Nordic Credit Rating (NCR) said today that it had revised the outlook on its 'BBB+' long-term issuer rating on Norway-based paint and coatings manufacturer Jotun A/S to positive from stable. The long-term rating was affirmed, as was the N2 short-term issuer rating.
Rating rationale
The outlook revision reflects our assessment that Jotun's size and diversity have improved relative to the rest of its peer group. It also reflects higher margins achieved in the course of 2023 and expectations of strong margins and cash flow going forward.
The long-term issuer rating continues to reflect Jotun's low financial gearing and strong operational efficiency. It also reflects the resulting robust credit metrics, which are strong both in absolute terms and relative to the company's peer group.
Jotun has a leading position in the market for marine coatings. In the decorative paint market, Jotun is a major player in Scandinavia, the Middle East, and 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 historical 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, the company has proven ability to increase prices to reflect higher raw material costs.
Positive outlook
The positive outlook reflects our view that strong operating cash flows and moderate investment requirements will enable Jotun to maintain a net debt position of close to zero in the years ahead. However, we see the risk for more margin pressure than anticipated, due to competition or slowing demand. Jotun's global diversity and exposure to growth markets in Asia partly offset its exposure to cyclical fluctuations. We expect the current prudent dividend policies to remain in place, but believe that the company could from time to time pay out excess cash through extraordinary dividends.
We could raise the rating to reflect an NCR-adjusted EBITDA margin sustainably above 20%, commitment to net debt/EBITDA sustainably below 1.0x, or a more diverse product portfolio.
We could revise the outlook to stable to reflect an economic downturn leading to lower demand, lower profitability leading to an NCR-adjusted EBITDA margin below 20%, or NCR-adjusted net debt/EBITDA sustainably above 1.0x.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Positive | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | BBB+ | BBB+ |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Anine Gulbrandsen, analyst, +4797501657, anine.gulbrandsen@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 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.