Nordic Credit Rating (NCR) has affirmed its 'BBB-' long-term issuer rating on Norway-based carton packaging producer and distributor Elopak ASA. The outlook is stable. The 'N3' short-term issuer rating and 'BBB-' senior unsecured issue rating have also been affirmed.
Rating rationale
The affirmation reflects the company's solid position in the European carton packaging market, geographic diversity and broad customer base. It also factors in the company's sound credit metrics and moderate financial leverage. In addition, our assessment of the operating environment is positive, based on increasing demand for sustainable products and a likely transition to carton packaging from plastic.
Elopak's largest market is the US, contributing to approximately 21% of its total revenues in 2024. We expect tariffs on imports to the US will have only a limited impact on demand for Elopak's products as the cost of packaging is relatively low and we believe clients will absorb the tariffs under current contracts. In addition, Elopak's new facility in Little Rock, Arkansas, is set to commence production in the first half of 2025 and should enable the company to avoid tariffs on some of its production. In addition, customers have already invested in carton-specific filling machines from Elopak.
We have revised our assessment of Elopak's financial risk to reflect the company's improved credit metrics in 2024, despite high capital spending, which surpassed our estimates due to lower net debt and net interest costs. We expect further improvements over our forecast period through end-2027 based on our projection of stronger EBITDA as growth investments come into production. We expect the company to have a balanced growth strategy.
The rating is constrained by Elopak's small size compared with its main peers, Swedish multinational Tetra Pak and Swiss multinational SIG Group AG. The company has a relatively small share of the aseptic carton packaging market, which accounts for the bulk of the wider market for carton packaging of liquid products. A further rating constraint is the cyclical nature of the raw materials market, although contract stipulations and pricing mechanisms partially offset this cyclicality.
Stable outlook
The stable outlook reflects our expectation that Elopak will maintain its current market position in Europe while growing in the US and new markets. In addition, it reflects our belief that Elopak will maintain stable operating margins and stay committed to its medium-term leverage target of 2.0x (excluding off-balance-sheet financing). The outlook also takes into account the sustainability aspects of and growing potential for carton packaging of liquids.
We could raise the rating in response to NCR-adjusted net debt/EBITDA sustainably below 2.0x or NCR-adjusted EBITDA/net interest sustainably above 13x and improved operating efficiency, reflected in an NCR-adjusted EBITDA margin above 15% over a protracted period. We could also raise the rating to reflect a noticeable shift towards the use of carton packaging and an increasing share of the liquid packaging market.
We could lower the rating to reflect NCR-adjusted net debt/EBITDA above 3.0x and NCR-adjusted funds from operations/net debt below 20% over a protracted period. We could also lower the rating in response to increased substitution risk from alternative packaging solutions or loss of key customers, or to reflect increased risk appetite, indicated by rising dividend pay-outs or a more aggressive growth strategy.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB- | BBB- |
Contacts:
Anine Gulbrandsen, analyst, +4797501657, anine.gulbrandsen@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.