Aug 21 -
Summary analysis -- BSH Bosch und Siemens Hausgeraete GmbH -------- 21-Aug-2012
CREDIT RATING: A/Stable/A-1 Country: Germany
Primary SIC: Household
Credit Rating History:
Local currency Foreign currency
16-Aug-2010 A/A-1 A/A-1
25-May-2004 A-/A-2 A-/A-2
The ratings on Germany-based household appliances manufacturer BSH Bosch und Siemens Hausgeraete GmbH (BSH) are underpinned by Standard & Poor's Ratings Services' view of the group's strong business risk profile and its modest financial leverage. The business profile reflects the group's large industrial size; its leading position in the mature European home appliance market and higher-growth markets like China; and its strong brand portfolio with a mid-to-high end price positioning. We also view positively the group's track record in generating high and stable operating margins with an ability to withstand volatile raw material costs.
However, the ratings are constrained by our view that durable consumer goods are generally more sensitive to economic cycles than consumer staples (food, beverages, and tobacco) due to the relatively discretionary nature of demand for these products and higher item prices. Additionally, BSH has lower geographic diversification than its Standard & Poor's-rated peers, such as Electrolux AB (BBB+/Stable/A-2) and Whirlpool Corp. (BBB-/Stable/A-3) with a large exposure to Western Europe and a very small presence in Latin America.
We assess BSH's financial risk profile as modest. This is supported by our view that free cash flow generation should remain strong with low debt leverage, reflecting management's conservative financial policy. In addition, we note the strong implicit parental support from BSH's equal shareholders-- Robert Bosch GmbH (AA-/Stable/A-1+) and Siemens AG (A+/Positive/A-1+)--and the demonstrated access to capital markets, with two bond issuances in the past year. We view the possibility of high dividend payouts to shareholders (as in 2010) as a negative and note that its cash conversion cycle remains below that of its above-mentioned peers.
S&P base-case operating scenario
We forecast revenue growth of around 2% for 2012-2013 compared with 6% in 2011. This is based on our conservative assumption of flat sales growth in Western Europe, compensated by low single digit growth in Eastern Europe and China. We have factored lower disposable income and weak consumer confidence in Europe and a slowdown in household consumption in China. Price pressure should also remain high due to the intense level of competition between manufacturers and high promotional activity by large retailers in Europe.
The EBITDA margin might decline to around 9.0%-9.5% in 2012-2013, from 10.3% in 2011, under our base-case scenario, mostly due to lower sales but also higher plastic and electronic components with potential downside risks from unfavorable euro-to-dollar currency-exchange movements. We also factor in increasing administrative and selling costs as BSH is expanding its production base and its distribution networks in emerging markets.
S&P base-case cash flow and capital-structure scenario
For 2012-2013, we forecast BSH achieving an adjusted ratio of funds from operations (FFO) to net debt of around 80% (69% in 2011), which we deem commensurate with the current ratings. This is notably based on lower operating margins being somehow mitigated by a lower cost of borrowing. BSH issued a total of RMB3.25 billion (about EUR400 million) of bonds in September 2011 and in July 2012 with a coupon rate of around 3.3%, replacing more expensive credit lines.
We anticipate free operating cash flow of about EUR200 million per year in 2012-2013. With sales volume likely to decline in mature markets, we think BSH should be able to reduce inventories, thus releasing some cash tied to working capital. We see some flexibility in capital expenditure (capex) given that part of the 2011 amount was for expansion purposes.
We forecast total adjusted debt to stabilize at about EUR800 million in 2012-2013. We understand that the large increase in total debt in 2011 (nearly EUR500 million) was mostly due to a one-off accounting change in the recognition of trade receivables. We think that BSH will continue its conservative financial policy and should be able to maintain debt leverage of around 1.0x in the next two years.