Nordic Credit Rating (NCR) said today that it had assigned a 'BBB+' long-term issuer rating to Norway-based paint and coatings manufacturer Jotun A/S (Jotun). The outlook is stable. At the same time NCR assigned an 'N-1+' short-term issuer rating. NCR has also assigned 'BBB+' issue ratings to Jotun's senior unsecured bonds.
Rating rationale
The long-term rating reflects Jotun's moderate debt and strong operational efficiency. It also reflects the resulting robust credit metrics, which are strong in both absolute terms and relative to the company's peer group. Jotun has a leading position in the market for marine coatings. It also holds the No. 1 position in the market for decorative paint in Scandinavia, the Middle East, India and Africa, and occupies the No. 2 position in South East Asia.
The rating is constrained by Jotun's small size in comparison with the biggest players in the global paint and coatings market, which is dominated by large US companies. We also note the cyclicality of the company's margins, which mainly results from volatile raw material prices but also reflects cyclical demand in certain market segments. However, Jotun's diversification across market segments and regions has allowed the company to sustain relatively strong margins through economic cycles. In addition, we note that the decorative paint market has been resistant to the wider economic downturn associated with COVID-19.
Stable outlook
The stable outlook reflects our view that strong operating cash flows and moderate investment requirements will enable Jotun to maintain strong credit metrics in the years ahead. We believe demand will increase as COVID-19 recedes, as we expect, and anticipate that higher raw material prices will be reflected in higher product prices over time. But we note that margins could be affected negatively over both the short and medium term if product prices fail to keep pace. We expect Jotun to make no significant changes to its currently conservative investment and prudent dividend policies.
We could raise the rating to reflect reduced EBITDA margin volatility through, for example, an increased proportion of revenues from decorative paint or an NCR-adjusted EBITDA margin sustainably above 20%.
We could lower the rating to reflect continuing increases in raw material prices combined with an economic downturn, lower profitability (leading to an NCR-adjusted EBITDA margin below 10%), or NCR-adjusted net debt/EBITDA sustainably above 1.5x.
| Rating list | Rating |
|---|---|
| Long-term issuer credit rating: | BBB+ |
| Outlook: | Stable |
| Short-term issuer credit rating: | N-1+ |
| Senior unsecured issue rating: | BBB+ |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Mille Fjeldstad, analyst, +4799038916, mille.fjeldstad@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.