E-Malt.com News article: Japan: Moody's Japan K.K. affirms Kirin’s A3 issuer rating and says ratings outlook is stable

Moody's Japan K.K. has affirmed Kirin Holdings Company, Limited's A3 issuer rating and senior unsecured debt ratings, as well as (P)A3 senior unsecured shelf registration, the rating agency said on August 21.

The ratings outlook is stable.

The rating affirmation follows the announcement on August 19, 2015 that Kirin has acquired a 55% stake in Myanmar Brewery Limited (unrated) from Fraser and Neave, Limited (unrated) - a Singapore food and beverage conglomerate - for about JPY69.7 billion (US$560 million). The transaction was financed with debt.

"While the acquisition will increase Kirin's total debt, Moody's also expects that its financial leverage will be mitigated by the additional profit derived from Myanmar Brewery as well as Kirin's continued focus on lowering its own debt," says Motoki Yanase, a Moody's Vice President and Senior Analyst.

"For the 12 months to June 2015, Kirin's adjusted debt/EBITDA stood at 3.2x. Furthermore, pro forma the acquisition, leverage could rise to 3.4x, after considering Kirin's EBITDA for the 12 months to June 2015, Myanmar Brewery's EBITDA for the 12 month to September 2014 and the additional debt. However, Moody's expects that the effects of such a level of leverage will be further mitigated by Kirin's debt-reduction efforts over the next 12 months," says Yanase.

Myanmar Brewery has an 86% market share in its home market of Myanmar and is highly profitable.

Its EBITDA margin was 35% for the fiscal year ending September 2014, according to Kirin, substantially higher than Kirin's own as-reported EBITDA margin of 12% for the 12 months to June 2015.

Myanmar Brewery was in a net cash position as of September 2014.

Moody's also notes that the purchase price equates to a multiple of 10x on Myanmar Brewery's EBITDA for the 12 months to September 2015.

While the acquisition presents operational challenges for Kirin in a new market, it will help it establish a foothold in Myanmar - a growing market - and will further diversify its overseas operations, if successful.

For January-June 2015, Kirin's overseas sales stood at 34% of total sales, a level which is lower than that for other major global alcoholic beverage companies, such as Diageo PLC (A3 stable) or SABMiller Plc (A3 stable).

Moody's believes that this acquisition's strategic merits outweigh the effects of the slight increase in leverage. Thus, it is credit positive.

However, Moody's also notes that Kirin has recently been focusing on re-establishing its domestic market share, and the resulting increased level of marketing costs is weighing on its overall profitability.

If Kirin does not maintain tight control on its total debt, or current profitability deteriorates further and prevents improvements in leverage, the situation could lead to a negative rating action.

Positive rating pressure could emerge with a turnaround of the domestic beverage business - Kirin's largest business segment - that results in increases in sales and operating margins. Specifically, debt/EBITDA below 2.5x, retained cash flow/net debt above 25%, and EBITA margin above 15% on a consistent basis could lead to an upgrade.

Negative rating pressure could emerge (1) if Kirin loses material levels of market share in its core domestic markets, thereby lowering profitability, or (2) if debt/EBITDA is sustained above 3.0x, retained cash flow/net debt falls below 15%, or EBITA margin falls below 10%. Furthermore, large debt-funded acquisitions or large shareholder returns will be viewed negatively and would also likely pressure the rating.

Kirin Holdings Company, Limited, headquartered in Tokyo, is a holding company that owns one of the largest producers of alcoholic and non-alcoholic beverages in Japan. Consolidated revenues for the 12 months ending 30 June 2015 were about JPY2.2 trillion.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2.



26 August, 2015