Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB-' long-term issuer rating on Norway-based Nordic Semiconductor ASA. The outlook is stable. The 'N3' short-term issuer and 'BBB-' senior unsecured issue ratings were also affirmed.
Rating rationale
The affirmation reflects our expectations of increased traction and revenue visibility in the distributor-driven sales channel (broader market). Nordic Semiconductor has intensified its efforts to reduce inventories, which were significantly above historical levels due to a strategic build-up during the supply chain constraints of 2022–2023. These factors are likely to support free operating cash flows throughout the remainder of 2024, enabling a continued net cash position. We have lowered our assessment of the company's operating efficiency due to the notably weaker profitability and more volatile margins than peers. We believe the company is more sensitive to economic fluctuations than peers due to its smaller scale and comparatively large exposure to the broader market.
Our long-term issuer rating on Nordic Semiconductor reflects the company's strong balance sheet and low financial leverage. The rating also takes account of the company's strong position in growing niche markets within wireless communication technology, and the Internet of Things (IoT) in particular, including products that help monitor various kinds of environmental impact. Nordic Semiconductor has close customer relationships with world-leading technology companies.
The rating is constrained by the semiconductor sector's historical earnings volatility. Demand for consumer products has declined since the end of the pandemic-induced boom. Moreover, inventory adjustments by customers and distributors have resulted in a deeper cyclical downturn than previously expected, resulting in negative free operating cash flows over the last few quarters. The rating is also constrained by the need to invest heavily in research and development (R&D) to maintain market share and customer relationships. The company's small size relative to the major semiconductor companies is seen as a key rating weakness, given the sector's R&D intensity.
Stable outlook
The stable outlook reflects our view that demand for Nordic Semiconductor's chips is likely to recover in the broader market after a period of inventory adjustments among customers and that revenue visibility will remain in line with pre-pandemic conditions. This is likely to lead to a rebound in free operating cash flow and stabilisation of the company's low financial leverage with a continued net cash position. The stable outlook also reflects the company's increased efforts to reduce inventory and the normalisation of supply chains.
We could raise the rating to reflect significantly increased scale, a broader product portfolio, and increased end-market diversity. We could also raise the rating to reflect a sustained improvement in working capital management and an NCR-adjusted EBITDA margin above 30%.
We could lower the rating to reflect protracted negative market conditions and continued low visibility. We could also lower the rating if the company were to lose its technological leadership. The rating could also be lowered if the company were to experience negative free cash flows over a protracted period, resulting in an increased need for debt to meet operating commitments.
Related publications
i) Nordic Semiconductor ASA long-term issuer rating lowered to 'BBB-'; Outlook stable, 12 Feb. 2024.
ii) Nordic Semiconductor ASA outlook revised to negative; 'BBB' long-term issuer rating affirmed, 26 Oct. 2023.
| 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:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@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.