Nordic Credit Rating has revised the outlook on its 'A-' long-term issuer rating on Norway-based defence and maritime technology supplier Kongsberg Gruppen ASA to positive from stable. The long-term rating and 'N2' short-term issuer rating have been affirmed, as has the 'A-' issuer rating on the company's senior unsecured debt.
Rating rationale
The outlook revision reflects our view that Kongsberg Gruppen is well positioned to benefit from currently strong global demand for defence products, which combined with sound maritime profitability has led to rapidly increasing earnings and cash flows. Although investors have been traditionally cautious about funding the defence industry, the Russian war on Ukraine and pressure on NATO countries to improve defence spending have given increasing numbers cause to rethink their position. Due to improving investor sentiment, we could raise the rating if investor reluctance reduces further and the impact of recession concerns to the maritime segment recede.
The long-term issuer rating reflects the company's leading position in its niche markets, strong cash position and cash flows, and low financial gearing. It also reflects our view that the company represents a strategic investment for the Norwegian government, which is likely to provide support, if needed. The rating is constrained by Kongsberg Gruppen's small size in comparison with its global peers. In addition, geopolitical and economic uncertainty is high, which could negatively affect the company's maritime segment and partly offset the impact of improved investor sentiment on the defence segment.
Positive outlook
The positive outlook reflects improving investor sentiment toward the defence industry. Negatively, the current international economic turmoil, volatile oil prices, and increased risk of recession could adversely affect the maritime segment, which is more cyclical than the defence business. However, we expect new regulations and energy requirements to drive demand for the company's green maritime technology. We also expect demand to remain high for defence products and advanced technologies, which should support the company's strong credit metrics.
We could raise the rating to reflect an absence of negative economic conditions (such as disrupted trade flows) on the maritime segment, improved demand for green maritime products, or further evidence of positive investor sentiment toward defence companies.
We could revise the outlook to stable to reflect reduced government support, increased investor aversion to defence-related funding, worsening economic conditions affecting the maritime segment (leading to an EBITDA margin below 12% on a protracted basis), or increased financial leverage leading to net debt/EBITDA above 1x over a protracted period.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Positive | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | A- | A- |
Contacts:
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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.