hit profits. It is essential for Taiheiyo Cement to establish an earnings base that is less susceptible to the supply-demand balance in the domestic cement market by expanding overseas businesses and non-cement businesses.”