Casio Outlook Revised To Negative On Slow Profitability Recovery; 'BBB+' Rating Affirmed

  • Casio's ongoing business restructuring continues to weigh on profitability.
  • Profitability is likely to recover more slowly than we previously assumed due to delays in revitalizing underperforming businesses and monetizing new ones.
  • We are revising the outlook on our long-term issuer credit rating on Casio to negative from stable and affirming our 'BBB+' long-term issuer credit rating.
  • The negative outlook reflects our view that there is more than a one-in-three chance of a further delay in a recovery in profitability as the company struggles to strengthen its product portfolio.
TOKYO (S&P Global Ratings) May 20, 2019--S&P Global Ratings today said it has revised to negative from stable the outlook on its long-term issuer credit rating on Casio Computer Co. Ltd. We have affirmed our 'BBB+' long-term issuer credit rating on the Japan-based watch and consumer durables manufacturer.
We revised the outlook downward because we see some factors causing Casio's profitability to recover at a slower pace than expected. These include the slow turnaround of unprofitable businesses such as musical instruments and system equipment, a delay in nurturing and monetizing new ones, and continuing restructuring costs.
We believe Casio's profitability will continue to come under pressure. The financial burden we have seen in the past two or three years is likely to ease, with the company having discontinued certain loss-making operations, such as digital cameras. However, we see profitability staying well below the peak levels seen in fiscal 2015 (ended March 31, 2016), as the company needs more time to bring certain underperforming businesses to a point where they can contribute to profit. In addition, it is likely to incur growing costs from attempts to pursue new ventures.
Casio's core watch business maintains high profitability. Its strong brand recognition and product differentiation strategy help it compete against the wearable devices now penetrating the market. But significant dependence on this area for profits constrains our rating on the company. The product range is highly discretionary and gadgets like smart watches have given rise to changing consumer tastes. In addition, the company's limited operations and narrow product lineup, stemming from the slow development of new lines, have weakened its resilience to external shocks, in our view. Accordingly, we assess its business risk profile as fair. The rating incorporates its relatively high profitability for the industry as a positive factor. But shifts in its earnings structure suggest to us that the boost this provides is shrinking.
Casio has maintained an extremely sound financial standing, with a net cash position for years. This supports our evaluation of the company's creditworthiness. Other positive factors in our evaluation include its low capital expenditure needs in core businesses and its conservative financial management, which includes limit setting on outlays of cash, such as for shareholder returns. We therefore assess its financial risk profile as minimal.
The negative outlook reflects our belief that the chance of a further delay in a recovery in profitability stands at over one-third, due to the extended wait for a recovery in earnings at struggling businesses and the monetization of new ones. This is despite the core watch and education product businesses continuing to perform solidly.
We may consider downgrading Casio in the coming six to 12 months if we see an increased likelihood of its EBITDA margin remaining below 13%. This could occur if:
  • The profitability of its watch and education product businesses declines,
  • Its underperforming businesses fail to improve profit,
  • The company continues to incur large amounts of additional restructuring expenses, or
  • The burden of growth investments increases.
We would also consider a downgrade if we determined that reforms had failed to diversify earnings sources and the company was likely to continue to rely heavily on its watch business for profit.
Conversely, we might revise the outlook to stable if we foresaw its EBITDA margin recovering to and staying above 13%. This could occur if its watch and education product businesses continue to perform solidly and, importantly, its earnings sources diversify as a result of improved profit from underperforming and new businesses.
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